What are the Rising Pressures
- House prices are getting uncomfortably high. During my 35 years in real estate, I have seen many boom cycles, where the market has surged ahead and then slowed for some time. I have seen very small drops of a few percentages in the bust cycle, but mostly the market has just slowed down. The house prices doubling every 10 years formula has proven true over those 35 years and historically over 135 years in New Zealand. If we take the current average house price in Whangarei of $580,000 (REINZ) then in using this old formula the average will be $1,160,000 in 2031. For that to happen house prices have to have an average growth of $58,000 per annum. That is $1,115 per week. Take another look at the current growth rate of $1,230 per week and we are only just ahead of where we should be for this historical doubling in price.
- Do I think it will happen? No I don’t, but then I didn’t think it would happen 10 years ago, nor the 10 years before that. Based on the available evidence today its on track to happen again.
- This really is a supply and demand situation. All real estate Agents today are crying out for more listings. In the existing housing market there is a chronic shortage of stock. The eventual answer to our housing “crisis” is new builds. If and when new builds catch up with the supply shortfall, we will have supply and demand pressure drop. For that to happen developers have to break up more land. For that to happen with any sort of speed the Resource management act has to be thrown out. And this is where our current Government is currently at. Kudos to them for finally understanding that the RMA is at the heart of our ability to address the housing shortage and having the courage to do something about it.
- Interest rates may rise. This will have an immediate impact on housing as it will scare a lot of people. But it would have to go up a long way to be a serious deterrent and that would be very bad for the economy. I think we may see one or two token rises to give the reserve Bank something to drop if the economy downturns, but it will be a token only. The USA did it 3 years ago and had to backtrack quickly when it built recessionary pressures.
- Building costs may rise to the extent that the inflationary prices are in the new builds. We have already seen this with building costs rising from around $1,900 a meter in 2016 to over $2,200 a meter in just a few years. If new builds become dearer than existing homes, then existing homes will rise in price also.
- I try to keep these newsletters factual, but the reality is both Diana and myself have developed a sixth sense in the property market and it’s kicking in this year. It may be a flashback back to my increasing and frequently wrong scepticism that prices cant possibly double over the next 10 years, but I have a very uneasy sense about the current market.
- I think we will see some sort of stall later this year. There is no evidence for this belief, in fact based on the current evidence we are heading for a 20%plus growth year. But instinctively I think we are going to see something happen that will stall the market. The most likely scenario is political interference. There are a number of ways this could happen this year.
- The Reserve Bank has already instituted loan to value restrictions on investment properties. They could increase these.
- Capital Gains Tax could be introduced. This would be a very unpopular move as the Labour party has ruled it out for now, but it may feel the circumstances warrant the change in policy. This would be a very bad look for a Government who mantra is trust, so I believe the most likely scenario will be the next option, Fiddle with the Brightline test.
- The Brightline test could be adjusted to remove or extend the 5 year get out of jail free period. This would mean any property that was not your residential home, would be treated as taxable income when you sold it. You would have to pay Tax on the capital gain as if it was part of your income. Removing the Brightline 5-year period and replacing it with a 10,15,30-year period will have a major effect on property prices. It would only require one word change from the current legislation and politically is a perfect solution for Labour. The legislation was introduced by National under John Key. It is old legislation, so labour can argue that they stuck to their word and never introduced a capital gains tax. It is incredibly simple to change. Basically, they tweak an already current bit of legislation. This option makes so much sense that I have convinced myself that it will happen this year.
- I recently worked with a client who has American citizenship. The USA has far reaching housing tax system. When this client sells their second NZ property, they will have to pay the US government tax on the profit, even though the property is in New Zealand. I asked how the US Government would know? and was told that the NZ government provides this information to the USA.
- Interest rate rises. If these went above 5% then a lot of people would be in trouble based on the high loan amounts to purchase today. This is not in the Banks nor the Governments interest, so is an unlikely strategy.
- Cheaper forms of housing. We are already seeing some cheaper construction methods being imported into NZ and imported kitset homes are on the rise. I have an A1 home and took an internal wall out. The timber framing was a very superior, slow grown pine, with “Made in Austria” stamped on every timber. This won’t fix the cost of the land, which is rising all the time, but could put a ceiling on building cost rises.
The Quota Concept and House Prices
A friend of mine was heavily involved in a particular quota system. It was designed to allow the product to be sold for what the market thought it was worth. All bids were confidential, so the only price disclosed was the top bid. What this friend discussed was how often the top bid was disproportionally higher than the next bid. It was not just a bid above the others but often 30-40% above and reflected what value that buyer saw the product as worth, on that day for their reasons.
