Progress or Stagnation? Choose one. (Column)

Olly Newland’s column June 2013


The news item that appears below (Land bought in 1995 for $890,000 – owner will sell for $112m — NZ Herald) encapsulates the sort of narrow-minded thinking that afflicts many people. It’s a mixture of greed, fear, and NIMBY (Not in my back yard).

The strong suggestion of the article is that ‘land banking’ is A Very Bad Thing and this particular example is one of the worst.

But this is nonsense, of course.

If land banking was so bad than every farm, large section, public park, nature reserve and even National Park could be seen as land banking. Somebody has to own the land …wherever it is. Also, the supposed ‘massive asking price’ for this piece of land is a smoke-and-mirrors exercise.

Land bought in 1995 for $890,000 – owner will sell for $112m
By Anne Gibson NZ Herald Jun 1, 2013

The 29ha of vacant land at 39 Flat Bush School Rd is close to Barry Curtis Park.
A land banking business with a big piece of residentially zoned real estate on Auckland’s outskirts has made more than $6 million a year for almost two decades – doing nothing.

QV records shows Yi Huang Trading Company owns 39 Flat Bush School Rd, which it bought in 1995 for $890,000.

Now, this 29ha block is listed on the market for $112.6 million, promoted as “the land of opportunity, vacant but close to Barry Curtis Park”.

Barfoot & Thompson real estate agent Charles Hsu said the owner might accept $80 million.

“They might drop the price. They understood the asking price is too high,” he said of the business which was established by Taiwanese. The block could be subdivided into tiny 400sq m parcels, he said, but first services must be provided, including a road.

Although I don’t know the details of this particular case, it seems to me that anyone who sits on land for 20 years (paying the rates and other expenses) is entitled to get whatever the market will bear.
And why not?

The fact that the owner has a Chinese name adds a distasteful touch of hysterical, nasty xenophobia to the story. The Yi Huang Trading Co. (owner of the land) was registered in 1994 and has two directors. The company has been in their hands the whole time. Hardly a foreign buyer takeover.

If you look at an aerial photo of the land you would see that the owners had the foresight to buy it and watch as new subdivision after new subdivision crept closer and closer. Indeed, massive new-built housing estates are hard up against their fence. I haven’t heard anyone complain about the mega-profits those developers must have made when they created the estates.

I bet if the owner was a Hoani Tuwhare holding it on behalf of some struggling Iwi, there would have been cheers all round. (And rightly so.)

There is also a mention of ‘furious developers’ who, by the gist of it, are angry that they missed the chance to clean up and now will have be content with merely making mega profits developing the land. (Isn’t odd that the ‘furious developers’ remain unnamed in the article? I am sure they are right now organising a mass march on Parliament in their thousands. Yeah right.)

I would also bet that 20 years ago that land was an unloved farm that has, at last, overcome massive obstacles to finally become zoned as residential land. Well done to them.

A client of mine has been through the same. He spent the last 25 years trying to get his farm re-zoned as residential. As to be expected, he was resisted — at enormous cost — by the local Council, staffed by the usual tree-huggers who seem more interested in keeping their jobs going than helping the public.

The so-called asking price between $80m and $112m makes me wonder if there wasn’t a bit of tongue-in-cheek going on. Or perhaps the reporter was not asking the right questions? The magnitude of the suggested price should not be too surprising when has to consider the cost of the infrastructure needed to proceed with development.

The HUNDREDS of sections that this land may provide each has to be first supplied with roading, power, sewage, footpaths, shops, schools, transport … as well as the extortionate Council fees, legal bills, surveying cost and Geo tech reports, to mention just a few. And reserves contributions, no doubt.

This is all before a single sod of soil can be turned and a single house built.

And then, when it is all done, a 15% GST tax is levied on every square inch of dirt, blade of grass, brick, roof tile and window catch … which adds around $75,000 to a $500,000 house.

So you can see that the asking price would be decimated by the time the preparatory work was done — let alone any houses built and the tax paid.

And the most important benefit will, in the end, be the supply of hundreds if not thousands of more houses which will help to keep prices down despite the expenses involved.

It matters not one iota that this particular area is popular with the Asian community, what matters is the increase of supply.

The Unitary Plan

Yet there are people still out there grumping that the Auckland Council Draft Unitary plan should be dumped. Such narrow minded thinking is hard to grasp.

It simply MUST be cheaper to build upwards using the  existing the infrastructure. Roads, drains, transport and other services have already been provided — sure some will need beefing up — so why not use them more efficiently?

And remember, the Unitary Plan looks up to 30 years ahead. Half the people complaining won’t even be here by then!

You would think from the howls of indignation emanating from some quarters that there will be skyscrapers on every corner from tomorrow on. What nonsense.

No one will build anything unless there is a demand … and demand can be fickle at the best of times, as countless developers and entrepreneurs have learnt to their great cost.

A Review Of The Market Today

Anyone interested in the property market today will be well aware that there has been a deluge of news stories about the rise and rise of property values, especially in Auckland.

For those of us who watch the market on a daily basis, the rise in values comes as no surprise.
Indeed, I was predicting this a year ago or more and was roundly condemned by those doom merchants who were sure that the market was poised for a collapse .

I gave several speeches around the country giving the reasons why the market was going to rise and, I say this with as much modesty as I can muster, I have been proved correct to date.

Now is the time to review the market and judge whether property prices will continue rise indefinitely or will there be a flattening off or, heaven forbid, a day of reckoning.

