The American Economy is still in deep Stook!

Far from showing signs of recovery the USA economy is showing strong signs of tanking, not helped by being under the unstable influence of its current and isolationist  leader. The long term effect for us in NZ,  is low interest  rates  (below 6%)  for some years to come as the world economy continues to struggle.

Here is a brief summary of the opinions of a number of the USA’s strategic thinkers and investment analysts who recently spoke at the SIC 2017 (Strategic Investment Conference) in May. This conference is attended by those who make the decisions of where to invest their own and others money. These snippets are taken directly from an email sent to subscribers of “Maudlin Economics” by Ed D’Agostino .

The common theme from these men, who are paid to get ahead of the market, is refocus your  investments in the USA and get it into the emerging countries such as China and India.  With this type of thinking coming from the people who advise the advisers the USA is due for some capital drain which will not help their already blundering economy.

Louis Gave, CIO of Gavekal: Diverging monetary policies and valuations would suggest emerging market equites will outperform their US counterparts over the coming decade… Being underweight US stocks is the slam-dunk trade, while consumer-related stocks in emerging markets are attractive. With certain European sectors near their 2012–2013 crisis lows, they look interesting.

Raoul Pal & Grant Williams, founders of Real Vision TV: Investors should be deploying capital based on the powerful demographic shifts now happening across the world… With the coming wave of retiring Baby Boomers, US equites will suffer. Look to capitalize on the huge developments taking place in India and Asian emerging markets.

Lacy Hunt, EVP of Hoisington Investment Management: Every US recession since 1915 (bar the one which followed WWII) has been preceded by the Fed tightening monetary policy. This time will be no different… Today, the bond market is telling investors these rate hikes will have adverse economic consequences. We have likely not seen the low in bond yields.

Marc Faber, publisher of Gloom, Boom & Doom Report: With favourable economic conditions and massive projects like China’s One Belt One Road happening, the setup for Asian emerging markets is extremely bullish. The opposite is true for the US and Europe… Investors should be selling US stocks and focusing on quality consumer and utility companies in emerging markets.

Mark Yusko, CEO & CIO of Morgan Creek Capital Management: The US is in the late stages of the business cycle, and when the downturn comes, stocks will drop by at least 30%. The outlook for US equites is bearish, but consumer and infrastructure stocks in emerging markets look attractive. There are amazing opportunities to buy quality companies trading at big discounts in China and India today.

Peter Boockvar, chief market analyst for the Lindsey Group: Just like quantitative easing caused asset prices to rise, if the Fed reduces the size of its balance sheet, asset prices will plunge… Given today’s lofty valuations, it’s a major sell signal for stocks if economic data continues to disappoint. Investors should be deploying capital in beaten-up sectors like agriculture and precious metals.

David Rosenberg, chief economist for Gluskin Sheff: Due to several deflationary headwinds facing the US economy, expect growth to remain lower for longer… The bull-market in bonds, which started in 1981 is not over. Investors should be stepping up the quality of their portfolios and investing around “late-cycle” themes.

John Mauldin, chairman of Mauldin Economics: Very soon we will have to deal with, one way or another, the largest twin bubbles in the history of the world: global debt and the even larger bubble of government promises. There will likely be some type of debt jubilee, accompanied by huge currency devaluation. As the disruption unfolds, it will be necessary to not only diversify among asset classes, but also trading strategies.

 

Property Collapse!! – Another media Beat-up

16/5/2107 The NZ Herald reported

“New Zealand’s housing market has a 40 per cent chance of going bust in the next two years, according to global investment bank Goldman Sachs.

In a research note published this week Goldman says the New Zealand’s housing market is the most over-valued amongst the G-10 group of developed economies, Bloomberg reports.

Goldman, Bloomberg said, defines bust as house prices falling five percent or more after adjustment for inflation.

Bloomberg reports that Goldman looked at housing markets in the G-10 countries -those with the 10 most-traded currencies in the world – and finds they are most elevated in small, open economies such as New Zealand, where house prices have rocketed in recent years.

Goldman compares house-price levels across economies using three standard metrics: the ratio of house prices to rent, the ratio of house prices to household income and house prices adjusted for inflation.”

The weakness in this sensational report is in the last sentence “ three standard metrics”. Whose standard metrics ? Not mine!

