Real Estate or GOLD

Gold v Shares v Real Estate over the last 10 years 

I’m a Real Estate agent !. Why ?. Because I unashamedly love and endorse my product. It’s really good for you. You can’t have enough and everyone should try to get some . It empowers people and helps build families and communities. It’s the safest and surest way to having a comfortable life.

Out of curiosity, I thought I would measure how over the last 10 year Gold , shares and real estate compared. It’s been difficult times and there has been a lot of talk about the best place to have your assets. The difficulty in comparing each category is Real Estate is measured in thousands of dollars while shares can be measured in cents. To look at apples with apples I have taken a Gold price graph (from paydirt.co.nz)  and the NZ share price graph (from the NZX top 50) and the medium Real estate price for NZ ( from REINZ.) They all cover the period from January 2006 until June 2015 I have then standardised these by measuring each assets movement on a scale of 1-50 . Forget about where the lines start , because they each started in different positions. Gold was low , Real estate was high. The important point is where they were in January 2006 compared to where are they now. ( June 2015 )

gold v shares

Gold . gold A pretty good investment over the last ten years. It’s fair to say gold is in its golden years because of the Global Financial Crisis and has performed out of its skin. If you started with a $1,000 gold ingot you now have a $3000 gold ingot. Your asset grew around 200% over this time. You would not have received any additional income from holding it.

Shares .  Not so good. If you started with a $1,000 portfolio you still have a $1,000 portfolio. You will have received dividends of around 3-5% over this time so you should have received about $300-$500 in cash as well. But what about splits and share buy backs etc?. Yes I know! it’s only an quick comparison so don’t be so pedantic and what about the fact that the NZX50 only measures the 50 top companies. If one of them goes broke or has a bad run it simply drops out of the equation altogether and doesn’t affect the NZX 50. (I’m still holding my Chase Share Certificates waiting for them to reappear in the NZ50X, but I’m not bitter)

homeReal Estate. If you went in with a $1,000 property (I know there’s no such thing, but this is just an comparative exercise! Really! Did your mum raise you on lemons or something? ) you should have an asset worth around $3,000. If you had rented your $1,000 house out you should also have around $500 cash as well.

The real estate figure used is the NZ medium so doesn’t differentiate Auckland from the rest of the country, but it’s the best way to compare apples with apples. If I was like  the NZ stock exchange I would only use my best performing cities as a measure. The REINZ 5X. Auckland, Queenstown, Wanaka, Tauranga and Hamilton

So purely on the return it’s easy to see why real estate is such a popular and sound investment. The other thing this graph shows is the relatively steady rise in real estate over time. It has the odd short term dip but nothing compared to the roller coaster ride of the share market and gold. It looks to me like Real Estate is a sound investment strategy while the Share market and gold are closer to gambling. You are trying to pick highs and lows and  getting  in and out at the right time.

There are a number of other reasons why Real Estate has so many followers as an investment, such as the effect of gearing, but for this article it’s purely about the return. So why do new Zealanders have such a strong fascination with property? Because they are smart that why!

 

Is it a Boom or is it just a Correction

boomOR JUST A CORRECTION

Over the last thirty plus years of selling I have seen plenty of boom and bust real estate markets. In Whangarei we are heading into the next “boom” market. On the surface it would appear that the market is constantly booming, stagnating or busting. However I don’t think that’s what’s really happening. The “boom bust” cycle is more to do with the way we measure the market. I think it’s more a case of the market having a natural upward movement and then occasionally falling behind, then correcting back to where it should be . In other words, we have corrections that correct any slowdown in the market. These slowdowns are caused by economic factors such as the global financial crash in 2007, or by political intervention as occurred in the late 1990,s and early 2000’s when the reserve bank governor at the time used interest rates to artificially cool the market.

I have seen historical figures that show house prices in both NZ and Australia have moved at an average price of 10% for over 125 years. The English figures, which date back to the Domesday book of 1086, show a similar 10% per annum trend.  Not surprisingly this book was created for “William the Conqueror” , a Frenchman of Viking descent , so he could better tax the English citizens he had just conquered. I’m surprised he wasn’t called “William the taxing froggy Bastard”.  Maybe the English were more submissive in those days, or more likely “Conqueror “ was a French word that he introduced to the English language, by telling the newly conquered British that it meant “ taxing froggy bastard “ .

