• The Current Situation in our Office
• Section Development Down
• Finding lions in Africa!
• Super low Interest Rates and Job losses.
• Banks Being Kind.
• Number of listings
• Changing Patterns Due to Low Interest Rates
• My Old Enemy the Media and Job Losses.
• Hiding in the Invisible Future
• Debt levels
• Making New Money
• Effect on Assets
• The New Migrants
• Election Year
• A Close Relative • Prediction
• The Two World bubbles.
• Can You Help
I pride myself on making accurate market forecasts of where the Real Estate market in Whangarei is going next. Over the past 35 years I have had past patterns to call on to predict the future. This market is unlike any we have ever seen before and therefore there are no patterns to look at, or follow. It is a big mistake to look at past recessions and say this one will follow the same patterns as this one has its own set of rules. Personally, I have felt the market is too uncertain to make a prediction, however I am being asked for some guidance now, rather than when the dust has settled.
It is the middle of winter and we would expect the market to have slowed down by now. What we are seeing is a property market behaving more like in a boom market than a recessionary market.
We are only a few months off an election, but instead of the market pausing for the election we have lots of sales happening. This is unusual.
There appears no doubt the economy will hit a recession. The question is, will this recession behave as past recessions have.
Below I will look at the key factors and make an assessment for Whangarei based on the evidence I am looking at.
The Current Situation in our Office
Many owners are taking a wait and see approach. Listing numbers are building but a slow rate and are not keeping up with demand. We we are seeing active sales and are pretty much back to pre-covid levels. We would be selling more, but as there is a shortage of good properties and we have a supply problem. Buyer inquiries are up in most areas and price ranges.
We are back to having multiple offers on most reasonably priced properties with one property recently having nine offers on it. 3-4 offers on one property are common. The sales are 90% in the $350,000-$650,000 price range with only the occasional higher sale. Higher priced rentals ($550 plus) are taking longer to fill, suggesting there is some resistance building in rental price increases.
Section Development Down
Many of the building companies have had their development money pulled by the banks. This has happened in the past and will result in a shortage of sections in 1-3 years. The catch-up in total housing numbers that has been happening across the country will stall and once again we will see pressure on existing house prices as the supply of properties falls behind the demand. It is like one of those frustrating dreams where we are always chasing something but never quite catch up. We are still well behind the amount of houses our population size requires. (40,000-50,000) The result is likely to be continued upward pressure on prices.
Finding lions in Africa!
If you are on Safari and looking for lions in Africa, you first look for the vultures. They are circling high in the sky either waiting for a wounded animal to die or for the lions to finish feeding so they can pick the carcass. In real estate we find the bargain vultures come out every downturn. They are easy to recognise, because they are looking for wounded or stressed out sellers, and they make low offers. They use words like:- “ we are cash buyers “ “and the market is stuffed” or “we don’t want to insult the owner but this is what we would offer” ( Invariably very insulting) or “the owner would be foolish to turn this down” . These people will look at lots of properties and make lots of low-ball offers hoping to meet a stressed seller. Today these people are out in force trying to talk the market down. They use the media reports of massive price drops to justify their low offers. They are trying to pick up a bargain at someone else’s expense.
I have seen this scenario many times before. This time around I think we are going to see lots of starving vultures, certainly for the next 6 months at least. I remember taking a well know economist to lunch after he made a low-ball offer on a property. Over lunch he explained all the perfectly valid reasons, (supported by graphs and charts and free form diagrams,) as to why the property market was overpriced and heading down. He was so certain of it; he had sold his own home and was waiting for the catastrophe to occur. The year was 2003 and sure enough he was right! Just five years later In 2008 the property market dropped all of 7% after a record 100% rise from the time of our lunch in 2003 to the 2008 global financial crash. After he had sold, and while he was eagerly making low-ball offers based on his graphs and charts, the average house price had doubled in value.