This report ignores the three prime factors that are driving house prices . Supply, demand and interest rates.  Why an “expert’ opinion should ignore these is staggering. Supply and demand are the two factors that define all pricing in all markets. The next most important factor in house prices is interest rates. Low interest rates drive prices up.

While the three most important measures of house pricing have been ignored  two of the measures they have used are seriously flawed . . Let’s look!

  1. Ratio House prices to Rents. There is always a lag behind house price rises and rents. The house prices go up first and then the rents tag along behind, but there is a delay. Initially tenants resist the higher rents and it only as necessity hits that they buckle and pay the higher rents. There are numerous rental glass ceiling that have to be broken in this process for the rents to rise. In Whangarei one was the $400 a week barrier. That ceiling is well and truly shattered now and rents are rising rapidly. Every news report you see on rents is saying how fast they are rising and how new record rentals are being paid. This catch-up process lags about 2-3 years behind price rises so to compare current rents to current house prices in a rising market is very poor research. It may work in stable markets but not rising ones.

 

  1. Ratio house prices to household income! This is another fantasy measure. It was introduced in the 1930’s to assist with state house pricing. It doesn’t have any validity in current house values. Firstly you couldn’t compare a 1930’s house with a house of today. Today’s houses are over twice the size and have more electrical points in the Kitchen than the 1930’s house had in its entirety. This measure has no relevance in today’s real estate pricing yet it still gets held up as a standard of affordability. It isn’t an accurate measure and hasn’t been for the last 30-40 years.

 

Coming back to the basics of “ Supply and Demand.”  There continues to be a SERIOUS   shortage of houses ( in the vicinity of 40,000)  with the supply of new houses not keeping up with the growing demand. We are falling further behind rather than catching up

There continues to be a growing demand for houses as our net population grows by just under 100,000 people per year. (72,000 from migration and 28,000 by natural growth).

Interest rates are expected to stay historically low for at least another 18 months.

There is a lot of emotional talk in the marketplace, fuelled by the media who latch onto, and headline, every bit of controversial data they can, but at the end of the day logic will prevail. Until our supply catches up with demand we will have upward pressure on house prices.

 

And How good is this American owned Bank at predicting their own market yet alone New Zealand’s

  • Almost everybody on Wall Street missed the financial crisis. But you would be hard-pressed to find a major analyst at a major Wall Street shop caught more unaware than Abby Joseph Cohen, the Goldman Sachs chief strategist who still had her rally cap on well into 2008 as the market imploded. Cohen set an uberbullish 1,675 price target for the S&P 500 for that fateful year, not foreseeing that the world was crumbling before her eyes. The stock market index would close at 903.25, a 37 percent drop and 46 percent below Cohen’s target. That same year, Goldman replaced Cohen with David Kostin and moved her over to a position as “senior investment strategist.” Yet on Wall Street there’s always room for a second act: Cohen maintains a prominent role at Goldman and even was selected to go first at a recent high-profile question-and-answer session with Federal Reserve Chair Janet Yellen.

 

  • Goldman Sachs was unable to see the risk in the USA subprime mortgage market, was heavily exposed ,  and required a 10 Billion bailout  (Federal Loan ) to survive the 2007 financial crisis.

 

  • Would have to pay $550 million in fines after the Securities and Exchange Commission said the firm misled investors on the other side of the Paulson trade. Goldman Sachs tried to keep their clients in the subprime market during the Subprime collapse against the advice of Paulson.  ( Read “The Greatest Trade Ever” Gregory Zuckerman)

 

April News

The Rental  Glass Ceiling Smashed! .

 

In the last newsletter we mentioned that we thought rents had peaked and reached their glass ceiling. Like all good predictions we want to totally change that view. All the evidence from “Harcourts Just Rentals” is saying that rents are on the way up and the pace is increasing rather than slowing down. For example the average rent paid to “Just Rentals” in January was $376, February this year, $412 PW and for March it’s already at $421. What we were seeing as a ceiling, is in reality a point of resistance. A pressure point is where tenants were baulking at the  increases and holding off committing to the higher rents. But once the average $400 PW barrier was broken rents rose sharply. Further evidence that $400 is a resistance point rather than a ceiling is that properties over $400pw are taking longer to rent than below but they are still being let. As $400 plus becomes the norm the resistance will evaporate and we will see the acceleration seen in the last three months until the next resistance point probably around $450

