February 2018 – Newsletter

Contents

• Real Estate Lessons From Colin
• House Price Predictions
• Rentals and Rent Rises
• The New Government And What It Means For Property.
• The Media And Why I hate Them

Real Estate Lessons From Colinmoney tree
Back in the early 2,000’s I met a local farmer called Colin. Colin was building a rental portfolio for himself and his extended family. Colin concentrated on the low-cost areas that most people shied away from. He was the mystery man who would turn up at the auction without having been inside the property and he would bid. He was often the successful bidder and our company sold a good number of homes to him. We would often hear him say, in the modest, soft spoken and hesitant way of a farmer who spends many hours in his own company . “Well as I’ve just bought it I’d better go and have a look at it “ At that time he was paying about $30,000 for a freehold ex state house ,although I often heard him say how he had snapped up bargains for a lot less.

Over the years I hear about his progress through the grapevine and on the rare occasions that I run into him I would mention something like “ I hear you have got 50 Properties now”. In his polite and modest manner, he would usually let slip that he had a number usually about double what I had heard. The last figure I heard through the grapevine was that he and his family group had 200 properties and that his whole family were now involved in the business of maintaining a large rental portfolio.

Colin came to mind when I sold a property on January the 2nd smack in the middle of Colin’s specialist area for $220,000. I though if he has 200 of these then he is an exceptionally rich man. His properties would be worth over 44 million dollars. The property I had sold was rented out for $310 pw so applying that figure to Colin’s portfolio he may be generating a gross income of $62,000 a week or just over $3 million a year. Keep in mind that Colin paid around $30,000 and less for some of these properties, so at $310 per week, the property is yielding a gross return of over 50%.

Apart from having a great deal of respect for the man I have learnt a very valuable lesson from him. In Real Estate you don’t have to buy the best properties to get rich. The bottom of the market is where all the trouble is. You will get more meth contamination, rent arrears, tenant turnover and damage, but if you are prepared to tough it out it’s a sure-fire way to riches.

All property goes up in value, even the bad areas. Colin’s early purchases are worth over seven times what he paid for them in just 18 years and in all that time he would have been getting a rental return that should have covered or exceeded his loan costs. He has a business that can provide employment for his children and grandchildren and I bet his extended family are getting some of the best practical “ how to do it schooling’ that money can buy.

House prices predictions 

ask the crystal ball1Quotable Value showed their first drop in prices for Whangarei in three years . The average price dropped from a high of $500,800 in September to an average of $495,464 in October. This would suggest that the market has peaked and may be either stabilizing or on the way down.
In my opinion we still have more growth to come although I will revise this opinion if the next few months figures are also downward. We are seeing a greater number of first home buyers in the market and we are starting to see the Auckland investors back in our market. These seem to be the “Mum and Pop” investors who have now saved the 40% deposit and see the Whangarei market as affordable with a reasonable rate of return. The re-emergence of these lower end buyers will influence the averages downward.
 
Upon returning to the first company meeting on the 12th January it was interesting to see that of all the sales that occurred over the break all were under $500,000. Investment properties are selling fast and there will shortly be a shortage of supply and upward pressure on prices.
The fundamental shortage of housing is still the driving factor and until that is addressed prices are heading upward throughout 2018. 
Quotable value have the Whangarei market sitting at an even $500,000 at the end of 2107 and we predict that this figure will be sitting at around $525,000-$550,000 by the end of the year. The market rises are slowing but the demand is still there. We expect these rises to be more seasonal with the daylight savings months accounting for the majority of this growth with a slow period in the winter.
 
The prediction is 5-10% growth this year but more likely to be in the higher end of this range than the lower.
 

For a more detailed report into the forces driving house prices this year ,Tony Alexander, the BNZ economists , latest newsletter 15/1/18 is well worth a read.

Rentals and Rents  detective

Our team reported a big increase in vacant properties prior to Christmas with around 30 rentals sitting vacant. This was in stark contrast to earlier in the year when they had reported their first ever zero vacancies. This could look alarming, but I remember from my Housing New Zealand days that this was a common trend just before Christmas and just after.  People move out of their properties and share with friends and family to save a bit of money over the holiday period.
I am marketing two properties in the cheap price bracket where the house is overflowing with extra people, despite that not being allowed on the tenancy agreement. One landlord visited their property with me to find that one of the not allowed extra’s had occupied the garage, along with her equally not allowed dog. It’s something to watch for over this period as it puts extra strain on bathrooms and kitchen facilities and these temporary guests usually become permanent.
You can’t blame the tenants for finding ways to lower their overheads, but do you want that to be at your expense. Since writing this article the number of vacancies have dropped to 21 which is also in line with historic trends.
Rental prices have not gone up as much as predicted but all the supply and demand pressures that were there last year are still present and it is inevitable that we will see a strong rise in rents charged this year.
The prediction remains that rents are going to an average of $460 per week ( currently around $400) . We incorrectly predicted that this would be by the end of 2017. Its got to be by the end of 2018. Surely !

The New Labour led Coalition Government.

We have always tried to keep our personal politics out of these newsletters, although I’m sure some biases show through. So without judgement into the rights or wrongs of the current government we want to discuss what a labour lead Government means to Real Estate: –

Prices.
A labour Government has historically been good for house owners. Property prices tend to rise, and a recent press article showed that over the last 12 years house prices have risen faster under Labour than National, per annum. It seems very unlikely this will happen this three-year term as we are coming off a huge price adjustment period but history says it will.

