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 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)

Crockers latest research

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.

Here’s the BNZ-REINZ Residential Market Survey released today.

Worth a read.

Download the report here
(8 pages PDF 50kb)

Olly Newland’s June 2011 Column

I have in several previous articles and columns predicted the rise in rentals, starting in Auckland and spreading like ripples in a pond throughout the country.

Having just been to Australia and with the benefit of my own investments there, I have always looked at the Aussie property market to pick trends at home. House prices in Aussie are sky high and $1million buys you little. Now rentals are moving as their market cools.

The natural disasters that have swept Australia have knocked The Lucky Country around. I predict before long the exodus of Kiwis will slow, stall and then reverse.

See The Age: Softening property market, new home sales slow

New Zealand

With regard to the local market, it remains (as I predicted two years ago) more or less flat with very little new building coupled by little demand. Why is this? Why are new houses, especially modest new houses, so hard to build?

The answers are simple.

(1) New houses carry a GST component of 15% on every door knob, piece of timber and blade of grass — this makes them immediately uncompetitive with second hand houses — which may only be across the road.

If the Government wants to revive the building industry then this is an area that should be looked at carefully. Some of the actions that could be taken to help first home buyers include a serious effort to provide grants towards the purchase of first homes up to a certain price limit (which would vary from area to area).

There is a ‘Welcome Home’ grant supposedly available from Housing Corporation but it appears not to be actively promoted. I haven’t ever come across one single person who has received one of these grants. It seems likely it was created as a mere political stunt to anaesthetise the masses rather than a genuine attempt to help. (Call me cynical.)

• A cash grant of up to 5% of the purchase up to a certain price limit (which would vary from area to area)
• A subsidised interest rate for the first 5 years.
• The ability to capitalise all or part of the Working For Families benefit to create a deposit. (http://www.workingforfamilies.govt.nz/)
• Making interest payments for first home buyers tax deductible
• Waiving or substantially reducing the GST content on new home …

Read the rest of this column

The chart below proves once again that rents are steadily rising right across the Auckland Region as has been predicted in these columns on several occasions. Naturally there are some odd results but that is the nature of statistics. It is the general trend that has to be looked at.
As costs, prices, disincentives and tax changes bite into investors pockets these rent increases will become more and more pronounced. The Rugby World Cup will also accelerate rents. Even though the event will pass, new levels will be set and it is doubtful that rents will fall to the same extent they rose.
I foresee better times for investors who ignore the sniping from the uninformed and envious. I have no doubts that the ultimate rewards will be great.

Crockers - Auckland rental table - April 2011 (click to enlarge)

Olly Newland returns to the interest.co.nz studio for another interview on factors affecting the property market — this time canvassing a range of issues, starting with the just-announced ‘Productivity Commission’ investigation into housing affordability, then residential and commercial property influences …

Recorded 31 March 2011

The latest building consent data drive home the dismal flow-on effects of a flat recession plagued market encouraged by Government moves to hike GST and discourage investment.

It confirms my oft repeated view that we are heading for a major shortfall in housing stock which will be exacerbated by the losses from the Christchurch earthquake, leaky homes etc. On the flip side it must eventually mean rising prices and rising rents in the not to distant future . Investors take note.
- Olly

see interest.co.nz article: Building consents for houses, apartments fall 9.7% in Feb to 2 year low, Stats NZ figures show

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10715659

by Anne Gibson Wednesday Mar 9, 2011

Auckland faces a rent shock as the Christchurch earthquake diaspora, rising insurance premiums and the loss of a landlords’ tax break all affect demand on already scarce stock.

David Whitburn, president of the Auckland Property Investors’ Association, and Andrew King, vice-president of the NZ Property Investors Federation, predict Auckland rents will spiral by $100 to $150 a week in the next year.

That will put many three-bedroom eastern suburbs homes and city-fringe properties in the $700 to $800-a-week bracket – about $38,000 a year. The average wage is just under $1000 a week.

The two men said the earthquake and demand for rental housing would propel prices upwards. Severe under-building in the past decade would exacerbate the shortage. Big insurance rises after the quakes and the loss of depreciation tax breaks from the start of next month are other factors cited for the rent shock. …

Read the full article at nzherald.co.nz

As a rule of thumb: What, typically, would you currently expect to earn (net per annum before tax) from: a) A clean & tidy 3 bed residential property in say, Balmoral/Sandringham? b) A tidy $2m commercial property in industrial East Tamaki? What do you reckon is the quickest and least painful way to really learn about commercial property? (Work as a researcher for you for free?) Do you think we are experiencing a Great Property Market Correction where, instead of house prices seriously tanking, rents will climb to the point where it will become worthwhile to hold residential in the absence of significant annual appreciation? I conscientiously read and enjoy your newsletters.
Best wishes Diana
PS Didn’t attend ’2011:The Outlook’ but I did get the workbook and audio programme (Queens Road, Panmure – brilliant!)

Dear Diana
As a rough guide you can expect around 3-4% yield from the Balmoral/Sandringham property- but it all depends on the number of bedrooms, condition and many other factors so this figure cannot be relied upon.
The commercial property in East Tamaki could return anywhere form 6.5% to 10% depending on the quality of the tenant and the property. There are so many variables in these exercises that far more detail would be required to come up with a better answer. I think rents are due for a big correction
again depending on position ad quality. Poorer areas cannot afford big rent rises so investing to more affluent areas would be the way to go.
Cheers, Olly

Agents offering cut-price deals, says real estate commentator NZ Herald 16 Feb 2011

Commentator Olly Newland wished Pero “the best of luck”, but said most agents were negotiable on their fees anyway – if homeowners were willing to speak up.
“Kiwis aren’t good at haggling – they usually get very embarrassed about it. I’m used to it, but that’s my game.
“The tricky bit is knowing whether to haggle at the beginning or when the pen is poised over the paper,” Newland said.

Pero slashes commissions on top home sales NZ Herald 17 Feb 2011

Property investor Olly Newland said the move could prove to be a “watershed” moment for the industry if Pero lasted the distance.
“All power to him if he can hang in there – he may have started a mini-revolution,” Newland said, adding that lower commission rates were common in many other countries.
Rival agents would be “gnashing their teeth” and “putting pins in their waxed dolls” upon hearing the news, Newland said.