Its Tough for Tenants

 

It’s a very competitive market with lots of demand and not enough supply (houses). Just Rentals had over 1000 applicants for the month of March, so the demand is huge, with only around 15-20 available properties at any one time. There is only one way rents are going to go and that is up. There are a larger number of quality tenants around who have the ability to pay more, and they are paying more for good homes. That’s not to say they are doing it happily but they have no other choice. If they want a reasonable house in a reasonable area then they have to pay the market rent and that is going up. (That’s for everyone except my daughter and son-in law. Diana ( Mother ) promised them that she wouldn’t put up the rent on the house they rent ….ever …so my master plan to live off my children is completely shot !!!)

Prediction !
We would expect average rents (3 bedrooms 1 bathroom) to rise to an average rent of around $460-$470 p.w by the end of the year .

 Rental Review 

 

In an earlier publication we did an in-depth look at where to buy property in Whangarei and what to look for . We have updated the relevant information and the link to the earlier publication is below.

 

 

An updated summary of where to buy and what to look for:-

 

Key things tenants want :-

 

  1. Access to good schools .( The hottest demand is around good primary school zones )
  2. Well maintained houses. ( if you don’t have pride in your home you can’t expect to attract tenants who will)
  3. Good internet and phone communications
  4. Safe areas
  5. 3-4 Bedrooms
  6. Proximity to town ( 2 categories here…. Walking distance, equals central areas or driving distance equals no more than 20 minutes from CBD)
  7. The ability to have pets ( Can cause more wear and tear but tenants stay longer and you can ask a premium rent. So many good tenants get over looked because of this somewhat unreasonable restriction )
  8. Off main roads. Always the last properties to rent because of noise.
  9. Insulation. ( Compulsory from 2019 on for ceilings and reachable underfloor. Best to get in now before the rush and inevitable rise in installation costs )

 

Best areas:-

  • Kensington/Avenues/Woodhill. Remain popular areas for tenants. Purchase prices have gone up so expect a lower cash flow return, but the capital gain is good. ( The average 3 bedroom one bathroom is getting $400-$450 )
  • Tikipunga. Still some resistance to this area based on tougher schools but with the supermarket and the new “Totora Parkland” development this area is certain to move ahead over time. ( Average $340-$380)
  • Raumanga. Still a lot of resistance to this area but it has all the hallmarks of a good investment area with the hospital, the tech, and numerous big shopping areas all close and just 5 minutes from town. ( $340-$380)
  • Morningside. Remains a hot rental area with its sunny slopes and proximity to town. Steeper sections create some challenges for both tenants and landlords. ($380-$400)
  • Onerahi.  Becoming an increasingly popular area with a big upside still. Proximity to town and improved access. WDC has purchased all the land for the Onerahi bypass so the through traffic will halve. Hot buying. ( $380-$420)
  • Riverside. One of my hot picks in May 2015. Very popular with tenants with its proximity to town and access to the “loop”, dog park, and other facilities. Steep land creates some maintenance issues so be careful what you buy. This suburb still has plenty of upside. Rents will rise as more people discover the area. ( $340-$380).
  • Kamo and Maunu. Very popular areas but hard to find properties that give a return. ($450-$480).

Avoid low socioeconomic areas. Hard to rent and you get the rougher tenants who don’t get the opportunity to rent in better areas. (Otangarei, The sunken Village Onerahi, South Raumanga) They are cheap for a reason.( $250-$300)

Some Considerations for Existing landlords.

 

  • Have your property meth tested between tenants. It’s a small cost ($200) but helps with insurance issues, responsiblity, and generally safeguards your property from tenants thinking about smoking in your property.
  • Smoke Alarms. Wired in ones are better because the batteries don’t go flat. These can save your property as well as the lives of your tenants
  • As part of my research for this article I interviewed Renee Wilkinson, (Business Development Manager for Just Rentals.) She told me about how she often gets enquiries for a property in a price range of say $380 PW but then directs the person to a property with a much higher rental that better suits their needs of say $450 PW. A property the tenant would never have considered because it wasn’t in their budget, but once shown the property can see the value in an extra $70 per week. This cross referring is a great example of how a good property manager can add value to you as the owner. In Real Estate sales around 40% of our sales are directly from taking a person who has called on one property to another.