Super low Interest Rates and Job losses
There is one key difference between this forthcoming recession and all the others. Low interest rates! . You can borrow for around 2.6% and there does not seem to be any threat of rates going higher for many years to come. That means a $500,000 loan taken over 30 years is going to cost you $461.68c per week to repay.Consider that it will cost you around $480-$520 per week to rent the same home.You have to ask, “why would people have to sell.” “Because they lost their jobs” the Vultures eagerly squawk! Well yes there have been substantial job loses, and probably more to come, and these are affecting many families in serious and concerning ways. However, some 43% of homeowners have no mortgage at all so you can take these people off your kill horizon. The average mortgage is over 10 years old so was taken out when property prices were half what they are today. Therefore the $500,000 borrowed today was only $250,000 when borrowed 10 years ago, and the repayments on that are around $280 per week. Most families today have two incomes so can survive for short periods of time if required, and there is substantial government hardship support. The people most affected by this crisis are the people in the Tourist sectors. That is the tourist towns like Queenstown, Rotorua and Paihia. And the people most effected are the minimum wage earners in those cities, most of whom do not own a house. The last time I was in Queenstown I was noted that every person who served me, be that in a shop, a restaurant, or a service, had an accent. I would ask them where they came from and the answers were Brazil, Peru, Ireland, England, Italy, and many other parts of the world. Not one was a Kiwi. They were on working holidays earning their daily keep. Tony Alexander has summed up this scenario in a few quick sentences; “Heading into the 2008 recession 4% of our workforce were people on a working visa. That now stands at 8% and such visa holders have accounted for 25% of the net job’s growth in NZ over the last 10 years. These people are not property owners.” Think about that for a moment. We may be heading toward double figure unemployment from the low figure of 4.6%. 8% of our current workforce are overseas people on working Visas. 10-12% job losses suddenly do not look so bad. This adds to the question “Where are the super stressed sellers going to come from?”
Banks Being Kind.
This crisis is a medical crisis. It is not caused by poor lending policies and zero or negative property equity. The banks are financially healthy, so do not have to recover loan money to save themselves. Even better, Banks are inviting short term accommodations like interest only loans to get people over the hard times. Interest only over a $500,000 loan is $250 per week. You can even get a complete mortgage holiday where you do not have to pay any mortgage at all for a time, (I do not recommend this unless there is no other option) . So where is the pressure to sell going to come from?
Number of listings
Another biggie from Tony Alexander’s observations, is that in 2008 we had 58,000 homes listed for sale. Today we have just 19,000. There is a severe shortage of properties for sale and a growing buyer demand. If there is any slowdown in our local market it is going to be because we do not have enough listings and that is going to put upward pressure on property.
Changing Patterns Due to Low Interest Rates
In a previous newsletter I mentioned that the number of people who were buying a home and keeping their old home had risen dramatically. The low interest rates often mean you can buy new and keep your old house, rent it, and have the tenant pay the mortgage. A simple way to get into the rental market. We are also finding landlords withdrawing properties from sale, because the interest rates are so affordable. The result is more pressure on listing numbers.
My Old Enemy the Media and Job Losses.
