1. Small Business Funded By House Prices
2. House Prices In The Next Six Months
3. House Prices Doubling Every 10 years ..
4. A Critique ! A Warning About The Auckland Market
5. Rental Market Headwinds ?
6. Hunterwasser Tribute
7. Wild Inflation Theory
8. Electric Cars Parity with I.C.E.
9. Fusion Energy and the Future
Welcome to the next edition of my mostly real-estate thoughts, facts and predictions for the future. The last letter was in July and as is becoming increasingly common it takes a few months for the dust to settle enough for me to get an idea where things are going in the property market. In the last issue I said that while logic told me that we had to be heading into a recession, we were seeing no sign of that in the markets, and that I though we would see the market stay flat of even rise for the rest of the year. Well half that prediction was wrong. It did not stay flat, but I was way ahead of every noted economist.
Small Business Funded By House Prices.
I managed to spend about 2 minutes walking alongside John Key, when he was Prime Minister, as he was heading from our conference for a rendezvous with a government BMW. I was desperate to get my message across that small businesses depended on house price inflation. He probably thought I was raving loony, as I garbled on about the link, that seemed so obvious to me, a business owner. He finished my monologue by saying “Small business needs rising house prices! I get it”. My teaching the then Prime Minister, who had a lengthy and distinguished career in the financial world to suck eggs, was done!
So, let me walk with you for two minutes …. Rising house prices are essential for business growth, survival, and capital expenditure. Approximately 97 % of all businesses in NZ are small businesses and they employ around 30 % of the working population. (MBIE). Any small business owner will tell you that when they need money to:- start up, buy more stuff, get an overdraft, buy more stock , buy more machinery, expand , or just survive, that when they go to their bank for funding, they are going to get asked one overriding question. . “What’s your house worth?”. While the banks are interested in other aspects of your business, what they fall back on is the security you have in your house or houses. That is what they primarily lend you money on. They know that this is the only readily realisable security they can get. They also know it motivates the hell out of you to make sure your business succeeds. The more your house is worth, the more you can borrow. The more you can borrow the more you can grow your business. The link between house prices and funding for small businesses is cast in chains. The last thing the government, the banks, and small business owners want to see, is property prices declining. That would be the beginning of a really, really, big financial disaster.
Which Segway’s into the Reserve Bank’s Chief Economist, Yuong Ha, saying the bank was not responsible for soaring house prices and cannot control them. “House prices are not something we can control, even though people put that on us”. And neither should they. Houses are a commodity and should be market driven by supply and demand. We do, and will see government intervention in house prices, but imagine if the government made legislation that controlled other asset classes, like the share market prices or Gold prices. Imagine the uproar!
Where Are Prices Going In The Next Six Months
The short answer is up and accelerating.
There is way too much pressure from the multitude of buyers to see any other result. We are seeing multiple offers on properties similar to the peak three years ago. Open homes are full, and we have people making offers on property without seeing them. What we are seeing in the streets
- First home buyers. As more and more young people build up a deposit in KiwiSaver, more and more of them have a deposit for a house and are they ever in the market. Any property that comes in their price range will get 20-40 people through the first open home and it is probably going to have a deal on it, within a week. KiwiSaver started 17 years ago and after three years people qualify to remove some money for a deposit. That means we have 14 years of qualified first home buyers entered or entering the market. These people are pushing the investors out of this section of the market as they pay more than the value the investor sees. A negative side effect is that the first home buyers are moving out of rentals and widening the gap between desirable tenants and less desirable, meaning the overall quality of tenants is declining.
- Money fleeing the banks. We are seeing more and more purchases where the buyer is pulling their cash out of a bank and putting it into a property. These people are often buying the one- and two-bedroom smaller properties that do not suit the first home buyer. Most of these people are older and have the cash, so we are not seeing many sales subject to finance
- People relocating from the main centers. There seems to be a huge amount of movement from the bigger cities to places like Whangarei. These people are often cashed up, as they are selling more expensive homes. I mention the cash element, current Bank strategy of limiting Loan to Value Ratio’s is only going to hurt the first home buyers and not the second two groups.
- With the current pressure on the available stock and with interest rates predicted to remain low or go even lower, there is no reason to believe we are going to see a slowdown in the market for the next 6 months, at least, and I suspect it for 12 months . Again, logic says that we must have an impact from the Covid recession, but every prediction of when that was going to happen has so far been proven wrong. We are through the end of July crash, when the subsidies would stop and kill the market, and through September crash when the impact of the subsidies stopping would be felt. The only predictions still standing are the ones saying next year when the impact of the subsidies stopping is going to be really felt. I’d hate to be the emperor standing naked in my new clothes but remember this Covid induced recession is not like any other recession and all the usual rules do not seem to apply. The recently released unemployment figure of 5.3% demonstrates that the predicted mass unemployment simply is not happening. We have had way worse unemployment rates even in good years. When you take out the 4% totally unemployable the real rate of active job seekers is exceptionally low, with some industries crying out for workers. The Government tax take is nowhere near as bad as predicted so again, bad news predictions proving wrong. The reality is we are being told things are way worse than they are proving to be.
