Land for Sale at Wal Mart! Going Cheap !

 

Wall martToday we are seeing an unprecedented demonstration of why paper money has no real value. We are seeing banks across the world printing money. Money that isn’t based on anything other than  the effort it takes to push a computer button to produce it. It’s a deliberate policy to stimulate the economies of those countries that have financial difficulties . In this world of e-commerce the money is just a symbol on a computer screen.

It’s called Quantative Easing . As Wikipedia explains it :-

 “To carry out Quantative Easing  central banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence “quantitativeeasing. ..” 

And the Government “Bonds” they buy are :

“A government bond is a bond issued by a  government, generally with a promise to pay periodic interest payments and to repay the face value on the maturity date.” 

Compare how easily  money can be created while land is in limited supply, unless you are Dutch or Dubaiian. . If it is created, the cost to produce it is every bit as much, or more, than the land value itself.  With Quantative Easing every paper or digital dollar created drops the value of every other dollar currently in circulation and raises the value of hard to get commodities like land.

We have numerous examples of countries that have gone on a money printing rampage. (The best know being the German Mark after the First World War and the more recent example of Zimbabwe, with its having to print a  100 Trillion Dollar bank Note with an exchange rate of around $1.50 US before the dollar collapsed entirely. )  As in both these cases printing money creates inflation. Quantative easing is supposed to be different in that the money is  used to buy bonds with a promise to repay it in the future but the actual money used to pay for the borrowing is still created out of nothing.

Let’s have a look at some of the countries using Quantative Easing.

Japan .

Japan has a saving culture. The good people of Japan are famous for saving money in banks, even when the interest rate for that money is a fraction of a percentage, or none at all. They still save it. This has resulted in zero or negative inflation for years. Japan just could not get any inflation into its economy, so the current government under their Prime Minister Shinzo Abe has decided to fix that once and for all. They started printing electronic money, using the spin “Quantative Easing”.  Lots of it!. They have been printing $660 billion dollars (NZ) per year   since 2013 and are planning to continue to do that until they have created an inflation rate of 2%. The inflation rate after 5 years is currently at 0.5% so there is plenty more money needed over the coming years to achieve target. The government has said it is willing to create 1.4 Trillion dollars of “eased “money,  but at the current rate that is going to run out way before they reach their target

The effect for us is that the Japanese yen is worth less, against our NZ dollar, making our products in Japan more expensive for their consumers. The consumers buy less of our products . The reverse also applies in that as the Japanese Yen gets cheaper against our dollar so their products get cheaper in our country.  It has been argued that  Japan is  effectively shipped its inflation problems overseas.  (The current exchange rate is 1 NZ Dollar to 79 Japanese Yen)

The EU or European Economic Union.

Mario Draghi, The President of the European Central Bank and the man who has his finger firmly on the European financial pulse said in a recent speech that they were planning to cut money printing :-“The €80bn-a-month quantitative easing  scheme will be trimmed to €60bn a month from April.” 

The British Guardian  has the amount of Quantative Easing  already created for Europe at NZ  1.7 trillion . .

 USA.

They didn’t even to bother with Billions. They  went straight to Trillions. . About 13 Trillion dollars to be exact . Its a bit like the Quantative easing version of the Big Bang Theory . Out of nothing there was 13 trillion! Or as “Dire Straights’ once sang “Money for nothing and the chicks for free!   Just as in the past, the ‘Chicks for free” may  not be free at all, and will come home to roost.

These three countries (or blocks of countries in Europe’s case) are not the only ones to use Quantative easing. Many other countries are using it, some countries use it and disguise it and some wont report it at all. (Think communist countries ).

THE BIG LAND SALE

A way to put these huge figures into  perspective is to look at how much land could be purchased with the created money. If  land was freely available at “Wal Mart or Pak &Save ‘  in unlimited supply, and the land was available at the current market rate for selected areas,  what could be purchased ?

JAPAN

With its 1.4 trillion NZ dollars Japan could buy 4,721 sq. kilometers of its own prime residential land in the worlds largest city, Tokyo. (Currently selling for $26 million NZ, per hectare.)  That is one third of all the land in the largest and probably most expensive city in the world .

EUROPE

With its 1.7 trillion NZ dollars, Europe  could buy  163,897 sq Kilometers  of Dutch farmland. (Currently selling for  $92,400 NZ per hectare) . Luckily for the Dutch that is 4 times the size of the actual country of 41,543 sq. kilometers. With their ability to reclaim land from the sea they will no doubt double that in no time and be the size of Germany in 10 years or so and share a common border with Scotland, where they will no doubt compare notes on how to save money.

