How to Avoid the Coming Lending Crunch … or: Will the Cure be Worse than the Disease? (Column)

Olly Newland’s column July 2013

Stories about the the property market dominate the headlines more and more as house prices increase especially in Auckland and Christchurch.
Hardly a day goes by without another horror story about some huge price being paid for some house that should be worth only half that was paid.

Of course, this has happened many times before … but on this occasion, the boom is based on REALITY and not some speculative fever.

Back in the mid-1980s, for instance, there was a massive share market boom. There was no rational reason for the huge up-swing in share prices. There were millions of shares for all to buy — but the ‘fever’ had set in and couldn’t be turned back. Likewise, the property boom that coincided with it was based on nothing more than money coming off the table from the share market its owners wanting/having to put it somewhere else.

This time it’s different

There is a housing shortage in Auckland — and in Christchurch — and there is no way that the shortage can be corrected in a short space of time. Not weeks, months or even years.

A shortage of any product, whether property or pineapples, houses or hairspray, will always result in a price rise …  until the balance of supply and demand is evened out.

The Reserve Bank of New Zealand. What? Regulating the property market now?

Controlling Loan to Value Ratios (LVR’s)

The Reserve Bank is widely tipped (signaled, really, as is the way with these things) to bring in restrictions on mortgage lending — targeting borrowers with small deposits/down-payments seeking to a high proportion of borrowings.

As to be expected, there are howls from all sides saying that such restrictions would hurt the first home buyer; are essentially ‘unfair’; or will send vulnerable borrowers into the clutches of ‘loan sharks’ and other unsecured lenders taking advantage of the situation.

I take the opposite point of view. Anyone who lends money to someone who wishes to buy a home (even if the interest rate is high) should be applauded … because in my view, home ownership is vital to create a stable society. The ends justify the means.

The proposed measures may sound practical and targeted, but I am convinced that if actually implemented, they won’t make a blind bit of difference. In fact, they will play into other sectors of the property market … to their great advantage.

Recycling old ideas

There is nothing new about these sorts of restrictions. We had them all through the 1960s, 1970s and 1980s.

The property market then was just as buoyant (in patches) as it is today. Maybe more so.

Continue reading

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”. Continue reading

Capital Gains Tax — not the magic bullet some people hope for (Column)

Olly Newland’s column March 2013

No matter how often the argument against a Capital Gains Tax is put forward, the subject is still popular among those who, it seems, fail to realise that implementing such a tax will solve nothing. The suggestion comes up again and again, and it has almost become an article of faith for ‘the left’ some of whom seem to imbue a Capital Gains Tax (CGT) with mythic powers to right all social wrongs.

When the Labour Government of the 1970s brought in a version of the tax to curb rampant property speculation, the result was a further rapid rapid rise  in property prices — on top of the 50% rise up until then! Sellers rather withdrew their properties from the market than pay the tax. It follows that Less stock = Higher prices. (This ain’t rocket science.)

The ’Property Speculation Tax’, as it was then called, was abolished a few years later by the Muldoon government, and I am proud to say that I was partly instrumental for that. It was in those days that I first organised public meetings, wrote newspaper articles, gave interviews on TV and radio to quietly and logically explain that that sort of tax would not work. (Well, OK, I argued and lobbied hard against the tax.)

A master stroke in the PR war was a stunt where I ‘sold’ a property to a near destitute Pacific Island family on $10 down and the balance interest free — with a condition of sale that no Property Speculation Tax was payable due to the transaction. If the tax was levied the needy family would be evicted immediately. (Yes, I said it was a stunt.)

This was all over the news, breathlessly, and culminated in a call to Wellington to meet a red-faced and embarrassed Minister of Finance, Bill Rowling. From that chilly meeting flowed changes over the next few months which saw some of the draconian aspects the tax modified. (I’ve written more about this episode in chapter 3 of Climbing the Property Ladder.)

Perception versus reality

There is no doubt that the idea of a Capital Gains Tax becomes at times popular, as the article below ‘Frustrated home buyers want investors to be discouraged’ and myriad others suggest. This is understandable.

