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.
Olly Newland Mentoring Programme
Olly Newland provides a consulting and mentoring service for people committed to make serious progress with property investments … whether it be buying, selling, holding or troubleshooting.
With more than 45 years in the property game, there are few investors who wouldn’t benefit from his insight and experience.
Olly’s services are impartial and independent of any real estate agent or sales organisation, bank or other lender. Unlike some who purport to offer similar services, he does NOT broker real estate ‘bargains’ (houses, apartments, sections or developments off the plans) nor other related services such as financial planning.
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.
FEEDBACK: Do you agree or disagree with Olly?
Send your comments, criticisms, counter-arguments or any feedback to him by clicking here.
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).
Hi Olly, I was wondering what your thoughts are on market leaders differing points of view. On one side you have some economists eg tony alexander and asb economists predicting the property market is going to improve by 4% this year then on the other you have a anz economist saying that our property market is over valued still by 15-25% which if eventuated would result in a fair portion of nz home owners with 0% equity. I just dont understand how these economists that were educated at the same universitys can come up such such different views? your thoughts?
Scott
Dear Scott
You are right. Economists have picked 5 out of the last 3 recessions correctly.
The trouble with numbers, charts and models is that they cannot predict emotion.
I view the scene based on personal experience over 50 years and trust that, as well as keeping up with the latest business and political news on a daily basis- both locally and internationally.
My instincts tell me that prices will stay flat and rents will rise until the tipping point comes where renters go back into the market.
I also believe that politicians cannot live with recession and survive so they will deliberately re-inflate economies- which means inflation.
You can see it already with constantly rising prices which will eventually lead to wage demands, which lead to more price rise and so on and so forth ad infinitum.
Regards
Olly
Olly, aren’t you and most of the market commentators trying to talk up the residential housing market?
With low economic growth worldwide, and the likelihood of limited income growth within NZ you seem to be forgetting the affordability factor of the average tenant or home owner who has limitations on servicing either rent or a mortgage. For rentals this means yields are either going to be remarkably low or prices are going to ease further to fit an acceptable yield platform.
As you have stated banks are getting “tougher”and will continue to be so for a further 6-12months which will influence greatly the prchase price. These new market values will shock most property owners and they will choose not to sell rather than face the reality of the market. A property shortage would in normal times bring about a rise in sale prices but we are not in a normal market situation and I believe we are in for further readjustment downwards.
Statistical means can be manipulated but the reality is NZ and many other nations property has been seriously overvalued for a long time. Past models are no longer valid in this market.
— Richard Jones
Dear Richard
I am not trying to talk up the market. Indeed a down market is more profitable as I can now drive bargains that were unthinkable a few years ago.
From past experience, when property prices rise dramatically (as they did) rent levels are forgotten as investors chase capital gain.
Now with the market flat investors are being much tougher on rent levels and will push these upwards to the maximum. Couple this with virtually no building,
leaky homes, low interest rates and the earthquake and we have a classic scenario for rent rises in the offing. The property market is not the share market.
Things do not happen suddenly and logical reactions do not always appear on time. I believe we are in for a large bout of inflation as the politicians try to get the economies of the world through the recession. This will feed into a push upwards for wage rates and thence into rents.
As you say past models are not valid any more but human nature stays the same.
Greed and Fear will always rule and the models will revert to the norm.
Regards
Olly
Click for details