USA

With its 13 trillion of electronic money the USA can go on a real shopping spree. Farmland in Wyoming , the 8th largest state, sells for around $4932 NZ dollars per hectare.  The USA can  buy 23.8 million sq. kilometers of newly printed land. Add this new  land  to  existing land  and Wyoming will become 3 times the size of the entire USA.  Now that’s going to annoy the Texans .

While this is a strange way to look at Quantative Easing it puts the amount of money being created into real measurable terms.

Money is becoming more and more plentiful.  It can, and is being created out of nothing, while land is still in the same short supply. With this huge amount of electronic money floating around it has to become grounded!  Somewhere! Somehow! Someday! It doesn’t have real value, because it’s created ,admittedly for good reasons but created none the less. The only place that money will eventually settle is in land, shares or gold. Historically land has been a much better investment than Gold as it returns an income, as well as capital gain. Gold only has capital gain, or loss, as the market dictates.  Shares while real in terms of ownership are a nominal concept of shared returns in a company  and are only as good as the company. If the company can goes  bust you have nothing left but some worthless paper certificates.  So it will be land in the long term.

Is it any wonder we are seeing the wise money heading this way.  Japan is already seeing signs  with most of their 0.5% inflation being in rising land values. The Global Property Guide when discussing Quantative easing in Japan, or “Abenomics” as it’s commonly called,  reports:- “Despite its seemingly negligible impact on the economy ……..since the introduction of Abenomics , real estate prices have accelerated strongly in Japan…. Tokyo Metropolitan  Area 3.73%….. Osaka Metropolitan area 7.5%  ”

With the amounts of money that have, or are being created worldwide, we are going to see real pressure come into land values right around the world. And with the nature of international borders money from one country can be used to buy land in another country. New Zealand is an easy country for overseas people to buy into , just ask the Chinese. You don’ even need residency for most land under 5 Hectares .

Property has to be the safest bet for the years to come.  Maybe consider  emigrating  to Wyoming!  With their  recent “Wal Mart ” land purchases they have loads of the stuff!

Interest rates going to remain low for a long time

We are hearing in the Press how interest rates are going up and I like a lot of others decided not to take the risk and fix for three years at the current rates. But having not put my money where my mouth is, I remain skeptical that they are rising significantly and believe the evidence suggests they are going to stay low for a number of years yet.  The increases we are seeing now are very small and caused by the cost of borrowing money rather than any actual rate increases.

From the horse’s mouth the NZ Reserve Bank Governor Graham Wheeler said  that the bank expects the OCR ( Official cash rate to stay unchanged until late 2019. That’s a year later than was being said last year.

Mr Wheeler said “

“In effect, there is an equal probability that the next OCR adjustment could be up or down.  We consider the balance of risks for the global outlook to be downside.  For the domestic economy, there is some potential upside for output growth if migration and commodity prices turn out to be stronger than forecast, but the risks around inflation look balanced.”

The key point being “we consider the balance of risks for the next global outlook to be downside “  The Bank are anticipating the world economy getting worse rather than better and while that risk remains there is no room for any substantial rate increases.

In an earlier article we discussed how the American economy was in worse shape than the press and spin doctors are letting on. This was based on the slowdown in trucking movements across the states. These are the people who move the products. This is the best marker for what’s really happening in the states when you take out the spin from the money printing. If this is slowing then so is the real economy. The figure was supported by Maersk Shipping Line which was reporting a similar slowdown in container movements. ( CEO Soren Skou “Currently we are challenged by market Headwinds. In the form of low growth and excess capacity”).  What this evidence is saying is the world’s largest economy, when broken down into what’s being moved into, out of, and around the country, is slowing down.

In an interesting article by George Friedman in his newsletter called ‘This Week In Geopolitics “, he describes “Something Rotten in the State of Russia “when analysing data about wage arrears (Wage arrears are workers not being paid )

In December 2016 (the last month for which Russia’s Federal State Statistics Service has data), total wage arrears amounted to 2.7 billion roubles (roughly $46.4 million in USD).

 The regions with the largest wage arrears can be divided into two categories. The first is port regions. Primorsky region, whose capital Vladivostok is Russia’s largest port on the Pacific, has by far the worst incidence of wage arrears. It accounts for 21.2% of the country’s total. The area where it is the second most prevalent is Siberia (in places like Irkutsk and Novosibirsk).