Here is a link to the earlier article. May 2105

 

 

 

 

They are Printing Money and its Going to Raise Land Prices Worldwide 

 
We are in an unprecedented time of “Quantative Easing ‘which is a digital version of money printing. In this article we discuss how the long term effect is certain to make property and land prices rise world-wide. To read the article Land going Cheap!

 

 
Interest Rates are Most Likely to Stay Low ( below 6%) for some Years to Come 

We have written a detailed report into our perception of where interest rates are heading this year and next, based on a recent statement from the Reserve Bank Governor together with information about the state of the world’s economy. Once you take the temporary effects of Quantative easing out of the world economy, it is still in deep Doo Doo!

Basically apart from a few token increases, interest rates are going to stay historically low and under 6% until around 2019 and maybe longer. For the full article click on the link below, but before you do, we mentioned the link between our NZ interest rates and the world’s largest economy the USA. We expected the US Fed to make some token moves to lift interest rates in spite of the evidence that the US economy is still in trouble and in too fragile a state to allow any serious lifting. We quote the reactions of two commentators about the first lift in the USA in 8 years. Both comments confirm the current rate rise is more about politics than economics.

Hoisington Investment Management’s Lacy Hunt on the Fed’s risky strategy:
“This is the first time in more than 50 years that the Federal Reserve is tightening when income tax collections at the US Treasury are declining. Those tax collections are weaker than when we entered the last four recessions. That’s a risky strategy.”

The Boock Report’s Peter Boockvar
“It is an economy killer, but it has to happen. There is no way the Fed is going to be able to normalize interest rates without having a recession.”

For the full article

Signs We Are Over The Peak

 

It’s still looking like we are at the top of the growth curve but there is still more to come. The reserve bank have hinted they see more upward price pressure coming as a result of immigration increases combined with new builds being slower than needed to address the shortage.

In a recent speech the reserve bank Governor, Graham Wheeler said:-
“House price inflation has moderated, and in part reflects loan-to-value ratio restrictions and tighter lending conditions. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand. “

Although a little more cautious about our earlier $80,000 price rise prediction this year (because we are seeing a drop off of the day to day activity and einquiry in the market) logic says we have a way to go yet. There are subtle hints that Auckland may be over its slow growth period and about to enter another high demand phase as the inconvenient truth remains that there are not enough houses for the population growth and therefore the old supply and demand rule must apply.

Whangarei is still well behind our traditional price gap with Auckland and we have over $100,000 in price rises to close this gap to our historical level. Emotionally I’m not so confident of the prediction but logically it has to be there! I’ll go with the logic on this one!

 

Breaking News !!!  Corelogics March property figures are just out this morning confirming  our prices are still rising.  The average Whangarei property price is now $472,081 a rise of just over $4000 on the previous month confirming our prices are rising at around $1000 per week. That’s slower than they had been rising but still heading up!

 

 

 “Show me the Money Honey “Ian Wishart

 

Late last year I had the very unpleasant experience of being diagnosed with a Melanoma Skin Cancer. It was a total shock to me and my doctor, as it didn’t look like the typical Melanoma. My father died from the same condition, and his first cancer was just a few inches away from where mine was located on the left forearm. I had a hectic Christmas as I underwent surgery to remove the effected skin area and have two sentinel Lymph nodes removed on the 29th December. Thanks to the quick response and the magnificent after care I am in the clear, or as the consulting surgeon so casually said “You have dodged the bullet …… (Long Pause)…….. This time!