We have a similar thing happening in the housing market. It does not happen in Auctions where the top buyer knows exactly where the second buyer saw the value but is happening in pricing situations where the price is either fixed or when it is advertised as “Buyers over xxx should inspect”. In multiple offer situations, we are seeing a range of prices usually within a ballpark figure, but then there is usually one offer a lot higher than the others. Its usually from someone who has missed out on several properties and has decided that they will get this one. The buyer has deliberately paid over the expected market price to secure the property for themselves. Not a bad strategy in a rising market as the property will be worth their figure in a matter of weeks or months.
But what it does do is speed up rises in house prices. This property then becomes the comparison agents and buyers use in the street for their future appraisals based on recent sales evidence.
As an Agent I recommend sellers use this marketing strategy, as my job is to get them the absolute best price the market will pay, however I can see that an Auction based marketing system is fairer for the general population as the price paid by the top bidder is dependent on the underbidders last bid.
A concept in Chaos Theory is called the ‘Butterfly Effect “and first suggested by Edward Lorenz. It suggests that even small events can have profound downstream consequences. For instance: – ‘A butterfly flapping its wings in Mexico can cause a tornado in China” . A simple example would be a drip of water falling into a full bathtub, could cause a small ripple that overflows the bath onto the floor, where it soaks through the flooring into the wiring in the room below, causing the light to short out, which blows the circuit breaker, which blows the power pole breaker, which faults and blows the district circuit fuse blowing out power to the district, etc …………. “
On the 12th of February, the new Tenancy rules came into effect. Amongst many changes is the requirement to give tenants 90 days’ notice to vacate rather than the current 42. A small change you would think, but No! it is having an excessively big Butterfly effect.
42 days was 6 weeks. 90 days is 12 weeks. With an average rental in Whangarei of around $480 pw, that means a bad tenant choice could cost you $5,760 in lost rent, compared to $2,880. Any opportunity the bad tenant must damage the property goes from 6 weeks to 12 weeks.
The result is, a landlord or Agency cannot afford to make a mistake. Those tenants who might have been worth a risk (i.e., missed a few payments, or had a few noise complaints made about them) are not going to get a second chance. The criteria for selection just got a whole lot tougher and ANY black mark is going to put the prospective tenant out of selection. For most landlords this is a good thing, but for many tenants it is a bad thing as their teenage history and dubious credit rating will follow them.
Consider the impact this will have on the 20/1/21 Stuff article by Henry Cook. “Public Housing waitlist grows by 1000 in two months to new record high …… The waitlist for public housing has continued its steady march upwards with 22,409 eligible households waiting for a state or social home at the end of November”.
The unintended consequence of the new legislation will be many people, with minor rental issues, being rejected at the selection process and they will become totally reliant on Government Housing. The growth in the Public Housing waitlist will be dramatic this year and swamp the effect of building new state houses.
In 1991 I moved to Whangarei and worked for what is now Housing New Zealand but was called the Housing Corporation of New Zealand back then. We had a points system where we allocated houses to tenants based on their current living conditions. The rougher their current living conditions the more points they got. I noted a family that we had just housed, who had been living in an abandoned 6 aside herring bone milking shed. I was in the area where they had lived and was curious to see the shed for myself. I stopped outside the building and it was clearly occupied by a young family. I spoke to them and they told me that their cousin had just moved out and that they had moved in. They had been living with their family but had moved into the milking shed as it would raise their points and help get them a state house. It was clear that the shed had become a commodity to be used to raise priority. I am guessing with the current waiting lists for state houses we are going to see a lot more of this.
When the government moved to introduce the accommodation supplement in 1993, they took the pressure off state housing by providing a top up amount to all qualifying tenants so they could apply for privately owned rentals. This latest change to the RTA, will go a long way to reverse the benefits of that move.
We are already seeing the consequences of this change today. The good tenants get the rentals. The poor tenants get first pick of the State Houses. The people in the middle, who have a “risk factor” against them are going to miss out. Keep in mind risk factor includes not having a past tenant history. This will affect first time renters like your kids or grandchildren. They will not get the private landlord homes and they do not qualify for the Government housing, so will have difficulty finding a home and may become the new class of homeless. The new tenants will not get the chance to prove themselves through no fault of their own and will move back in with you!
In a few cases this will be their own fault. I can think of one example where a friend of mine privately let his property to as family who carried a few warning signs. The landlord was taken by the family’s story, the apparent good character of the bread winner and believed in them and wanted to give them a chance. Immediately upon occupation strange repairs were required, where toilets and showers started leaking, a dog was moved in, and the neighbours started complaining about noise and cars and the rent stopped being paid. After some difficulty, this tenant was moved on. Today that tenant won’t get another chance (yes I know they don’t deserve it),