We may not see the calamitous and dire future predictions that we have been foretold occurring. We do not seem to have died from lack of tourists. 10 billion of the money that was spent on overseas holidays is now being spent on NZ holidays. I thoroughly enjoyed my latest camper holiday, where the first thing you noticed was the different attitude of the camper staff to their own people, and the second you noticed was that everyone pulls over to let cars get past. You don’t see the big lines of cars following slow campers. The pickup and drop off terminals were very busy. There were plenty of campers on the roads and the holiday parks were full.In Reefton, Diana and I dropped into “Dawson’s Bar and Dining” looking to talk to a local about the town. I asked the extremely helpful bar lady to point out a local to me. Her finger waivered in the air as she used it as pointer to scan left and right over the 30-40 diners and drinkers, before finally with a sense of triumph, identifying one couple and a single manic looking gentleman. 3 locals out of 30-40 people. The point being NZers are out and about seeing their own country and spending much of the 20 billion they would have spent overseas this year in good old NZ.But for me the biggest bonus of all was the lack of social media posts of annoying family and friends basking in some exotic overseas location, while I was hard at work suffering the rain and cold.
The fundamentals of low interest rates, a shortage of houses and a growing population are still in play and have been for the last 15 years. Basically, until the supply catches up, the demand will drive prices up. (See Something to watch in Auckland)
“Do House Prices Really Double Every 10 years” by Mark Lister. Craigs’ Investment Partners
An interesting headline that always captures my eye, as these articles are invariable written by someone with a barrow to push. Mark starts off his article saying he is no property hater and recommends young people getting on the property ladder. Craigs are predominantly a share broking and investment firm and property investment takes money away from firms like this.
In this article he quotes Reserve bank data from 1962. He writes “that at first glance, the numbers are good. New Zealand House prices have increased 8.2% per annum over that 58-year period, so they’ve in fact doubled every nine years”. He ends his article saying that “It’s also based on some periods in our history when inflation was exceptionally high, this makes the rule of thumb much less useful, and potentially a little less accurate”
And this is the argument all these writers follow, like a well-worn Wildebeest game trail into the Great Green Greasy Crocodile infested Limpopo river. They try to claim that this increase is not truly representative of true growth, because we have inflation and gross domestic product and these events must be taken off housing growth. Mark also talks about how mortgage rates have fallen and made housing more affordable, thus distorting the increases.
He mentions that the biggest rises have occurred in times of high inflation and therefore are biased increases And the answer is “Of course!! That’s the exact point and that’s why people invest in property and that why the rule of thumb of doubling every 10 years is accurate”. Do not complicate it Mark. Your article clearly shows that despite fluctuations in interest rates, despite how well the gross domestic product is doing or not doing , despite economic slowdowns and rises, despite high interest rates and low interest rates, despite plagues of locusts and corona viruses, property does on average double in value every 10 years , (or nine years in the last 58 as your research shows.) This does not just go back to 1962, but back to when property records began. 130 years in NZ and Australia and 900 years in England (the Domesday Book)
Something To Watch In The Auckland Property Market.
Auckland looks like it is making inroads into its severe housing shortage. Previously this figure has been estimated at around 40,000 by noted economists like Tony Alexander, however a new report from the Auckland Council Chief Economist David Norman has the current shortfall at around 15,000 homes. This in part will reflect the intensive building programme in Auckland, but also by the slowdown and shift in immigration trends. While net immigration figures are up on last year (79,400 this year as opposed to 52,300 last.) The people coming into NZ now are predominantly returning New Zealanders, and with our borders closed we are not seeing the number of non-NZ migrants to the country. The New Zealanders differ from the more typical overseas migrants as they head back to their areas of origin, rather than piling into Auckland as the non- Kiwis have done in the past. Along with the baby boomer retirement drift out of Auckland for financial and lifestyle reasons, we could see the pressure on Auckland house prices slow down or even stop. The result will be a stagnation of prices in this area. It is 3- 5 years away, but we may be seeing the beginning of the trend now. It looks like we will have a Covid vaccine before then ,and it will be interesting to see how open our borders are to overseas persons after this scare. You can be sure there will be more pandemics coming and some of them will be deadlier. You can also be sure New Zealand will be an even more attractive destination to people overseas, with our ability and willingness to close the borders in times of crisis. Just how open our borders are will decide the future growth in the Auckland market.
Rental Market Signs.