Ordinary folk who find themselves locked out of the market by rising prices feel angry. They have a right to be angry. But if they believe the propaganda that a CGT will solve the problem, they’re wrong. It won’t.
It would make it worse. Here’s why:

Continue reading

The Year in retrospect … and What is to come (Column)

Olly Newland’s column November 2012

As the end of the year draws near, now is a good time to review the past 10 to 11 months and look into the foreseeable future.
Let’s look at a number of influences and influencers on the property market in general. I’ll also look at the suggestions being made to ‘help’ first time home buyers into the market, as they get further and further left behind.

‘New Initiatives’

The Government is about tell us about some ‘new initiatives’ to help the housing market and, supposedly, to put some heat into the supply of property instead of just hand-wringing. Looking at what has been suggested, the effect will be minimal even of the intentions are well meant.

The Government is poised to announce changes to development laws that will make it easier and cheaper to build houses, stretch Auckland’s city boundaries, upgrade existing state houses and transfer state houses to non-government and local government providers.
It may also signal changes to income-related rents and state subsidies amid moves to ensure tenants’ needs match the size and type of house.

Link: Government grasps housing thistle (stuff.co.nz)

My view: Perhaps your grandchildren may get some benefit, but for those looking for affordable home today the cupboard remains bare.

Making more land available sounds good in principle, but land supply is only ONE part of the equation. There’s also the need to create the associated infrastructure (roading, power, sewerage, transport — even without considering the cost of that.

The cost of house construction materials is still one of the greatest problems. Despite massive imports from China of cheap fittings and appliances (some of appalling quality) the cost of building materials remains stubbornly too high. It seems odd that in a country where timber, aluminium and steel are produced in massive quantities, the end cost for us is way over what the same materials cost overseas.

The reasons are easy to explain: low turnover, lack of competition, a dearth of builders and the huge dampening effect of GST on all new materials and land. These all combine to stifle progress.

Making more land  available will do little until these other price factors are resolved.

Interest rates

The low interest rate environment continues, with the pundits pushing their predictions for interest rates rises further and further into the future. I take the opposite view. I believe that interest rates will remain at or near the current levels for many years to come, and may even fall further.

This is the new “normal” and is, in effect, a huge wage rise for the mortgage belt and working classes, let alone for investors and first home buyers.

Never in my lifetime have I seen interest rates so low as now, but I am reassured by the fact that the current rates are in line with the rest of the world. Unless massive inflation appears, there is no reason why rates should ever go up significantly.

A low interest rate environment means that people can afford their mortgages — and even borrow more — which, by the way, is why prices are steadily rising in many parts of the country, Auckland in particular.

Even if interest rates were raised by a quarter or half a point, what difference would that really make?

The side-effect of low interest rates is that savers are tempted to put their money into other avenues of investment, with  investment property being one of their options. In my view, the merry dance will continue. House prices are likely going to double again over the next few years. Of that I am certain.

Pieter Brueghel II “The Wedding Dance”

Look at it this way: All that is really happening is that as prices rise, people are merely swapping equities. The value of a house goes up making the owners feel richer, and they then buy another more expensive house using the “extra” wealth and thus the beat goes on. The only people affected are those NOT already on the property ladder — and they make up a small minority.

But from a political point of view first home buyers are hugely important. The left wing professional mourners love to weep copious tears about the homeless, as if it was a crisis of monumental proportions with insurmountable difficulties for first home buyers.

Don’t’ forget: that ‘struggle’  to get one’s first house has always been so. It was much worse when I was a first home buyer, (cue: violins) but these days generation Y’ers seem to want to start where their parents ended up.

A quick look at what is currently available on Trademe, shows approximately 15,000 houses, 1,800 town houses, 1,200 apartments and 1,800 home units all for sale — at under $300,000.
The trouble is, they are not all in central Auckland.

Maybe some of the first home buyers will have to learn cut their cloth a little.

Commercial Property

Commercial property does not make headlines much but it too is undergoing a revolution. The low interest rates have made the returns from commercial property that much more attractive. Where once upon a time a 10% return was commonplace, this has slipped to 6% or less depending on the quality of the location and the tenant.

Put another way, good commercial property has doubled in value, and hence we now have a plethora of commercial syndicates offering all types of commercial investment for the smaller investor seeking higher returns.

They come dressed up in various forms such as proportional ownership, units, shares etc. but the end result is always the same: Some syndicates are absolute dogs, enriching the managers rather than the investors. Buying a big dinosaur with a specialised single tenant in the back of some provincial town is not the best investment to get into, in my opinion.

