In response to his December column, Olly Newland was invited to give his market analysis on Radio New Zealand National’s news and current affairs flagship Morning Report today. Listen here:
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Olly Newland’s column December 2011
Once again there are headlines that suggest the housing market is stirring and that prices are rising. Auckland is, as usual, the leader of the pack, but by a process of osmosis the rest of the country will catch up over the next year or two.
With all the modesty I can muster, let me point out I have been predicting this for a long time now.
Why is this happening?
What is driving the improving market when the headlines are still lurching from one crisis to another ?
Low interest rates are one key factor. Now borrowers can service up to twice as much debt as they could a few years earlier … but at the same cost.
Another key factor is that many savers are tired of getting measly returns (less tax) and are again finding the idea of investing in the property market a more attractive idea.
As for the Global Financial Crisis, people are thoroughly sick of that as well. There seems to be one crisis after another but the world keeps turning. It’s human nature to become immune to an endless, ongoing stream of ‘crisis’ talk – much like the desensitisation practice of tying a horse up to a fence by the road so they get used to traffic.
People cannot fail to notice that cars still fill the streets, that restaurants are full, exports are solid and that rents are slowly but surely rising.
Now that the “looney left” with their capital gains tax ideas have been well and truly routed at the polls, New Zealanders can get on with their plans — which including investing, buying and selling with the freedom they have always enjoyed.
All in all, these and other factors and we end up with an (un)holy mixture which could result in an even bigger boom that the last one.
Is property a gilt-edged investment? Like this? (click to enlarge)
However I believe there is a risk of some considerable danger so I give this warning:
If we do have another boom, – and the chances of that are increasing daily- encouraged by continuing low interest rates, plus earthquake rebuilding, leaky home renovation etc then the risk of the bubble bursting followed by a nasty crash seems far more likely than ever before.
So my advice is to tread carefully.
By all means enjoy any such boom. Do all the profitable deals you can find. Make money with both hands but be ready to press the ‘dump button’ at any time. In other words do not get involved in long term speculative projects.
In my view the next boom (when it happens) will be shorter, sharper and could have a very nasty bite at the end.
Coincidently, this report surfaced in the last few days: (more…)
Olly Newland’s column November 2011
We are now nearing the end of the year … and now seems a good time to reflect on the year past — and indeed on the past three years since the Global Financial Crisis struck.
For most of us it is business as usual, although let’s admit there were many who were seriously hurt by events.
The collapse of many finance companies and developers, followed by high profile prosecutions seems clear evidence that parts of the ‘investment community’ had over reached themselves in their rush to get rich quick.
Through all this, the vast majority of the property market in NZ both residential and commercial, carried on — affected far less than anticipated in the main by events both here and overseas.
Unlike some other countries which had experienced a building boom of unprecedented proportions (e.g. USA, Spain, Ireland) here in New Zealand, being a small country, our construction industry was unable to be quite so reckless. With the exception of high profile extremes, and, sure, a downturn in the industry like others, our construction sector came through relatively unscathed.
There were also several other events in the NZ economy which “tightened” the market from a purely economical point of view: (more…)
Here’s a link to an audio interview with Olly Newland following reaction in some quarters to his controversial October column: ‘While Mortgage Rates Are Low – Borrow More!’
Listen here at www.EmpowerEducation.com
Olly Newland’s column October 2011
This may seem a little contrary to popular thinking at present but by being counter cyclical you will have a greater chance of profit and wealth creation than when interest rates are high.
A few weeks ago I spoke to a group about investment. I spoke mostly about seizing opportunities when they arise and, with my usual arm-waving, talked about how the volatility in the market is a great chance for all investors and home owners. I probably got a little carried away (as I sometimes do) because I find the volatility in the market very exciting at times.
At the end of the talk someone in the audience asked me if there were any opportunities when you had a mortgage (or mortgages) to deal with.
The common practice used by most is to apply cash to reducing debt — and not save it for investing. There are exceptions, of course, such as KiwiSaver and the like, but the general rule stands that debt should be paid off first before investment begins.