We are seeing an unusual set of statistics in the rental market. We have previously talked about price glass ceilings for rents. $400 per week was one of these I talked about in 2018, but that ceiling is well and truly shattered. Rents are going up fast at present with an average increase of $7 in the last month and average rents are closing in on the next ceiling which will be $500 per week. There are some potential signals that all is not as good as it seems. The days a property is vacant has increased to 26.5 days. Correspondingly we are seeing both enquiries and applications down on previous months. There are a lot of potential reasons for this, including the approach of Christmas, but one suggestion is that people are not prepared to pay the rents being asked. We will watch this closely as we know there is a chronic shortage of rental properties and we went through something remarkably similar when average rents approached $400. For the first time in my memory , it is usually cheaper to own a home than to rent it.
Hunterwasser Nears Completion.
Never has a building in Whangarei been so mired in conflict and so polarizing in opinion. You would this it was another Trump Tower. The process to fund it followed a very convoluted and twisted path, and looking back on it there were obvious signs of “clever manipulation “ of the public, including creating a referendum that split the “No” vote in half and despite assurance to the contrary, it will undoubtedly be an ongoing cost to the cities ratepayers for many years to come.
However, that said, as this magnificent structure slowly and sensuously strips from its bridal white robes, revealing tantalizing glimpses of gleaming multi coloured tiles and soft seductive and sweeping curves, even the staunchest critic must be impressed. We are seeing a masterpiece being created.
For 100’s of years after the controversial process has been forgotten, this unique building will become a symbol of Whangarei and its future. It will make national headlines as it becomes the Ohakune Carrot or the Paeroa L&P bottle of Whangarei. It will spread across the world in people’s selfie photographs and will put Whangarei firmly on the map.
Congratulations to the many who fought so hard for this building for over 12 years. Who had the vision to see what many (including me) could not see. You will be remembered in future generations as some of the current day founders of our city .
Inflation Theory A’la Barry
Here is a strange theory I have been working on. In July I mentioned that when you print money you make that money worth less, because there is more of it, and the things it buys worth more. Classic inflation theory. Historically when money gets created through “Quantitative easing “inflation gets going. But this is not happening yet. Japan has been deliberately printing money for about 5 years to try to get inflation moving, and so far, it has fallen as flat as a rice cracker!
So, what if we were in fact getting the inflation that quantitative easing creates, but it was only showing up in certain areas. Imagine that brick pavement you walk on in most city centers. The ones with brick sized pavers and lots of cracks between. As those bricks push down into the sand underlay you get sand rising through the cracks and settling in the grooves. If we look at the sand as the things that are going up in price like houses, shares, and gold. The bricks represent the things that are not going up in price, like cars, TV’s, and toasters. These things cannot go up because there are so many of them and if the manufacturer put the prices up, you would buy a different one, or hold off buying one for a while. Technology and mass production are constantly driving the prices of these items down so holding off can save you money. So, let us say there is inflation occurring, but its only in selected areas like property and shares. They are the cracks in the pavement. When we look at property it is deliberately excluded from the inflation index, as is the share market. So what we are seeing as a rising market could in fact be inflation happening, but not across the board as has previously been recorded, but specifically in property.
As I write this it seems a bit far-fetched, but I am leaving it in the newsletter for those with greater knowledge to comment. I would also point out that this ties in with the K shaped recovery we are told about, where the recovery is very uneven and favours certain sectors over others, such as medicine over travel.
Electric Car Prices Due to Hit Parity Next Year.
Just putting this prediction out there again. New electric vehicle costs are predicted to reach parity with internal combustion engine vehicles next year. If you are in the market for a new car then you should watch this closely, as once this happens, internal combustion cars are going to be hard to sell on the second-hand market. Initially the cheaper vehicles will come out of China and India, but once started the rest of the car companies will follow suit.
New Renewable and Radioactive- Free Power Source Possibility
We are all aware of the nuclear fission energy source. That is the classic atomic reactor that splits up very heavy atoms like Plutonium or Uranium and captures the energy released to create electricity. The problem being that pesky by-product radiation.
A British company based in Oxfordshire has switched on a new type of power source ( Tokamak Fusion Reactor) where they fuse two lighter elements together and harness the energy, so instead of splitting a heavy atom they fuse two light atoms together in a process called nuclear fusion, as opposed to nuclear fission . The process attempts to create the same type of energy the Sun creates with its hydrogen and helium mass. So, providing they do not turn us into a mini sun ourselves, (it is switched on so that minor setback has passed), the new type of energy source could create unlimited power with zero radioactive by- products.
This will revolutionise power as we know it, with cheap , efficient and green energy for Cities, Houses and vehicles.
While researching this article I looked up the “ NZ Nuclear Free Zone Act 1987 “ to see if we would be allowed to use Nuclear Fusion, and guess what, this much quoted act only stops nuclear powered warships, weapons and craft. The act allows the building and using of Nuclear Power. You could knock me over with a radioactive feather!!(Thanks Rupert Morrish for putting me right on Fission and Fusion )