Interest Rates

It is unfortunate the the property market has once again become a political hot potato — with politicians and commentators (especially, but not entirely, from the Left) who make or promote dire predictions or threats of intervention in the market — and hang the consequences.

My view is that the market will continue to rise for some time yet, and barring unforeseen events or intervention, will flatten out over the next two or three years.

The main reason is interest rates. They are at half what they were a few years ago, and the chances of interest rates rising much in the near future seems very low .

It is, of course, possible the Reserve Bank will put up rates in an attempt to slow the market, but even if rates were increased, such an increase would likely be on the order of a quarter or half a percent at the most. Any more than that would lead to wholesale mortgagee sales, and Government debt ballooning.

Always remember, the Government borrows money too. Any rise in interest rates will have a severe effect on Government income and expenditure.

So with only small rises in interest rates likely, the market will adjust accordingly and after an initial ‘shock’ at an interest rate rise, it will be back to business as usual.

Capital Gains Tax

The threat of a capital gains tax to take the steam out of the market has proved singularly unsuccessful in other countries who have such a tax. No one yet has explained to me how such a tax will lower prices.

What it will do is  encourage people to take property off the market (if you don’t sell you pay no tax) which would only create a bigger shortage than ever.

I challenge anyone to provide me with one example where a tax on something has made it cheaper. Anyone?

On the contrary, taxes eventually feed into prices … which again has the opposite effect of what might be intended.

There are some loop holes that could be plugged, especially for those who buy and sell for a profit tax-free. A more rigorous regime could be justified. But in my view the biggest land speculators are the Mums and Dads who change houses regularly and reap a ‘profit’ each time.

It would be a simple exercise to tax any retained gains on rapid re-sale of the family home unless all the moneys are put into a replacement home within a specified time, or where the owners are retiring. The emphasis is on ‘rapid re-sale’ which in my book would be under two years.
You can trust the accountants to look for loopholes there, too.

Auctions

Another area that needs ‘sorting’ is the auction method of sale.

Auction sales are almost the universal means of sale these days, for good reasons. But that sale method leaves too much guesswork for the buyer to sort out.

Overpaying has now become a serious risk. The old method of using the CV and adding or subtracting a percentage is obsolete.

In my view real estate agents should be obliged to publish a guide price based on previous sales of similar properties. This is commonly done with other big ticket items such as art and antiques. Any such guideline can be, of course, ignored by keen buyers as is their choice.
It would be a start.

Rents

This is one area of the market that is due for a shake up in the near future.

Residential and commercial rents have hardly moved over the last 10 years and a significant correction cannot be far off.

One of the main reasons that rents remain so low is the very fact that so many people are buying houses for investment purposes that renters are often spoiled for choice.

It seems ridiculous to me that returns from residential property by way of rents  hardly ever exceed 4% based on current value – unless you buy a dump in some forsaken village.

In theory, rents should  double to provide an adequate return to investors for the risk and trouble involved. However so long as buying rentals for investment purposes remains so popular, large rent rises can be deferred  a little longer.

Should more ‘disincentives’ to ‘non-productive’ rental housing investment be introduced by way of taxes or interest rate increases, then rents will be sure to rise, hurting the very people any such disincentives were designed to help.

Macro Prudential Tools

This is another mumbo-jumbo term designed to disguise such words as ‘regulation’ or ‘control’ which are no longer PC in the current environment. Macro prudential in simplistic terms means general controls (compared to ‘micro prudential’ meaning specific or targeted controls)

The suggested Reserve Bank controls to suppress mortgage lending by banks will, again, hurt the very people who need help the most, viz. the first home buyer.

This was the case back in the 1960s and ’70s when I was active in the residential market and mortgages were extremely hard to get.

If you did get lucky and got offered a mortgage, the maximum lent was typically two thirds (66%) of the purchase price leaving a huge gap to fill with cash.

This drought led directly to the rise of solicitors’ nominee companies and finance companies who made up the difference with second mortgages or were sometimes willing to lend  more than 66%.

For decades these forms of lending flourished because of market pressures, all to end in the ‘Big Bang’ of 2007 with the wholesale collapse of many such institutions at the onset of the GFC.

I would venture to guess that these macro prudential controls will have little effect other than psychological, and something sterner would be needed – but, politically, that seems a highly unlikely event.

Summary

The market has a long way to go yet before it tops out, in my view.

If you are renting at present, save as much as you can to buy, and be content with a house that may not be your dream home or exactly where you want to be but at least you will be on the property ladder.

If you own a home or three then don’t get greedy. Don’t think that more must be better than less.
Buy more property by all means — but buy quality and not rubbish and you will never go wrong.

-

Olly Newland
June 2013
www.ollynewland.co.nz
© 2013 Olly Newland. All rights reserved. See Olly’s books and audio products.


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One thought on “Progress or Stagnation? Choose one. (Column)

  1. Property in NZ will never get cheaper until we grow up as a nation. I have never been to any country in the World where developers are seen as the lowest of the low as they are in NZ. It comes from the ‘tall poppy syndrome’ which is a national embarrassment! Developers should be held in the highest of esteem in any country as they are in many, they do their country a huge service by creating houses and space to live, the more the better and lower prices will come about due to intense activity.

    But as an investor, I hope this ‘tall poppy syndrome’ continues, in fact I hope they ban developers and ban all building, that way my existing property will continue to skyrocket in value!!!!

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