The Financial Markets Authority has finally issued some new guidelines about syndicates and not a moment too soon.

link: FMA Guidelines (via Bob Dey Property report)

One elephant in the room for commercial investment comes from the pressure from the top echelons of insurance companies to grade every commercial property according to their vulnerability to earthquake.

From level one (virtually no risk)  to level two (slight risk) to level five (very high risk) — the grading is a nonsense.

Despite having sucked in huge premiums for decades, the insurance companies now want to recover their losses as rapidly as possible. You have to ask what’s happened to all the moneys they have collected over the years?

To strengthen a building can be prohibitively expensive and there is no guarantee that having done it, the building will be of any use. For example, the CTV building, the subject of the most lethal damage in the Christchurch quake, was relatively modern so what does that prove?

Furthermore, the cost of strengthening is a fiction and quite impossible to pay. In total it would run into many tens if not hundreds of billions of dollars. In many cases the cost could be on the tenant as many leases contain clauses that put the cost on the tenant if any upgrading of a building has to be undertaken.

“In the wake of the Canterbury earthquakes, lawyers, landlords and tenants are carefully examining lease clauses (possibly for the first time) to determine who is responsible for strengthening earthquake-prone buildings and to what extent. One such clause is the Improvements Rent clause, which potentially gives landlords the right to pass on earthquake strengthening costs to tenants.”

Link: Earthquake prone buildings: Brace yourselves (Minter Ellison)

For a once in a 10,000 year event,  a more pragmatic approach is needed e.g. strengthening to be carried out when major upgrades are undertaken and certainly with new building projects (as is the present case in any event).

Despite all this background noise, retail shops remain one of the more popular commercial investments, followed closely by small industrial units. Anything with multiple tenancies is of high demand because that arrangement helps spread some of the risk.

If rental housing is not to your taste think about commercial. It’s a whole new world and the difference between the two is like chalk and cheese.

The Emergence and re-emergence of Property Spruikers

The improving market has brought out the usual bunch of spruikers offering “instant wealth” through property. All of them offer a quick path to riches, initially at little or no cost to you – or so they say.
My friends, do not be fooled.
There is no such thing as a “free lunch”.

These spruikers are either going to sell you a property from which they will collect a hefty fee through an option or some kind of side deal arrangement.
Or they will charge you after you have been convinced that it was all free.

Get your investment advice from genuinely independent sources, where the fee is up-front and there are no hidden agendas or add-ons to come, and where your advisor has no part in the sales process, disclosed or undisclosed. Continue reading

Can house prices be controlled? (Column)

Olly Newland’s column July 2012

It’s clear that house prices and rents are rising. The news media run stories of astounding prices being achieved for what are sometimes old houses in less than mediocre condition.

TV ONE ran a news story on 14 July on how house prices are ‘locking out’ first home buyers. The suggestion is that the government should intervene to help those who cannot get into the market. TV3News ran some property expert by the name of Newland (ahem) describing the property boom on the horizon.

Various talking heads were asked ‘what should be done?’ but had no real solution other than more land should be made available. I’m sorry to tell you this, but they are all dreaming.

Let me tell you that more land may be the long term solution but it will take many years for ANY benefits to be felt. What’s needed are more dramatic moves that will get results without distorting the market.

For starters, a suggested capital gains tax as some are clamouring for, will have the totally wrong effect. It would drive prices up even further. If such a tax were to be introduced it would result in a mass withdrawal of property off the market.

Think about it: If you have a property that you are considering selling, would you rush it onto the market if you were going to be slugged with tax? Of course not. After all, if you don’t sell you don’t pay tax. It’s a no brainer.

Worse still, those pushing a capital gain tax want to exempt private homes. Well, that’s even sillier, because private home sales make up the vast majority of the market. Under that system we will end up with mums and dads flogging off their houses for tax-free gain … leaving house prices to continue to rise.

Look overseas if you want proof positive. Some of the countries that already have a capital gains taxes have suffered the worst property crashes. Such a tax does nothing to stop price rises.

Twelve months ago I predicted the coming current rise in property prices and told everyone the reasons why. That some sort of ‘mini bubble’ was forming has become obvious, as can be seen in this interview I gave to interest.co.nz last December.

