We are seeing a high number of signed up sales falling over. This is strange in a rising market. A large number of these are Auckland investors.
I once dealt with a Commercial developer whose catch phrase when he heard about a new property was “Just get my foot on it ” . That meant get a contract in place and then I’ll do the research to see if I can make any money out of it. Great for him, but a real bastard for the owners if he couldn’t see money in it or, even got too busy to be bothered with the research. It meant their property had been off the market for that time and usually involves some costs to the owner in legal fees.
There is at least one property coaching school where they advise their clients to put in a full price offer on a property, sight unseen.They add a clause that says the agreement is subject to a building report and doing a due diligence within 10 days . They are basing the buying decision on the internet photo’s, the Whangarei District Council website and a look down the street using Google maps. I have heard one such client say “its not an emotional buy so I’m just looking at how it stacks up in a practical sense. I don’t have to love it” . They are often putting in several such offers on properties in the district ,then travelling up one day to inspect all the properties and decide which one they want.
While these deals are exciting at the time they have a high fall down rate, as once the buyer sees the property, warts and all, they often find they do have an emotional reaction after all, or worse still pick a better option and cancel the contract.
The other strategy they recommend on this course, is to find a problem in the builders report and every property has some issue. They then use this item to negotiate the agreed price down.
I personally believe the buyer should inspect the property or have someone else inspect the property before putting in an offer. It’s not to say you won’t still have problems with the builders report but at least you know the property has passed the first visual hurdle and the agent has met the buyer and been able to form some sort of opinion as to their motives and character.
Tony puts out a weekly report about the economy . As a Real Estate Agent I have followed his writing for a number of years and have found his views compelling, informative and well researched. Like everyone he gets it wrong every now and then , but he seems to get it right more than most . If you don’t get his newsletter I recommend subscribing to it. The article below is from his latest issue of the “BNZ Weekly Overview”
Housing I gave a talk on the Auckland property market to some 700 people at Ellerslie Event Centre last night and here are the nine key points which I spoke to in terms of whether they represented a threat to the strength in Auckland’s market. The answer for all was no. Hence, as written since 2009, Auckland prices rise.
- NZ economic growth. Is the growth outlook bad meaning the outlook for jobs and incomes is bad meaning people will find themselves unwilling and in more and more cases unable to buy a house? No. While dairying is weak there is a lot of strength in tourism, export education, wine, pipfruit, kiwifruit, honey, manufacturing even, and construction.
- Auckland growth Has the surge been a flash in the pan and will we go back to the old world of Auckland being just a bigger version of Wanganui? No. Auckland is New Zealand’s agglomeration delivering growth from the fast interaction of talented young people from diversified backgrounds. Auckland was 21% of NZ’s population in 1961 and now it is over 34% heading to 40%.
- Migration Is the migration boom about to bust? No. Migration busts when we head across the ditch to make money during an Australian minerals boom and our economy is in or close to recession. But our economy is not forecast to enter recession soon and Australia’s mining boom has been and gone and won’t come back for a generation. Net migration is likely to remain strong for a number of years and 60% of the net flow goes to Auckland.
- Construction Is Auckland house supply about to boom? No. There is a shortage of builders, shortage of developable land, shortage of land not simply being landbanked, development costs to finance infrastructure can be huge. Supply will rise but the shortage is still getting worse.
- Interest rates Are they about to rise strongly? No. The RBNZ is still easing monetary policy and the bigger global problem is low inflation rather than any inflation threat. Interest rates look like staying low for a great number of years/decades.
- Regional investing Are investors flocking to the regions for yield and low mortgages going to keep doing this at the expense of investing in Auckland for the next few years? No. Investors, having soaked up cheap stock which has sat on the market a long time in the regions will soon start to ask themselves whether population growth will justify growth in supply they see in some locations. In certain locations like Hamilton and Wellington prices are likely to rise with logical economic and population growth support for a number of years. But in many locations elsewhere population growth is likely to be less than some people are thinking and investors questioning growth assumptions will eventually wonder whether they can liquidate their asset quickly should times and rentability again get tough in the less popular places.