So the person in the audience, feeling a little awkward no doubt, asked me how he should deal with his debt.
Yes I agreed that money is cheap these days — so why not borrow it and then borrow some more at every chance while low interest rates last?
Some stick-in-the-mud advisers (with respect) say differently. They suggest taking the opportunity of low rates to accelerate repayments of principal and interest. After all, they say, when interest rates fall and you keep up the same monthly repayments, it will have the effect of paying off the mortgage more quickly.
When money is cheap it is easy to get carried away and lower repayments as well … so you have more money in your pocket to spend on other things.
The problem is that principal payments make up such a tiny portion of any loan that it’s hardly worth the effort. Even though it’s true that a component of each payment you make is applied to reducing the mortgage it takes years to make any sort of dent in the amount still owing through your regular payments.
Interest rates are down and ‘down for the count’ … and let me go out on a limb here and say I believe that low interest rates are here to stay for the foreseeable future- as has always been the case in most Western economies for decades and especially these days.
One day interest rates will rise … but that day is far-off — UNLESS, of course, we get hyper inflation. If that happened it would not occur overnight and there would be plenty of time to change course (and, indeed, profit mightily as hyper inflation carries all assets up in value as money devalues).
Home buyers and property investors see low interest rates as a great opportunity to trade up to a bigger and better house or investment and — despite what some say — that is how it should be.
Worrying about future interest rate rises is a hiding to nowhere. Should interest rates RISE it means that the economy is improving or inflation is on its way which means higher wages and greater profits which should easily make up any difference.
The opportunity to get cheap money now carries little threat to buying on tick and loading up some debt — if done carefully — and it can bring great rewards.
My advice
My advice is to borrow more and use the money to carefully upgrade your home or investment property. A dollar well spent in upgrading can return up to ten dollars in profits — and it’s a darn easier way to make money than trying to pay down a hopeless debt.
Put another way, increasing the value of your property is the same as decreasing the mortgage. e.g. if you have a $500,000 house with a $250,000 mortgage then your gearing is 50%. Not bad, but it could be better.
If you spend a prudent $50,000 on upgrading the kitchen, bathroom, or whatever and the property ends up being worth (say) $750,000 (this is pretty easy to do. Ask any property investor) then the mortgage — still at $250,000 against a $750,000 house is now only 33% geared.
Extra borrowings, even at the current historically low interest rates are being covered by rising rents (something I predicted over 12 months ago). Look at the latest figures for the Auckland region. Some rents have risen by as much as 40% … and this is just the beginning as the housing shortage deepens:
Crockers September research (click to enlarge)
Also: remember paying off a mortgage has to be done with tax paid dollars. Increasing the value of a property is tax free in most cases. Which one, then, is the obvious choice?
Before embarking on any such plan get your friendly Registered Valuer to give you an estimate on what your property is worth as it stands today and what it would be worth when you do the upgrade you are planning.
Be prepared to compromise to get the biggest bang for the bucks as possible. (This is a big subject. Contact me if you want to learn how.)
Now is the time to increase your mortgage, NOT to buy ‘toys’, but to reinvest into the home or investment through improvements and ultimate tax free capital gain.
This is not the time to fall asleep and forget the opportunities out there. In fact it’s time to wake up and increase the value of your investment as much as possible … and reduce your debt the far easier way.
I have had countless number of clients who have followed my advice and seen their homes or investments climb quickly in value — outpacing the market easily — even in these quieter times.
A few years ago everyone was throwing money at real estate and just wanting values to go up without any effort on their part. (No wonder so many came to a sticky end.)
Now a relatively few well spent dollars (borrowed or not) can bring the same rewards with minimal effort. The aim for most renovations is to complete them quickly —ideally inside 4 to 6 weeks. With that it is quite possible to get that gain more quickly and more certainly then by blind speculation or naïve hope.
Time is of the essence. Avoid major rebuilds and stick to once-over-lightly makeovers — then you will see your equity increase in leaps and bounds … as your debt ratio reduces.