 

I felt I was in very capable hands throughout the process and thanks to all involved.
When I heard a radio interview with Ian Wishart , the investigative journalist and much published author, about a link between taking cholesterol pills (Statins) and cancer, I decided to get his book “Show me the Money Honey “ . I have yet to read a critique of his book so may be talking too soon but have to say it has immediately changed my views on Statins for one, but also salt intake, chocolate and fats. And they are the only chapters I have read at the time writing this article.
Basically he says most of the western theories about what levels of certain products are good for you are based on 1960-1970’s surveys and that modern 2015-2106 surveys are showing that the levels being currently touted are not only wrong but in fact bad for your health. If you practice the current standards of salt, fat and cholesterol levels you actually increase your chances of dying rather than decreasing them. He goes on the show how 40 years of practicing these current WHO standards, have successfully lowered overall public levels in the intake of these substances, but the result is more people dying from related diseases rather than less.
Amongst the many researched and documented studies he outlines:-

  • There is a positive link between Cholesterol and the body’s immune system that fights cancer. ( I have been on cholesterol pills for about 8 years)
  • You have a higher chance of dying from a heart attack from a low cholesterol count than medium to high. In fact Cholesterol is an important part of your health system especially as you get older.
  • Dark chocolate (70% cocoa) is very good for you. In fact you should aim to eat around 8 pieces a day
  • There is a bell curve where salt is good for you and then bad for you and the good starts above the World Health guidelines. While there is a level that is too high, the research shows the levels being touted as healthy in the western Diet are too low and damaging to your health.
  • Coffee is very good for you and helps reduce a number of ailments including Alzheimer’s

I think this book is essential reading for anyone on Heart and Cholesterol pills or low salt diets. I got mine from ‘Mighty Ape ‘ Books Online . The radio ad said it was at the Warehouse and Paper Plus but when I went to the Warehouse they didn’t have it.

 

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.

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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” 

 

Market Predictions.

Contents

  1. Have We Reached the Peak of the Growth Curve .
  2. Thanks for noticing
  3. Homelessness and the Link to The Reserve Bank
  4. Rental Comment
  5. The Great Meth Myth Revisited
  6. Donkey Business
  7. Out of the Mouths of Babes

 

I have just returned from a lovely week in the Kaweka ranges with two fine men. I enjoyed a wonderful time with two great personalities. Both with new-borns so their priority was catching up on a bit of sleep. Lots of laughs, a few gut busting walks, serious games of “Risk” late into the night, loads of trout caught in the most pristine of rocky rivers, with most released. No deer this trip but they were there laughing at us,  and the big bonus is that both men were my sons!

price-rising-pic-by-julz

Back in November 2015 we predicted that the correction cycle was about to kick into life in Whangarei and owners should hold properties. I started that newsletter with the words “the winds of change are in the air”. What followed was two years of growth with the average Whangarei property rising by over $120,000 .  We are beginning to see early signs of the same “winds of change”.  It’s more of a gut feeling, supported by minimal evidence, but it does seem the Oomph! has gone out of the market . That’s not to say the market has stopped rising, far from it. The market has a lot of growth in it yet, but it is starting to look like we may be at the peak of that growth curve. While the growth will continue we are seeing the early signs that that growth rate will start to slow down.

In a recent conversation with a senior bank manager, he revealed that the 40% deposit requirement was having an effect with a slowdown in lending. He also mentioned that it was affecting all the wrong people, the first home buyers and the Mum and Dad buyers picking up a retirement income. The seasoned investors had plenty of equity and therefore less trouble borrowing.

We are seeing lots of sales happening, but the panic buying seems to have gone out of the market and we are not seeing the same number of buyers at open homes. We are still getting multiple offers on properties but maybe two or three contracts as opposed to the 6-7 we were getting in the peak.

The one thing about Real Estate is that the market moves slowly and we as Agents tend to see trends long before they become evident. We are probably at least 6-12 months away from any significant slowdown, but we think it is coming.

Auckland has been the key driver of our market and we continue to see a wave of Aulander’s taking the opportunity to cash up and buy in the provinces. This is not showing any signs of slowing yet, but will if the Auckland market continues it’s slow down and properties become harder to sell. Again we are some way off this happening as the Auckland market is still growing at around 15% year on year. Should this growth slow to around 4-6% we will see the effect in the provinces. Basically as long as there is someone to buy the Auckland properties the Whangarei market will bubble along, but should these buyers dry up then the slowdown will be here.

Its not that the market is going to hit a brick wall, far from it, it has considerable momentum and our predictions that the average price in Whangarei will hit $500,000 are still odds on, ( October sales reached $451,874), but what we are seeing is the first signs that the market may be changing. We still predict growth through this year and into next year but once it peaks in the next month or two it will gradually start to slow. Growth is more likely to be at saner levels.