I also outlined the reasons why price rises were inevitable when I spoke to various property investment groups in Tauranga, New Plymouth, and Rotorua in the past months. Regular followers of my commentaries will recognize some of the points I have made earlier. They bear repeating.

The reasons for the current situation are:

  1. The extortionate costs of council charges when building or subdividing.
  2. Escalating costs of raw materials.
  3. The loss of tens of thousands of houses because of the leaky homes scandal.
  4. The loss of thousands of houses from the Christchurch earthquake disaster.
  5. Slow but steady immigration and increase in population. New Zealand’s population is growing by a small percent annually — 1% or so. By itself, that means an extra 40,000 people who will need at least 10,000 houses before actually getting ahead of the current problem.
  6. The removal of tax breaks (small as they were) in the 2011 budget was a colossal blunder and I said so at the time. It wasn’t so much the money it was the message. The authorities openly stated that they wanted to discourage investment in property. Well, they succeeded didn’t they? It discouraged many buyers  from going into the market to provide rental accommodation. (Not to mention the huge fright  everyone got from the Global Financial Crisis.)
  7. We have GST on every new house or renovation. Think about it: A newly built $500,000 house (the Auckland average) carries a GST content of $75,000!  So why build ? Next door could be a second hand house for sale, GST-free and often loaded with extras.
  8. The ongoing effect of historically low interest rates cannot be overstated. So long as these low rates exist they have the effect of providing a hefty wage rise to the mortgage home owners as well as allowing borrowers to borrow even more. These low rates are likely to fall even further which will add more fuel to the fire. The worry that interest rates will rise sharply has so far proven to be an empty threat. Many people are no longer believe this rhetoric.
    My prediction that house prices could double again over the next 10 years looks more and more likely as every day passes. Low interest rates are the driving force behind the current the rise in prices, make no mistake. It would take a huge and sustained bout of hyper-inflation in wages and prices to reverse the current low interest rate regime, and that possibility seems as unlikely at present. Indeed, deflation is a greater risk than inflation and the risk of deflation and its consequence is a nightmare that should not be contemplated. The thought must also haunt the Reserve Bank as well as the politicians. It wouldn’t surprise me in the least if these officials are quietly stoking the fires of a property boom in an effort to AVOID deflation. Like most of us, they probably regard some inflation (especially in house prices) as a positive thing, whatever the downsteam effects are. The risk is worth it.
  9. Low interest rates have another side effect: Depositors now earn almost nothing from their savings. I see this time and again from my advisory clients, where depositors sick of earning peanuts in the bank and are now pouring money direct into property or syndicates with the hope of better security, the hope of capital growth and some (very) minor tax breaks. Of course, what they withdraw from the bank often ends up in someone else’s bank account … and thus the giddy round starts all over again. Commercial property too is showing the effects of low interest rates. Yields are now regularly falling below 6% for average stock. This would have been unheard of few years ago. What is happening is that  commercial buyers are paying ever more for the same cash returns, the consequence of which results in rising prices and falling yields.

Well, some might say it’s easy to criticise, but what can be done?

Here are a few ideas:

  1. First home buyers should be given a GST rebate on new built houses of up to (say) $500,000. First time buyers only and not repeatable. That would be a good start for those who are trying to get on the property ladder. Australia has something similar and stamp duty is rebated for first home buyers. It’s the same general idea and it works.
  2. Reinstate the building depreciation deduction allowances — thereby send out the message that being a property owner is no longer a sin.
  3. Shake up the costs involved through council and water charges. They are scandalously too expensive and make up a disproportionate part of building costs. (See my article: Who’s to blame for the rising price of property?)
  4. Give first home buyers a grant towards any low cost home. This would only apply to newly built homes and that, along  with the GST rebate would give a big boost to builders to provide low cost homes. There’s the nub of the problem: Builders cannot make a profit on cheap houses. Radical thinking is required to solve that conundrum.
  5. Give encouragement to investors to provide more affordable rental accommodation. For those who provide long term accommodation, remove some of the more onerous restrictions of the Residential Tenancy Act. The emphasis is on long term. If tenants could rent for years, free from the threat of eviction, able to call their house or flat a “home”, a lot of pressure would come off the rental market. In other countries you can lease a home for years if not decades. Think about it:  If you could rent back your own home  (the one you live in) for, say, 30 years and use the money for business or similar would that not be attractive? Such a move would take a lot of pressure of people who currently think they need to buy or face eviction at relatively short notice.