And one more bit of advice before you rush out to you see your bank manger: Increasing equity (viz. decreasing debt) requires a fair amount of hard work and dedication on your part. There is much to learn if you are not experienced. With the right coaching and right advice virtually anyone can achieve great results. It takes lateral thinking and the will to succeed
From the files – A real life story
Let me give you a real example from my recent files on just how increasing value creates equity and cash profits.
Sue and Brian, with a small loan from their elderly patents found a very nice looking 3 bedroom plus wash house brick and tile 1970’s home in the suburb of Glenfield on a reasonably level full site of 620M2 more or less.
Brick and tile are always popular as there is no concern over leaks or shoddy workmanship and so is a full site. These types of houses are in great demand as they tend to be easier to renovate being made of relatively modern materials.
It was for sale in a very shabby run down state after being rented out for years. The suggested asking price was $395,000 and with my advice Sue and Brian put in an offer of $340,000 which was rejected but came back with a counter offer of $370,000.
With my advice a registered valuer was employed who valued the property at $380,000 as is, but with the note that similar fully renovated houses in the area were selling in the high $400’s-to mid $500’s. Brian and Sue put in a counter-counter offer of $359,000 and a deal was finally sealed at $361,500. A mortgage of $300,000 was arranged and then Brian and Sue moved into the house and got stuck in. Within 6 weeks ( a little longer than anticipated) a new kitchen ( pre made variety) and bathroom were installed, the place repainted inside and out, floors polished or carpeted a double carport erected (always a good move and cheap), plus new lighting, gardening and minor repairs and major scrub up.
They also turned the wash-house into a study — good move.
Total costs $35,000 plus their own labour. A new valuation was obtained suggesting $525,000 so it looked like around $100,000 equity or profit was created. Brian and Sue listed it for rent on Trademe and were staggered to get 40 replies within 3 days. This sort of response told them that they had created something a little special so they decided to sell it, which they did within 2 weeks achieving a sale price of $500,000 clear. Not bad for their first effort and I am sure they will do even better next time – and the time after.
Indeed as I write Brian and Sue are now onto their second property also on the North shore and if they keep this up they will earn enough to effectively double their annual income.
While it is true that doing up a house while you a still living in it is not easy, the rewards more than make up for it.
Olly Newland
October 2011
www.ollynewland.co.nz
© 2011 Olly Newland. All rights reserved. See Olly’s books and audio products.
The property market is changing and changing fast. As never before, obtaining sound independent advice is needed to prosper in this changing environment. Get the benefit of Olly’s experience: Click here for details of his Property Mentoring Programme and consulting services.
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Olly’s style is up front and he offers sound, road-tested advice, robust counsel to help people move ahead with property investment. He is not adverse to using somewhat unorthodox methods to achieve his clients’ goals. (Experience PAYS!) Olly offers a limited number of people one-on-one, totally private consulting and mentoring by phone, email, Skype video and face-to-face meetings seven days a week.If you’re interested in knowing more, visit Olly’s webpage on Mentoring www.ollynewland.co.nz or email him.
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Olly Newland interviewed by interest.co.nz’s Bernard Hickey about why hard assets such as property are better than ‘paper assets’ in an era of share market volatility and possible hyper-inflation.
from Bernard Hickey’s introduction at interest.co.nz:
“The share market is a den of thieves and is not for the small investor at all,” Newland said. “They’re tired of having their share portfolios messed around with and they’d like to get into something hard that they can see in the morning and is still there and has the same value from one day to the next.”
US Fed to keep interest rate at record low
The Federal Reserve has said that it will likely keep interest rates at record lows for the next two years after acknowledging that the US economy is weaker than it had thought and faces increasing risks.
The Fed announced that it expects to keep its key interest rate near zero through mid-2013.
It has been at that record low since December 2008. The Fed had previously only said that it would keep it low for “an extended period.” …
With this announcement we should be able to kiss goodbye to any more interest rate increases for some time to come. Unless inflation roars into a life (a good possibility, as I discussed here) interest rates are here to stay or even fall.
Already our major banks have a announced mortgage rates cuts, only a few days after putting them up. There’ll be more.