The media should carry a health warning just like a cigarette pack. “Ingesting this material could be damaging to your Health “. The standards of reporting have dropped so low. Investigative journalism is rare and so much media information is based on the reporter following social media reports like Twitter and many of the reports are used to prove a story line, rather than have the story based on the evidence. A glaring example of the Media sensationalism was the 1000 jobs Fletcher’s are shedding. It’s reported as being a result of COVID 19, but it’s not! Fletcher’s where is serious trouble in 2018 with a loss of $660 million in its Building and interiors division. Fletcher’s employ 21,000 people across all its divisions and like any sound business had to cut back to survive. They cut 4.7% of their workforce. That is equivalent to a company of 40 people cutting one job from its payroll. Fletcher’s had to reduce overheads including jobs based on its 2018 and 2019 performance, not Covid as reported. Many companies have taken the “Covid opportunity” to trim their fat and I would suggest that around half or the total job losses (excepting tourism) are simply businesses trimming their overheads and using Covid as the excuse. Locally we are about to witness some changes at the Marsden Point Refinery. They are going to rationalize the operation and may well end up closing the production side of the company, and there will be job losses. It will get blamed on Covid 19, and admittedly the refinery will be affected by the airline cutback as Jet fuel is a big earner for them, but this restructure is a long time in the making. The refinery has only been borderline profitable for some years now and a rationalization was coming anyway. It is cheaper to buy refined fuel from overseas than it is to refine it ourselves. The changes in the refinery were going to happen anyway. Just as an aside …don’t forget that our petrol price is driven up by the Governments outrageous $1.03 tax* per litre tax on fuel. (aa.co.nz Petrol tax $0.73 c plus GST on total at $2.00 per litre). About half your petrol bill is Government taxes!!! Rationalizing the refinery is the right move as Fuel as we know it is changing. Volkswagen have just joined the rapidly growing electric car movement by declaring its Zwickau factory has produced its last internal combustion vehicle as they transition to electric vehicles. The year 2021. (next year) is when electric vehicle prices are predicted to match ICE vehicles and they will only get cheaper from then on. It makes little point to keep a dinosaur industry such as Oil Refining going in a small country like ours going, when the future of fossil fuels is limited.
Hiding in the Invisible Future
Public enemy #1. the media have ignored the facts that property prices have risen since Covid lock-down and continue to report anyone willing to predict a property crash. With the current wave of data proving them wrong they have moved into the grey area of tomorrow. The imminent recession will come September, October, and November. This is just too convenient. If you make predictions into the future, then facts cannot prove you wrong. It is a certainty that our economy is in a struggle now and things will get worse and we will have some form of recession. It will probably get worse next year, when the election is over , but the problem is that this coming recession is like no other recession. All the current rules do not apply. I see some economists are pushing the main impact of the recession out to 2021 now. Again, I don’t think anyone knows what will happen. Logic says we are heading into hard times, but the current evidence is saying differently. I drove from Whangarei Heads through town out to Ngunguru on Sunday and just about all the for-sale signs I saw had a SOLD on them.
In past recessions the debt level has been predominantly carried by individual persons through borrowing. Our personal debt level is at record highs but most of this is in housing mortgages, which many will argue is an investment rather than a true debt. Today the government have shouldered the lion’s share of the new debt with its 60 Billion budget this year. The 60 Billion budget is a Government debt, and not individual debt. You and I wont lose sleep over our new debt levels, but the minister of Finance Grant Robertson may! Unless he could magically make some more money!!! Magically Making More Money Unlike individuals, Governments can create money through their Reserve Bank to stimulate the economy and pay back debt (Quantitative Easing) which is exactly what Grant Robertson has said they will do.It has taken me a while to get my head around this concept but here is an example from England of how quantitative easing works. “The Bank of England purchased financial assets, almost exclusively government bonds- from pension funds and insurance companies. It paid for these bonds by creating new central bank reserves (this is the created money) and is the type of money that banks use to pay each other. The pension funds would sell the bonds to the Bank of England and in exchange, they would receive deposits (money) in an account at one of the major banks. The bank ends up with a new deposit (a liability from it to the pension fund) and a new asset, Central bank reserves at the Bank of England.
Quantitative Easing therefore simultaneously increased A) :- the amount of central bank money , which is used in the system that banks use to pay each other, and B):- the amount of commercial liquidity ( deposits in the bank accounts of people and companies). Only the deposits can actually be spent in the real economy, as central bank reserves are just for the internal use between banks and the bank of England” (positivemoney.org)Effect on Assets
What impact does this creation of money have? Firstly, is spreads the financial shock over several years rather than having it all in one year. Secondly it creates a big supply of money into the system which boosts the economy, but devalues money as there is more of it in circulation. If money is worth less, then the things it buys are worth more. Traditionally this is the cause of inflation, however for now inflation is a thing of the past, and even countries like Japan who are actively printing money to get inflation, cannot get it rising. But what does rise in price are assets. Assets like property, gold, and to a lesser extent shares. The equation is simple. (More money + the same amount of property(assets) = rising prices.)