Change of Direction for the Rental market

Crockers Auckland rentals (click to enlarge)

 

Most observers agree the rental market remained relatively flat during the housing boom — much to the delight of the supporters of renting versus buying. There is no doubt that during that period renting became increasingly cheaper than buying.

The disconnect between the two types of accommodation in terms of costs became so wide that a correction was inevitable.

And so it came to be.

As properties became dearer, and tax breaks disappeared, the COST of providing rental accommodation dissuaded new investors from entering the market … hence creating a shortage of rentals.

This trend was greatly exacerbated by the Christchurch earthquake tragedy which in one fell swoop removed thousands of rentals from that area and has resulted in massive rent increases through that unhappy city with the spill over moving to other centres, Auckland in particular.

See property managers Crockers Auckland rental price table for June (right)

And:

Rental property shortage near breaking point (NBR)

BUSINESSDESK: Rents in Christchurch skyrocketed 26% in the past year, while nationally rents are up just 4%, according to Trade Me Property’s analysis for the three months ended June compared with the same quarter last year.

At the same time, listings of houses for rent in Christchurch are down 34%, even as demand, measured by the number of inquiries, has jumped 47%. Nationally, listings are up 4% and demand is steady.

“The news for prospective Christchurch tenants is still grim,” Trade Me Property head Brendon Skipper says.

The particular “pressure cooker” suburbs of Christchurch are the central city, Linwood and St Albans.

“We’ve seen the number of properties available for rent in these three suburbs plummet more than 40% on a year ago and, on the flipside, the properties that do get listed are attracting huge volumes of inquiry,” Mr Skipper said.

While shortages of houses to rent in the Auckland rental market have hit the headlines in the past, Trade Me found listings are up 20% and demand is down 18%. In Manukau, listings are up 21% while demand is down 4%.

North Shore listings are up 7% and demand down 2% but the Waitakere market is much tighter with listings down 10% and inquiries up 7%.

“Autumn has wound down and the winter hibernation period sees tenants hunker down so we often see listing numbers swell and demand taper off,” Mr Skipper said.

Still, one surprise is the increase in listings and reduced demand in central Auckland hasn’t led to lower asking rents, he said. Average rents in the city are flat while in Manukau and Waitakere they are up 4% and North Shore’s by 5%.

One reason demand has softened in Auckland is that tenants are looking to become home owners, he said.

“Over the quarter, we’ve seen a 16% increase in inquiries from potential buyers compared to this time in 2011 but they’ll be finding the market challenging, too.

“Listings are flat and there’s plenty of healthy competition in Auckland, in particular.”

Elsewhere in the country, listings in Palmerston North are up 30%, rents are up 3% but demand is down 14%. In Dunedin, listings are up 17%, rents are up 3% and demand is up 4%, and in Hamilton, listings are down 2%, rents are up 1% and demand is up 1%.

In Wellington, listings are up 1%, rents are down 2% – the only major centre to show a decline – and demand is down 4%. In Lower Hutt, where rents are unchanged, listings are up 15% but demand is down 4%.

Mr Skipper said landlords in areas in which listings have shot up “shouldn’t panic” because more than half of all rental listings stay on Trade Me for 20 days or less.

Even with the jump in rental prices in Christchurch, it’d be a pretty brave investor who’d buy or build rental property there while the ground is still shaking. The much-talked about re-build of Christchurch is only just starting and the are still years of shortages to contend with.

Expensive rents may be on the way out

Here’s a strange phenomenon I have noticed. While rents for average homes are increasing rapidly, rents for expensive properties seem to be falling. Some of my clients complain that top-end apartments and homes which may have been easily let from $1000 per week and upwards are showing weakness.

My own research seems to support the notion that people paying high rents now find that OWNING is competitive to paying high rents. Hence high priced rentals are tending to remain empty longer, while the pressure on the housing market increases even more as renters move to ownership. This was proved to me when advising a client about renting out their luxury city apartment . For years it appeared there was no problem to obtain $1200 per week in rent, and the owner was regularly rushed of her feet whenever it became available.
Recently when it became available again, heavy advertising produced total silence. It wasn’t until the rent was advertised at a $850 a week did the phone again start ringing. Quite a discount.