Allan Bollard who threatened to raise interest rates with the next OCR must be staring into his coffee wishing that the earth would swallow him up.
With low, if not zero interest rates being the new norm in much of the western world, there will be a rush to the NZ dollar because our interest rates are “high” by comparison to others. This may be a problem to exporters … but a bonanza to every one else.
This is all good news for property. If you listen very carefully you might just hear, way off in the distance, the first tentative whisperings of the next property boom. Keep listening. I’ll swear it’s getting louder.
Dear Olly
You may not remember me but I contacted you earlier this year through your website seeking a bit of inspiration about what next step to take. My husband and I are both teachers, my husband was a painter and decorator prior to retraining as a teacher.
We have a 2×2 bedroom flats under one unit title in [...] which was valued at $430k – we bought it for $300k seven years ago with 18k deposit. They are currently renting for a combined total of $530 p.w.
We had attempted to sell them twice with no luck and after spending the equivalent time renting in [...] – more recently with a young family we took your advice and leveraged off the equity in our property to purchase on 100% finance a 3 bedroom do up in [...] for $380k on over 800 sqm site.
When we first bought it for the first time in 7 years one of our flats was unrented for 6 weeks, we scraped through somehow and are now working at a motivating pace with decorations.
We have no extra $ at present to do major work but it is amazing how a coat of paint transpires a house.
I wish to thank you for pushing us into taking a chance and pushing ourselves to do this even though financially its tight. We are stretched to the limit at present but once my hours increase next year we can pull out more money for essentials and hopefully sell [...] in due time and reinvest up here.
And as a bonus we landed in an up and coming area with a peek of the sea and amazingly, enough room out the back to sub-divide in the future if we wish too.
Thanks heaps Olly – simple words of encouragement do change peoples lives.
Kindest regards
Michelle [surname withheld]
Here’s the BNZ-REINZ Residential Market Survey released today.
Worth a read.
Download the report here
(8 pages PDF 50kb)
Here is graphic evidence that there is an “ugly” side of capitalism.
Capitalism is all about growth, the right to profit, and to deal. It is also the right to do nothing and builders are doing just that. The end result will be a chronic shortage of homes and its consequences.
In a relatively short time, the lack of new homes will become a hot political issue as the shortage leads to over crowding, rising rents and “shock horror” stories.
It also is laying the ground work for the next property boom (hard as it may seem to imagine at this time).
In 5-10 years from now we will look back and wish prices and rents would be so cheap again.
Published 30 June 2011 Bob Dey Property Report
Consents for new homes fell 16.3% in May from a year earlier, to 1139, and the annual consent rate fell 12.4% to 13,917.
The May consent figure was up by 200 from April and the highest monthly tally since November. There were 66 apartment consents, taking the annual tally for apartments to 1010.
Statistics NZ said today 68 Canterbury consents were identified as earthquake-related. The $28 million-worth of earthquake-related consents doubled the value of such consents issued since last September.
Consents were issued for $77 million of alterations & additions and $15 million of outbuildings, taking the total residential consents for May to $389 million, 19.3% below May last year.
The total value for all residential categories, $5.08 billion, is $533 million less than for the previous year, a 9.5% fall.
Auckland consents for the month fell to 236 (321 a year ago), Northland rose by one to 52, Waikato fell to 163 (202), Bay of Plenty fell to 72 (67), Wellington fell to 89 (141), Canterbury rose by 14 to 251, Otago by 10 to 85.
Consents around Auckland – using the old council boundaries except for Franklin, which has been sliced in half – for May were Rodney 52 (63), North Shore 33 (48), Waitakere 28 (40), Auckland 60 (56), Manukau 40 (73), Papakura 14 (21), Franklin 9 (27 for the whole former district).
Non-residential construction for the month rose 17.2% to $350 million ($299 million) but is still down 6.5% for the year to $3.695 billion ($3.95 billion).
Total consents, including the $33 million ($40 million) of non-building construction, fell 6% for the month to $771 million ($820 million) and 8.5% for the year to $9.185 billion ($10.036 billion).