The New Migrants
We have the huge number of Kiwis returning to NZ. The Covid crisis is not going away anytime soon so our people are coming back, and they are buying property. Statistics NZ estimate that 21,000 New Zealanders returned home during December – March and that is accelerating. The quarantine facilities are talking about 2,000- 3,000 new arrivals per week, most of which will be Kiwis. Many of these people have come home for good and will be able to buy a home. Statistics NZ also estimate there are a further 800,000 New Zealanders still living overseas, so the pool of potential returning Kiwis is very large. To put that number in perspective , that the total population of Wellington, Hamilton, Tauranga and Whangarei all in one.
|An election year is usually a bad year for Real Estate. In a previous newsletter I said that I did not think this would be the case this year as the worst-case scenario is moving from a left-ish government to a right-ish government so no major worries for homeowners. Being an election year, I think we will see some major pushes on the job and economy front and as many negative recessionary effects are going to be delayed until after the election. The government is going to be pushing companies to retain jobs so the overall impact, while severe, will not be as bad as many are predicting and thus we are seeing the new predictions that the full impact of a recession won’t hit until 2021.|
A Close Relative-
…. drives trucks for a big national trucking company. During Covid the company reduced the guaranteed driving hours from 40 per week to 30 per week in anticipation of less work. My close relatives experience was NO drop in hours. He still regularly drives 40-50 hours a week. The fears of a slow-down were worse than the reality. Many firms have paid the government wage subsidy back as they have had no drop in work. While the predictions have been dire, we are seeing a lot of evidence that the situation on the ground is not as bad as expected.
So back to the circling Vultures and the dire media led predictions about property prices. This crisis is very different from any other. We have healthy banks, who have a big safety level built into their house lending and very low interest rates. Listing numbers are dropping from an already low level and demand is increasing. To get housing prices reducing you have to have stressed owners, who are forced to take a lower price or lose their home. You have to ask the question. “Where is the financial pressure to sell going to come from? When is the Bank pressure to force mortgage sales going to arise? Where are the super stressed sellers going to come from? On the reverse we have upward pressure as more buyers enter the market and an already existing shortage listings. Prediction # Its too early to look at 2021 which could be a very different year, but the current evidence for the rest of 2020 shows the Whangarei property market remaining steady and probably rising .
Roll on the Vaccine.
Unless we get a vaccine, we are heading for two different worlds. A world that has come to live with Covid and a world that has contained it. The smaller of the two worlds will be ours. The island nations that have a big moat around them and have either contained or eliminated Covid. The bigger of the worlds will be those that have lost the containment battle and now live with the virus. In Qatar 3.3 of every 100 people has or has had the virus. In the USA they are closing in on 1 in every 100 people had or having the virus. In Brazil it is 1 in every 160. At this stage you would have to say the battle is lost in these countries. At best they can slow it down , but their chances of elimination are long gone. They are going to have to live through the crisis and in terms of numbers the virus has only just started. In the USA over 99% of the population have not had it. The only way they can win this war is with a vaccine or effective treatment. Until there is a vaccine, we will have two bubbles. Those with and those without. Unfortunately, we will be in the smaller without bubble, but fortunately, we are only small ourselves and don’t need a big bubble to survive. It doesn’t mean we can’t trade outside our bubble, it means we can’t visit each other and therefore overseas tourism is going to be in trouble for a time to come. A vaccine or effective treatment will join these two bubbles together, however while I hope a vaccine will be found within the next few months, the reality is that this is a corona type virus. The common cold is a corona type virus and we don’t have a vaccine for that.