There are some forces in play that will put pressure on house prices. The lower paid believe they are going to be better off under Labour. This has tended to result in more buyers entering the market to buy their own home. However, with the current prices and the loan to value ratios the hurdle between wanting to own, and having the means to own, will be too high this time around so we won’t see this increase.
Interest rates.

Interest Rates
We tend to see mortgage rates going higher under labour. This is very likely to happen again as by lifting the minimum wage you create pressure all the way up. Take for example a company that provides support for people who have left hospital on the way of cleaning their homes and basic health care. Most are on minimum wages with some having yearly rises above this level for length of service and skills. If the basic wage rises, so do all the rest of the wages to keep the differences in scale. The company is funded by the District Health Board for services provided so they have to go back to the Heath Board for the extra funding. The Health Board have to go back to the Government (or cut services) and the Government have to go back to you or borrow the money in competition with you. Anyway you look at it, there will be competition for whatever money is available and that means higher interest rates.

One of our successful predictions made in 2016 was that interest rates would stay low until 2019, (Despite some very learned and skilled economists saying they were heading up in 2017.) A big tick to Barry and a baa-humbug to the people who really know their stuff. This prediction however wasn’t based on any magic crystal ball or reading the tea leaves better than anyone else. It came from a press release that Graham Wheeler ( The Reserve Bank Governor ) made in early 2016 where he said that “Interest rates would stay low until 2019.” The reserve bank controls the interest rates so what they say must carry more weight than all the economist put together and the say interest rates are going to continue to stay low until 2019.

With strong pressure on inflation, especially wage inflation, it is inevitable that interest rates will be heading up by 2020

Supply.
There is no way on this earth that 10,000 new homes are going to be built this year or the next or the year after that. We don’t have the builders, the plumbers, the electricians, the land, nor the legislation that allows quick building. 10,000 homes a year is an empty election promise.

Building Costs
If the government step in and starts building (which is the only possible way towards this goal)you will see building supply companies and builders putting their prices up.The law of supply and demand applies to the people building the properties and supplying the materials as well. We have already seen this happen after the Christchurch Earthquake where builders doubled their hourly rates in just over two years.

The price per m2 to build will quickly go past the current $2,000 -$2,500 per meter standard and prices will reach around $3,000 per m2 by the end of 2020. That means the average 180m2 house will cost $540,000 to build. That is without the cost of a section. It stands to reason that if the cost of a new 180m2 house reaches $540,000 plus land (at say $260,000 per section) $800,000 all up,then that will put pressure on existing houses and they also will rise in cost .

The conundrum is this: – If you drive a substantial building programme you will drive the prices of housing up (not down) Houses will be less affordable thus defeating one of the purposes of building the houses in the first place.

Employment
Jobs get created under Labour. We are already in a growth phase for jobs with over 450,000 full and part time jobs being created since 2009. Labour will create more. Every labour Government since “Rogernomics” has increased the size of the Government sector. This coalition has signalled it intends to do just that with more Teachers and Police for a start. More jobs means more people are in a position to buy property so we will see demand from the newly employed . In most cases this will be where the household has gained two incomes and a mortgage is more affordable.

In summary we should be in for three good real estate years with a strong and growing buyer base. Many of these buyers will be in the lower end of the market so we may see average prices appear to drop a bit as these sales skew the graphs. But the reality will be the increased demand for these cheaper houses will be driving this price bracket higher. We are already seeing this in our January market.

The Media And Why I Hate Them ! Reporters

Maybe its because I’m getting older and a little bit wiser but I just cant stand how the media ( especially the NZ Herald) try to make the news rather than report it. For over a year now they have been predicting and reporting an Auckland housing crash. Take this headline on the 11th January Herald,
“House Sales Plummet in 2017 ” by Holly Ryan.
Higher prices,higher deposits ,finance constraints and lending tightening has seen the number of houses sold in 2017 plummet….”
The heading and lead paragraph are slanted to show how the Auckland market had tanked. It is only further down the script that you found out they were only talking about the number of sales which had declined . House prices had actually gone up by 6.6 % over the year. The slowdown in sales is much more likely to reflect a shortage of houses for sale than a shortage of buyers. A more accurate headline would have read

“ A shortage of listings is slowing the numbers of sales and putting increasing pressure on existing prices “ .

And then on the 18th January the heading
“The supply of Auckland Rentals drops 35% “ by Aimee Shaw
“Aucklands supply of rental properties has dropped 35% while the median weekly rent is predicted to spike to an all time high. The number of rental properties coming on and off the Auckland Market is down 35%compared to December2016 and rental prices in the region are up 3.9 percent.”
It turns out these figures are a press release from Trademe. The supply of houses hasn’t dropped by 35% in Auckland. Its just that Trademe experienced a 35% drop in the number of rental listings they received compared to December 2016. The reality is when rentals do get harder people stay in one place rather than house shopping  for better properties and locations, therefore the turnover rate drops. We have been seeing this trend all year. It is true that rentals are getting in short supply, which is a stupid but inevitable consequence of a Reserve Bank that deliberately makes it harder for people to buy rental properties. But to headline that the supply has dropped 35% is just ridiculous.
And then to say that “rental prices are up 3.9%” again shows the complete lack of understanding of the reporter. Trademe are an advertiser. They only know asking prices . They don’t know what the property actually gets rented at. To report this as factual just demonstrates the low levels of investigate and deduction skills of many of today’s reporters.
A more accurate headline would have been
A growing shortage of rental properties in Auckland is resulting in a 35% reduction in advertising”
We are in an age when reporters take press releases as gospel and completely fail to investigate and understand the true story behind them.

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