10% growth seems such a high figure and I guess houses of today are very different from the hovels that “William the Conqueror” taxed into submission, but never the less it seems to be consistent over the years and over different nations.

To test this I have taken a more conservative 8 percent per annum growth rate and because I don’t have access to all the government statistics, I have used figures kindly supplied by the REINZ which go back to when they first started collecting sales figures for NZ in 1992. The two graphs below show 8% growth from 1992 for Auckland and Whangarei. The 8% annual growth figure is the red line in both graphs. The green line is what actually happened each year. Because 2015 hasn’t finished yet I have taken the latest medium sale price for August from the REINZ figures.

auckland chart

If we start with the Auckland figure and take the red line ( 8% growth) as the basis of what should be happening in a perfect world where we don’t get wars, economic collapses, and governments artificially boosting interest rates to haul in housing prices. We have a red line climbing steadily as the population slowly grows and land becomes in shorter supply and therefore more valuable. The “law of supply and demand” at its simplest. The green line represents what actually happened over this 24 year period, occasionally going above the line but pretty much tracking it until 2007. We then had the global financial crisis of 2007 where property prices stagnated for around 5 years before starting to correct back to where they should have been.

Note the use of the word ‘correct “, If you use this model then that is exactly what the green line represents. A correction back to the underlying value of property. Auckland looks like it will be fully corrected in about 16 month when the green line crosses the red line at about $900,000. The Auckland market still has $150,000 to go before it reaches its natural growth level.  If you take 10% as the natural line then Auckland still has three years to go.

whangarei chart

When we look at the Whangarei market and apply the same criteria we get a few more fluctuations, probably due to the smaller size of the city and the effect that would have on averages. But the real item to notice is the huge gap between the red line where we historically should be, and the current green line. Unless there is going to be a major change in population trends where provinces just stop growing, there is going to be a large catch up. All the news today is about how Aucklander’s are moving out of the city to the more affordable provinces. I hear on the news how unless you actually own a house in Auckland it is nearly impossible to afford to live in the city now. Two average NZ wages (Stats.govt.nz) of around $600 per week ($1200 combined) are not enough to live in Auckland anymore.

Every time I slowly creep through the Auckland motorway congestion I wonder two things. First and loudest “how can anyone actually live here?” And second,  quietly, in case a fellow congested traveller has their window open, “if everyone hates their current mayor as much as they say they do, how come he is in his second term. Haven’t they heard of democracy!”

People are moving out of Auckland in increasing numbers, some to retire and others  so they can  afford to buy a house and have some sort of lifestyle. There are still plenty of jobs in the provinces especially for those with a good work ethic. Many of these Aucklander’s moving north are bringing their jobs and skills with them so don’t need pre-packaged employment.

So while Auckland still has a short way to go to reach its ideal line, Whangarei has only just started. If this model is correct, then we can expect to see the average property rise by over $150,000 in the next 3-4 years. As mentioned in previous newsletters the growth is well underway with Corelogic’s August newsletter having 4.6% growth for Whangarei year on year. (August figures) This will accelerate over the next few months. The evidence is there. All agencies are desperately short of listings. Traditionally agents are buffered from a shortage of listing for a while because they have the “old unsold ones’, Those listings that have either been on the market for years or were withdrawn because they hadn’t sold but were still available at a price. These properties are now being sold as agents phone withdrawn listings to see if they would sell. By October /November we are going to see some real pressure on existing prices. It would be fair to say that most existing agents are saying “Wow” nearly every  time a property sells. Wow because we didn’t think it would get that much!

Although the Whangarei graph doesn’t show much recent growth, (it will in the next few months) there is a clear upside happening now, and logically, based on past historical factors, you can expect the Whangarei market to have a large correction. This could  be a minimum of $100,000 but should be more in the range of $150,000 to reach the correction line.