Summary

The property market is in a state of flux with rents rising rapidly at the cheaper end and pushing people into buying as rents become too expensive.
The pressure on the existing housing stock is at bursting point in the main centres and we could be facing another bubble — which would be a very unhealthy state of affairs given the weakness of the economy both locally and internationally.

In my view the whole property market is approaching some sort of crisis and I am picking a large upward burst of prices and rents in the next year or two until a new equilibrium is reached. That will hopefully be a situation where, the mix of low interest rates, shortages of housing stock and rent levels reach some sort of balance once again.

Can this be done or will there be collateral damage on the way?

Olly Newland
July 2012
www.ollynewland.co.nz
© 2012 Olly Newland. All rights reserved.

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Confusion in the Ranks – Mortgage wars and the Budget

Olly Newland’s client newsletter May 2012

To fix or float? has become one of the most pressing decisions anyone with a mortgage has to face especially now.

Lenders are slashing rates left right and centre. But how much further?
From all sides a thousand voices argue one way or the other.

Had anyone listened to the advice given out by some of “experts” and bankers to fix then — for 6 months, 12 months or longer — it would have cost them a bundle.

We now have the lowest interest rates in 50 years, not only in New Zealand but in most other countries in the world.

In the USA Home mortgage rates are at a record low — frequently under 4% for up to 30 years fixed.
See: Rates keep dropping

Likewise the UK mortgage rates are at a record low between 4.5% and 5.5%: Compare Rates

And in Germany rates hover around 3.5% to 4%

Now we have the same phenomenon in New Zealand with banks vying with each other in cutting rates.

Why is this?
What’s going on?
The answer may be simpler than many think.

With the demise of finance companies, and recent performance of the ‘risky’ share market (in some people’s view, run by rogues with inside knowledge) the only ‘safe’ place to put spare cash is in the bank.
Hence the banks are awash with cash and need to get it out working.

Banks survive on the small margin between what they pay for deposits and what they receive by way interest from borrowers.

As usual, there are fish hooks

Here’s the kicker: The real reason banks are cutting interest rates is to obtain the “add-ons” that come with granting a mortgage.

With the mortgage they hope to get more rewarding and lucrative interest rates by lending to you other products that is well above the measly home mortgage rates e.g., credit cards [9 to 19%], car loans [8 to 14%], overdrafts [9 to 17%,] fees up to 20%, not to mention life insurance, home and contents insurance, and mortgage insurance as well.

There is another strange oddity where we have floating rates often more expensive than fixed rates – but as usual there’s a catch.

The catch here is that with a fixed rate you are trapped with that particular bank.

At present the beauty of floating rates is the ability to go from bank to bank to compete for your custom.

Recently I assisted a client who was offered a mortgage at 5.5% floating. With my advice he approached another bank and was quickly offered the same deal at 5.25% .

He then went back to the first bank which matched that rate and knocked further 0.2% off that!

He then returned the second ask and got an even better deal! He ended up going with the original bank at 4.99% … which just shows you that competition is alive and well.

Moral of the story – banks hate competition. They want to lock you in so make them pay for the privilege if you can.

See below for 20 Questions you should ask your lender BEFORE you sign or renew your mortgage.

Where to Now?

It is my view that interest rates have further to fall yet … perhaps by as much as 1%. Now that might not sound much but to the maths

A $400,000 mortgage at 5.5% = $22,000 p.a interest
The same mortgage at 4.5% = $18,500 p.a. interest
A saving of $3500 per year or $67 per week. Probably enough to keep the family car in petrol or pay the bus fares 52 weeks in the year.
Not bad money if you can get it.

So in my opinion this is NOT the time to fix, but to stand back a little longer and keep your mortgage floating — bearing in mind that you are free to swap banks any time you want.

And here’s another thing: The quoted rates at any one time are not necessarily what you have to pay.
Banks frequently cut special deals below the quoted rates.
So give it a go. If you don’t ask you don’t get.

Whose advice should you get?

The last person you should ask is your bank manager. (C’mon use your common sense!)
Would your bank manger give you unbiased advice like, ‘Try another bank’? (Do turkeys vote for Xmas?) Hardly likely.

Not to pick on them, but only a short while ago the ANZ was suggesting fixing your rate. Now they are slashing them again: ANZ National cuts rates
So much for THAT advice!