We also have to be aware that the Real Estate market generally has buying seasons. The February through to June months are the busiest with October being the next. If the boom market slows down then the effect of the selling season has more influence and we see bursts of activity in these months with quieter times between

Tip.  If you are holding a property to get the capital gain, its time to start thinking about selling it. You have plenty of time, but don’t hold off too long as you want to be selling into the rising market while it still has plenty buyers. If you try to sell when the market has slowed you join a rush of other sellers doing the same and you may have difficulty.

Thanks for Noticing .

thank-you-jpg

We have had a number of people on the mailing list ask when the next newsletter was coming out. . It’s good to know it’s been missed. The last issue was in August so it has been a while. We try to put these out at least every second month, but don’t want to just be writing them for the sake of writing them. We want to make sure there is something to say and the last two months have been more of the same. A rapidly rising market, with year on year growth hitting 23.9%, in line with our prediction of 24%.  So basically while it’s been an exciting time for property owners there has been nothing new to write about. At a seminar we attended recently, we were told that if 3-7 % of the people on your mailing list read your newsletter it is a success. We currently have over 70% opening this newsletter. We really appreciate that you read it and thanks you for your support.

The Recipe for Homelessness Courtesy Of The Reserve Bank!

homeless

We have long advocated for an untouched Property market where the regulators stay out of the residential market and let it find its own level. Every time the powers that be intervene they create a crisis in another area. A past example is the building industry where the boom and bust cycles created by rising and lowering interest rates have resulted in our country now having to import builders to meet current demand and a serious lack of new building. Along with this trend we now have the 40% deposit ratio and its unintended and dramatic long term effects.

The first is increased homelessness. Imagine the supply of rental houses is like a pyramid. The best tenants get the ones on top of the pyramid, as the tenant’s suitability declines, they move further down the pyramid. The top of the pyramid is made up of quality homes in good areas and the base of the pyramid is made up of poor quality homes in undesirable areas. If the supply of good quality rentals reduces, (the intended effect of the 40% loan ratio to stop investors and speculators) then the tenants for those properties take the next best one they can find further down the pyramid. They are assured of getting it because they are quality tenants and they will squeeze out the ones below them. This process continues right to the bottom of the pyramid, where the people who are “challenged “ as tenants find they have no choices. There is nothing available for them and they drop out of the pyramid like so many water drops falling from a squeezed sponge. When the 30% deposit ratio was introduced and sales slowed down we saw an increase in the number of homeless in Auckland. That will be nothing to what is about to happen with the 40% ratio, if the Reserve Bank is successful and drives the Mum and Dad property investors out of the market. The rental supply will not keep up with demand and the vulnerable and least able to advocate for themselves will have no options but the streets or temporary shelters provided by charities.  A new wave of homelessness will be created because of the unintended consequence of the deliberate and artificial interference in the value of a house.

Basically the country needs the financial input of these investors, be that Mum and Dads or long term professional landlords. We need these people to be pumping their capital into housing. If they don’t, and we are seeing a slowdown now, then we as a country have a consequence which is more homelessness.

However there is a solution and that’s the second consequence! The government of the day can step in and build thousands of rental homes for these people to fill the gap left by the private landlords! But this isn’t easy. Firstly where are the builders going to come from and secondly where is the land?. When I managed Housing NZ for the Whangarei District in 1992 the Crown owned 72,000 state houses. By the time I left in 1994 they owned 68,000 homes.  I haven’t got the latest figures but information from the various census figure shows 69,000 is the current figure.

Based on population growth we are short around 15,000 state houses now. At a conservative cost of $400,000 per house and land package, we the taxpayer would have to find 6 billion dollars in extra taxes to fund these houses. And that is without the existing private landlords deciding they want to pull out of providing rental housing. Currently the private landlords provide around 355,500 (Census 2103) rental houses while the Government provides around 69,000. If just 10% of those landlords decide they don’t want to be owners, then the state will need to purchase or build another 35,000 homes to fill the gap. That’s another 14 Billion dollars of extra taxes needed.  We can’t have it both ways.  Either support the landlords who are doing their bit for our country by investing their capital in housing, or be prepared to take up the slack and pay way more in taxes to provide more housing. Alternately  expect a huge surge in homelessness.  I’m pretty sure we all know which way we are heading.