 In part this will reflect the lower oil prices and maybe some of the sanctions over the Ukraine, but interestingly it seems the port regions are the hardest hit. If Russia is being hit with a drop off of container movements as reported by Maersk in the USA then we are seeing signs of world trade slowdown in Russia and the USA.

Add to this the very real financial issues still facing the Europe

Mario Draghi, The President of the European Central Bank and the man who has his finger firmly on the European financial pulse said in a recent speech

“The main interest rate remained at 0%……. although the €80bn-a-month quantitative easing (QE) scheme will be trimmed to €60bn a month from April.”

 I’ve skipped lots of the speech but look at the meat of what he is saying. The European Central bank is about to cut its money printing from 80 Billion Euros. (That’s equivalent to 122.4 billion NZ dollars) to 60 Billion Euros (NZ equivalent 91.8 Billion)  A MONTH!!!! . This is money the ECB creates out of thin air to try to rescue the European economy.

“Asked at the news conference whether interest rates were likely to rise before the end of the QE programme, Mr Draghi replied that policy makers wanted to see “a sustained adjustment in the rate of inflation, and we don’t see it yet… we see progress in the recovery [but] it’s a gradual process”.

In a statement ahead of the news conference, the ECB had reiterated:

“The governing council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.”

Together with Brexit,  there are no economic rainbows in the foreseeable Global financial  future. Remember our  Reserve Banks comment “ Global outlook to be downside “ . The 2019 projection for flat interest rates is  almost certain to be pushed out further. It would be export suicide for our reserve bank to push up the cash rate now while the rest of the world tip toes around  with its head just out of the financial water.

All this supports the earlier article arguing that we have not reached the end of the property price rise cycle.

 

February newsletter

Welcome to the first newsletter of the New Year. It has been great to get your comments about the contents of this publication and your positive comments. The newsletter is copied to our Blog and it too has a strong following. If you want to see older issues check archives on this site.

Warren Ellis the English comic book writer famously said ” I try not to get involved in the business of prediction. Its a quick way to look like an Idiot

With this quote in mind we are going to do our best to risk looking like idiots as this issue is entirely dedicated to what to expect this year . To date our predictions have been remarkably accurate with us picking a 10 % property rise for 2015. (the actual was 12.9%) and our predicting a 17.5%-22.5% growth rate for 2016 . (The actual was 24%)

The predictions are based on Diana and my collective 50 plus year of selling Real estate, gut feeling, some statistics and a lot of analysing market trends based on what we know about previous years.

 

predictionsMarket Predictions for 2017

We have long argued that we are in fact in a correction cycle rather than a boom. Events happen that suppress the market, such as interest rate hikes and global financial crisis’s but these are temporary brakes on the markets and a catch up cycle will always occur. Over time property values have historically grown by around 8% a year. We have tracked the Whangarei market from 1992 to help predict where prices will be at the end of 2017. We use one set of figures supplied by REINZ and the other by Corelogic. We base the amount of growth in the graph below purely on the REINZ figures as we can access these back to 1992. However during the year we will use the Corelogic figures as these give us a more accurate figure of the average home in Whangarei. For example the REINZ have the Median price in Whangarei as $390,000 as of January this year while “Corelogic” have the Average Whangarei price at $463,000. The difference of around $70,000 is in the way the information is analysed. Medians against Averages. While Median prices are considered more accurate, we note that if you wanted to buy the average house in Whangarei you would have to spend $460,000 plus. $390,000 will only get you the better of the cheapies therefore we use the Corelogic figures as a better reflection of what most people understand as the average.

The graph below is  based on House prices rising by an average of 8% per year. The  graph shows where these prices should  be at the end of the year to fully catch up with the 8% compounding growth . (Red line $517,745) The green line is where prices are at January 2017. This means we are measuring the growth for the full year, but as we only have the first month of the years actual figures so there will be a big gap between the red and green line which will close as the new months data comes in. If we compare Januarys predicted growth against actual January figures then we are  $92,000 below the line. The December 2017  figure currently has us $127,745 below where we should be at the end of the year.

graph-1

The question is “Do we see $127,745 in catch-up growth this year. The answer “Probably not! “ There are definite signs the market has peaked in, that the rate of growth has slowed some. However Corelogic have the rate of growth for Whangarei running at 19.8% for January. If that rate of growth continues then we will see over $90,000 catch up this year . The media are hammering the public with messages that the property market has tanked but that’s not what is showing in our activity levels. Far from it.

The next question is will that rate of growth at 19.8% continue for this year ? . Again. “Probably not”. The first half of the year is the busiest time for property sales. It is more likely the rate of growth will climb back over 20% for a few months and then  drop in the latter half of the year .