How about your lawyer or accountants?
They would be better but, with all due respect, many lawyers and accountants have no idea either.

Some people think that just because someone is a lawyer or accountant it makes them experts in property as well. This is not the case at all. I have seen to many situations where these respected professionals make colossal boo-boos in the subject.
They may be brilliant divorce lawyers or business advisors but on interest rates they have no more clue than the man in the street.

Independent mortgage brokers (and I emphasize “independent”) are much better but the best in my (biased, naturally) view are independent property consultants such myself as we have no allegiance to any bank – only to the client.

See below for 20 Questions you should ask your lender BEFORE you sign or renew your mortgage.

The Downside

The people who are missing out are the term deposit investors who are obliged to take lower and lower rates on their savings. This is the other side of the coin and it would seem to me that depositors should be compensated by at least by having their loans either indexed to inflation, modest as it is, or the tax on their returns adjusted for the same reason.

The one disquieting side effect of low interest rates for depositors is the inflation effect. We may be setting ourselves up for massive inflation some time in the near future as low interest rates encourage people with any sort of money to look for alternative investments.

The art market is one of these outlets.
Consider this sale of ‘The Scream‘. This sort of money for some pastel and canvas resembling the demented daubings of a monkey, is not rational and surely a portend of things to come.

The Budget

Another downside may be further moves by the Government in the budget to fill loopholes in taxes as they affect property investment.

It wouldn’t surprise me in the least if the Government re introduced Stamp Duty on property sales, or disallowed some more tax ‘losses’ in an effort to rake in more tax.

Any such moves would increase rents, since all costs to landlords are eventually passed on, so it’s not all bad.

In an effort to get people to invest in “productive  investment”, expect further disincentives – none of which will work but will, as usual will end up with even higher prices than  ever.

I have seen many times before. The more you restrict the market the higher prices become.
If you want to contain prices you make property more available, not less. Ask any economist if this is not  fact.

Any serious interference with the property market could lead to a ‘collapse’ as waves of selling sweep across the country with results we are all aware of when we look overseas. So let us hope our masters are aware of this fact and keep a very light hand on the tiller.

Olly Newland
May 2012
www.ollynewland.co.nz
© 2012 Olly Newland. All rights reserved.

FREE Report

I have prepared a list of 20 Questions you should ask your lender BEFORE you sign or renew your mortgage.
It would be my pleasure to send it to you with my compliments. Email me at Olly@NewlandBurling.com or use the contact form to request a copy.

Who’s To Blame For The Rising Cost Of Property? (Column)

Olly Newland’s column May 2012

Almost on a daily basis websites are full of angry people accusing ‘speculators’ of ramping up the price of property — supposedly pushing it out of reach for ‘the poor’ and first home buyers.

'The Tax Gatherer' 1540 - Marinus Van Reymerswaele (click to enlarge)

‘Bring in a Capital Gains Tax!’ is the cry, or there are calls to ‘restrict’ lending for property purchases, or to ‘punish’ investors by removing tax advantages, or to flood the market with more undeveloped land. Some even want the government to tax gains that have not even been realised.

This cacophony of shrill envy aimed towards property investors is almost exclusively driven by those who cannot comprehend this market reality: where someone has actually taken the plunge, bought a property of some kind and then — whether immediately or over time — made a profit.

However let me tell you that it’s not ‘speculators’ who are driving up the price of property. Indeed, they are more likely driving *down* the price of property! For speculators can only really thrive by fierce haggling in order to buy at bargain prices.

Continue reading

Commercial Property – the alternative to residential (column)

Olly Newland’s column April 2012

I have always been surprised by how some people react when I suggest they should investigate commercial property investment because it provides a very a good alternative to residential investment.

It’s “too complicated”, they say. Or “too hard to understand” is another common response, as well as fear of vacancies with a consequent loss of income.

Yes, I agree, residential property is the more “liquid” of the two forms of investment, but successful residential investment is, in my view, the hardest subject to master by a country mile.

We all know the advantages of residential property and they are persuasive, that has to be said, but let me give you some of the disadvantages — just for the sake of the argument.

The main problem with residential is that it’s “political” in every sense of the word. From one day to the next there is a steady drum beat, criticising those who own or invest in residential property.