(Note. I have said before that I prefer the average market figures that QV use as a more accurate reflection of house price levels in our city rather than the medium levels that REINZ use. Because I have access to the REINZ figures I have used these. For some unknown reason there seems to be a lag behind what the REINZ figures show and what QV shows. QV have the current Whangarei House price for July at $353,402 while REINZ have it at $280,000. The $350,000 level seems to better reflect what I am seeing in the market place and clearly shows the growth we as agents are seeing.  As proof I only need to think of the average  Whangarei house today. Three bedrooms ,  150m2,  double garage,  flat section, I could find you that for $350,000 ( just ) but its not there at $280,000.

Just as today, back in 2003,  I could see all the same signals indicating a correction was coming. I thought a smart man like myself  would mortgage everything I had and buy 10 houses right now. But regrettably caution prevailed and I did no such thing. I just couldn’t conceive  how a property that was worth $150,000 today was going to be worth $300,000 in three years’ time. So I did nothing.

I feel the same way today. I am sure there is going to be a big correction and the smart thing to do is to go out a buy more houses now, but there goes that caution buzzer again. I’ve got a big stake in the property market anyway, and will get a nice gain if and when the correction happens so why take the risk?.  I bet I don’t feel the same way in 3 years’ time when I look back cursing that caution.

Advice #1 Buyers . Pay the money being asked . It’s foolish to negotiate hard in a rising market . The capital gain you get after securing the property will do the negotiating for you. Quote ”In a rising market you never pay too much , but you may buy it too early “

Advice #2 Sellers. Time to hold on if you can! Your asset will almost certainly be worth more money tomorrow than it is now.

The media The media love a story, and seem to love zigging when everyone else is zagging. This can have a large influence on people’s exposure to real estate stories as they read the current headlines. Recently the Media have been finding articles to support the Auckland market being in a bubble that is about to burst. Take for example the following found in the NZ Herald.

“Jan O’Donoghue, QV home value northern operations manager, said speculator trading patterns showed signs that they thought the market could soon turn. QV stats show more than 2000 homes have been bought and sold more than once over the past 12 months. Often, nothing has been done to improve these properties at all and speculators are just on-selling it and taking the capital gain. Rapid on-selling can be a sign that some speculators may believe we are close to reaching the top of the market and decide they have made enough profit,” she said.”

There is such a fragile link between 2000 homes being bought and sold more than once in 12 months and the market reaching its peak that it beggars belief. What about the factors against it. There is still a massive shortfall of homes, Interest rates are heading down towards a historic low, Immigration is at an all-time high, and land to build the new houses on, is wrought with difficulties as various self interest groups oppose and slow the developments. I’m sure Jan O’Donoghue didn’t mean her comments to be taken as “proof’ the market was about to collapse, but the media will continue to push negative stories because it sells newspapers. The reality is Auckland has a way to go before it hits it peak and then the  most likely scenario, is it will stop growing for a while rather than collapse.

The Winter Effect. Having sold real estate for over thirty years I have observed some common patterns. With the odd exceptional year, sales volumes are seasonal. Winter is a time the market slows down. People tend not to list over winter because their house is not looking its best. The weather is rubbish, so maintenance jobs get put off till spring. Buyers are more reluctant to brave the climate to look for houses, but most importantly there are less physical daylight hours for people to look at homes. The end of July through August and into September  the market slows down. It moves again in spring, peaks late summer and autumn and then drops off starting late June. I keep hearing media reports about the sales figures slowing down. Don’t believe it! That’s just the winter seasonal effect and we are still full on into a boom (correction) market. Very few listings and multiple buyers for any well priced property.

About this Newsletter . “ What’s it all about Jimmy!”  Diana and I worked out a few years ago that the most powerful and useful thing we could share with you was our real estate knowledge . We put our combined 50 plus years of real estate selling experience into print to help benefit you in your decisions. The newsletter is based on what we are seeing, statistics, media,  and reports as available, together with some original research and our interpretation of what it all means . We try not to sit on the fence but to make predictions about what we see happening in the near future specifically in the local Whangarei District. History is a great teacher .