From what we are seeing locally and in other regional centers close to Auckland we have to be at the top of the growth curve, so just like gravity it has to be heading down. We expect this to be a gradual slowdown with the rate of growth slowing to around 12% by the end of the year . Keep in mind this is still a faster growth rate than in 2015. The big change from last year’s predictions is that we see the slowdown taking a lot longer to kick in, and growth won’t slow to anything close to the inflation rate until 2018 at the earliest. The correction cycle is going to be longer than expected  going well into 2018.

Specifically in Whangarei we are anticipating an average growth of 19.8 for the first six months then a slower average of 14% in the second half of the year. We would expect Whangarei prices to be around $70,000 to $80,000 higher than they were last year. That’s an average  growth rate in the 16% range. The final catch up to the red line won’t happen until late  2018.

Something to think about is that 16% average growth this year will be close to the same dollar amount of  24% last year . 16%  growth on a start line of  $464,000 this year  is $74,000 while last years record 24% growth on a start line of $380,000 was $91,200. A difference of just over $17,000

Putting our money where our mouth is: – This means the REINZ median price will be around $465,000 by December and the Corelogic Average will be around $540,000 in December 2018.

Some Considerations 

 

  • Has the Auckland market stopped growing . January showed a drop in Auckland prices according to REINZ figures . This is almost certainly an aberration caused by the holiday season. A lot of people choose not to sell over this period and they are usually the wealthier people in the more expensive homes. Economists such as Tony Alexander ( BNZ) continues to argue that until the supply catches up with the demand there is only one way Auckland prices can go and that is up. While is seems absurd that Auckland prices could go any higher, until there is sufficient supply, the logic is on Tony’s side and as long as their prices rise so will ours.
  • We are an increasingly attractive proposition for the increasingly larger numbers of Auckland retirees. Lovely beaches and lovely people. You only need to drive around town and experience the increasing traffic congestion in Whangarei to know the population has grown over the last year and fast. Parking has become harder to find and there is traffic congestion in areas that never had it before. We have more Auckland buyers than we have properties so that will continue to drive prices up. • Interest rates are still at an all time low . We are getting small changes in fixed rates in an upward direction but you can still fix your rate for three year for around 5.5% . That is super low historically with some of us old timers remembering 22.5%. As long as the rest of the world is struggling we cant afford higher NZ  interest rates as this pushes up our dollar and that’s bad for the exporters and the economy . • The number of people coming into the country versus those going out is at an all time high with over 70,000 net gain. Sure most of those go into Auckland , but they then buy the houses of those who are trying to get out of Auckland , so the housing boom continues to spread out of Auckland. • The rest of the world ( most of it anyway ) is still in dire straights . NZ is one of the few countries genuinely doing well. It is away from most of the global trouble and is a very beautiful country . Why wouldn’t it be a destination point for people overseas. At home we have just had  over 50 days of overseas visitors. One of the visitors sitting in the front seat of my car , while simply driving the what to me is the very mundane State Highway 1 to Auckland said “ At every turn of the road the landscape is just so beautiful” . As Fred Dagg once sung . “ We don’t know how lucky we are “ • We have a very low unemployment rate . There is pressure now to fill vacancies so wages are going to go up. • The Reserve Bank has predicted 1.3% inflation for March this year, 1.6% for March next year and 2.1 for March 2018. Their target is 1-3% . So inflation is very much under control and within the target range and predicted to stay there. • Housing prices love low inflation. Low inflation equals low bank deposit rates, equals alternative investment strategies with housing being the most stable and secure of these strategies. Its sad but true. A low inflation environment is a high house price environment
  • Rental demand in Whangarei is at an all time high. We are getting to the stage that we have a chronic shortage of  homes and people are scrambling to find a rental. Harcourts Just rentals said rents went up by 15% across all price ranges last year, but they  don’t see that happening this year, as the average rental  of around $400 pw, is becoming unaffordable for many wage earners, resulting in the  current catch-up phase slowing down. However they also note that they have rented out properties recently at $550 pw,  which is in excess of the previous years glass ceiling of $500pw
  • Building costs just keep rising and as long as they do , existing house prices will keep up.

Sorry if its a bit of a dry newsletter. Lots of the three “F’s”  Facts , Figures, and  Foughts.  We hope the information will help you with your property planning for the year. We live in a changing environment and our reasoning is just as fallible as anyone else’s, so please seek alternative advice  and opinions before acting on our predictions .

Someone famous once said “When everyone is thinking alike, no one is actually thinking”