- Aging population Are baby boomers going to sell their housing investments soon to fund their retirements? No. They need yield over a greater number of years (rising life expectancy) than people were thinking just a few years ago. The boomers will hold their housing assets for the income they yield.
- Chinese buyers Have they disappeared for good? No. They are returning in force going by the anecdotes over the past four weeks with more to come when eventually the Chinese implement their Qualified Domestic Individual Investor 2 regime in six large cities. There is no timing on when this will happen and it probably won’t until the capital outflow from China seen this past year eases off.
- Backlog Have potential buyers given up all hope? No There is no shortage of people bemoaning their decision to hold off buying since 2007. They want to buy and eventually will raise the deposit to do so.
There are other factors but these main ones sum up the situation. Pressure on Auckland prices is upward though it is not only doubtful that we will see prices rise at the same average speed as in recent years, we had better not else the Reserve Bank will impose stronger lending controls. Should the regions produce widespread rises near 20% per annum then the 30% minimum deposit requirement for purchase of investment properties in Auckland will be applied to the rest of the country.
The Reserve bank has dropped the Official Cash rate by .25 basis points today and hinted that they will drop again this year . Most will be expecting that to flow straight into lower mortgage rates which is “mana from heaven” for property owners and property investors .
However bank economists are saying that the 80% of the money we borrow from overseas is not getting cheaper and in fact has gone up a little bit . So we can expect the floating rates to come down a fraction but fixed rates may not move this time around. The main signal from the Reserve bank is that interest rates are not likely to go up anytime soon.
The big impact the reduction will have on the market is that the interest rates people receive from the banks for money deposited will go down and that means lots more people are going to be heading to the Real Estate Market to find an alternative to bank deposits .
As these people join the already crowded house buyers list there is going to be more upwards pressure on property prices. Most properties in the investment category are receiving multiple offers within weeks of going on the market. All agents in our company have a long list of investor buyers looking for ” a good property in a good area with a rental return of over 6% .” These properties do not exist anymore and buyers need to drop their expected rate of return to 5% or lower or move into the lower socio- economic areas.
On Average property prices in Whangarei are rising at $1,400 a week and that rate is expected to increase to over $2,000 per week later this year . While a good rate of return is great , in a rising market like this, your capital gains will greatly outstrip your rate of return and therefore its smarter to get hands on the property at today’s prices than to concentrate too much on the return. In six months time today’s property prices are going to look cheap and rental increases will catch up with your ideal rate of return.
If the property meets all your other requirements, except you rate of return, pay the money and secure it now as you are going to have to pay more next month.
Corelogic have just released their February Property Sales figures. The speed of increase is going up with Whangarei now showing a 14.6% year on year rise . This is well in line with predictions that we will hit around 20% growth this year . However the rate of growth has slowed down this month to a 0.7% increase from a 1% increase last month. This probably reflects the apparent slow down in the Auckland market where prices appear to have stagnated for the last two months together with the holiday period. Despite this slow down all the signs are for more pressure on property prices not less. Low interest rates are going to be with us for several more years. Houses are not being built as fast as demand dictates. In other words we have a housing shortage that is getting worse not better. Our population is getting bigger faster through natural growth, emigration and people not leaving the country. Building materials and costs are going up daily so the cost of building is increasing fast .
Every indicator that I look at says the rise in house prices is far from over and that Auckland has another round of rises coming. A bit like the calm before the storm or better still Auckland is passing through the eye of the hurricane . And while Auckland tends to be the focus of attention the provinces , like ours , will get big capital gain rises over the next two years as we close some of the gap that happened when Auckland prices bolted away.
The average house price is now just under $392,000 . That’s a $6,000 rise on last month so properties are increasing on average at $1,400 per week. This is really important to remember if you are negotiating to buy a property. An average sale would take 6 weeks to settle from the time it was first signed up. That means the property will have gone up in value by $8,400 from the time you signed up to the time you pay for it. The message is clear , be prepared to pay more for it to secure it. If you miss the property you are chasing not only will have some costs but the next property you chase will be that much dearer. Its not the time to quibble over a few thousand dollars of price. It is the time to get your foot on the property now. It will be worth what you made in a matter of weeks . Remember ” you never pay too much but sometimes you buy it too early”