Since drafting this article the Government has released its $300 million , 1,400 extra temporary bed places for the homeless package. We now know which option has been chosen. In a war its called “collateral damage”

If you are looking for the early warning signs that this is happening right here in Whangarei then read the next article.

Rental Comment.

for-rent

The lovely Renee Wilkinson , Business development Manager for Harcourt’s Just Rentals , has been talking about an increasing trend she is  seeing. The number of  properties that they are advertising for rent has dropped by over 50 % year on year. Down from Mid 150’s last year to 50-70 this year .  This means there are less rentals available and they being filled faster . Because of the lack of choice more tenants are staying put rather than moving around increasing the shortage. The rental market is already starting to hit a crisis level with good, well qualified people,  unable to find a rental property.

She has also stated that they have 6-7 well qualified tenant applicants for every good rental property. This demonstrates a strong growing demand for rental properties and the flowing  down the pyramid effect discussed in the earlier article .  The good news for landlords is rent  rises are happening  as demand is clearly outstripping supply ..

meths-pic-1

                                          The Great Meth’s Myth.

We are delighted to see some common sense finally coming through on “Meth’s/P” test levels  . The Health Department have heeded the concerns expressed by Dr Nick Kim  a senior  lecturer in Chemistry from Massey University,  that they were applying the wrong measurement to houses where “Meth’s” had been smoked rather than manufactured, and have subsequently relaxed the standards .

The 0.5 level remains for “P’ labs where it has been cooked, which is what the test was actually designed for, but drops to 3 times the level at 1.5 for houses with carpet and 4 times the level at 2.0 for houses that don’t. This is a common sense approach although still ridiculously conservative as Dr Kim sated that the safe level was more like 20 and that he would be happy for his kids to live in anything up to 12x.

The amounts are still way too low for any Health risks but at least this should solve some of the ridiculous situations, where people have had to clean houses or even replace interior walls , for miniscule amounts of meths,  based on a false understanding of dangers.

One important comment Dr Kim made that all landlords should remember, is that rather than rushing in with expensive cleaning options, try opening windows for a while . The “P” contamination from smoking does break down over time just as cigarette smoke does. His comparison with cigarette smoke is a good analogy to keep in mind.

A special thanks to Dr Kim for his enlightening work in this field and the restoration of some common sense in the great bureaucracy. This man will save landlord millions of dollars

For a look at the earlier article click here

donkey

SOME INTERESTING STUFF ABOUT DONKEYS.

One of the best aspects of Real Estate is the people you meet. From all walks of life, with the experience and diversity of ages. As a result you hear the most interesting bits of information. A few days ago it was Donkeys . The information came from four different people all in the same day.

The first gem was Donkeys live a long time. Your pet braying machine can live for up to 50 years! No wonder they get so smart. This came up as I am about to list a property where the pet Donkey has stayed as part of the chattels. The Donkey has been there for as long back as anyone knows yet the property has changed hands three times.

The second snippet if that Donkey’s keep bulls in line. If you have bulls run a donkey with them. The Donkey will be peacemaker and will stop the bulls fighting. One Donkey will keep about 30 bulls from fighting. They do this by kicking the bulls and biting the bulls on their rumps when they get aggressive, and if that doesn’t stop them they will bite them on the testicles!! No wonder the bulls fall into line.  There’s nothing like a nut cracker from a large toothed Donkey to take the fight out of you. !  Perhaps they should be introduced into our prisons.

And then, American sheep farmers have been known to run Donkeys with their Sheep in the wild country. Donkeys have an aversion to any canine and if they are in their patch, will chase them relentlessly, and as we all know “they kick like a mule”. The Donkeys keep Coyotes and dogs away from the flock. Apparently they can also bite down on a Coyote’s neck or back and throw them through the air.  What a useful if slightly noisy animal.

From the mouths of Babes

little-blond-girl

Just an aside , My sweet, angelic, blonde, butter wouldn’t melt in her mouth, three year old  granddaughter fell hard on her rump, at her Great Grandmothers 60th Wedding anniversary, after trying to scale a table.  She has two older brothers who teach her all sorts of strange language, as evident when she loudly proclaimed to the throng of oldies who had gathered around her concerned about her wellbeing.  “ Oops ! think I might of cracked  my ball sack!”