The media run one story after another on overcrowding, shortage of rentals, rising rents, unfair profits, and lately pressure  to introduce a capital gains tax or reduce so-called ‘tax rorts’.

It’s no wonder that there is a growing rental crisis, and increasing homelessness, all aided and abetted by the recent tax disadvantages which have, as expected, had the exact opposite effect from what was intended.

See: Sleeping rough is street legal

All this was predicted by me for over a year or more. And let me quietly tell you something else in the strictest confidence mind  you. Draw close, I don’t want to shout. Continue reading

Feature article on Olly in ‘NZ Property Investor’ magazine

Real Estate's Rascal Looks Ahead

The latest edition of NZ Property Investor’s magazine features a four page feature on Olly Newland and his advice for investors: Real Estate’s Rascal Looks Ahead

Buy your copy of the magazine at your local bookshop, subscribe to the magazine here.

You can download a scan of the article here (PDF 1.5MB)

New: 'Portfolio Tune up' — click for details

The Mood of the Market: 2012 (column)

Olly Newland’s column February 2012

2011 has come and gone — and for many it’s good riddance. It was a particularly tough year for some. The recession, both local and overseas, seemed to have no end

Hopefully 2012 will be better for those of us who are investors, or who intend to be investors.

We are still battling the ding-a-lings lenders who don’t seem to have a clue about what they are doing most of the time. Even worse, we are obliged to endure the stolid hierarchy of bureaucrats at Council level, some of whom should be whipped across the soles of their bare feet until common sense penetrates.

I am proud to say that my team and I have advised and mentored many investors — guiding them along more profitable paths, ironing out problems, re-organising their financial affairs, (whether property related or in general) and sadly, sometimes acting as grief counsellors in difficult situations.

The mood of the property market has definitely turned for the better … starting from late 2011 and continuing now. Hopefully this will last and even improve further.

Likewise the commercial property market (shops, offices factories etc) has seen yields falling to new lows as investors seek much better and tax effective returns other than in limp wristed bank deposits.

Pressure

Shortages lead to pressure in the market

In previous articles I have outlined a number of reasons the market has improved — such as continuing low interest rates, the leaky homes fiasco, the Christchurch earthquake tragedy and a virtual freeze in new construction — all of which combine to form a veritable witches’ brew of shortages and pressure. As we know, shortages create demand, and demand drives up prices and rents.
And we should mention here the loopy Government tax changes soon coming into effect where depreciation will be disallowed. On the bright side, for the property investor and landlord, this tax change will push up rents even further, but disenfranchise even more people from ever getting onto the property ladder.

I predicted all these problems many months ago. Even so, it is frustrating to read all about it today, as if the problem had just arisen, with no idea that there was a problem until now.

Renters in race for space in inner city
By James Ihaka NZ Herald
Tuesday Jan 31, 2012

Renters are scrambling for properties in a housing shortage that has deepened in central Auckland and is now rippling out to the suburbs.

Some areas have seen rents rise by up to 28 per cent and more increases are on their way as the first tax bills disallowing depreciation claims hit property owners from April.

Letting agent Lesley Wills, of Ray White, held a viewing at a Mt Eden house at the weekend and got 10 groups hungry to get a lease. …

and

Bidding wars over rental housing
By Michael Dickison NZ Herald
Feb 1, 2012

Auckland tenants say they are trapped in a bidding war in a city choked for rental properties, as consents for new housing hit a 46-year record low.

Desperate house hunters are sending realtors full CVs with photographs before viewings – which they turn up to with applications already filled out – and one renter says he has been up against offers to pay $100 extra a week. …

All these pressures also lead straight into the property market via increased sales and prices. The wheels start to turn once more and the flow-on benefits show up … with even more breathless urgency.

There are those who try to argue that housing is “non-productive” and anyone who has spare cash should put it into “productive assets”.
But what exactly are productive assets?
No one seems to know or, if pressed, can only give the vaguest of answers.

Say what you like, but it is clear housing, whether purchased to live in or as an investment, creates a huge number of employment openings — from carpenters, electricians, steel, glass and concrete workers, to architects, engineers, and so on down the line to everyone else either directly or indirectly.

Moving on, I’d like to bring two more subjects to the fore:

(1) Why I would never buy cheap houses in South Auckland
(2) Property Finders: a plague on the market

Continue reading