2021 has got off to a rollicking start. House prices in Whangarei have been going up by an average of $1, 230 per week for the last year. So the question is “ Will this continue or are there some pressures building to change this. I think so!!
Low interest rates. its cheap to borrow money and you get a better return from houses than from the bank.· Supply and demand. There is still a chronic shortage of housing. The supply issue in partly being addressed. Higher property prices mean marginal subdivisions are profitable again. Building permits are steadily increasing across the country, so we are finally beginning to close the gap between supply and demand, but we have a long way to go and it will be 10 years before we actually catch up.· Returning Kiwis are buying up properties. Many of these are in the county where they were born, so the provinces are doing well.· Qualified KiwiSaver buyers are in the market in ever increasing quantities.· Building costs are going up fast. In 2016 the average cost to build in NZ was $1906 per m2, with many variances depending on size, quality, and location. In 2020 that had risen to $2238 and will be higher today. ( Canstar.co.nz) We are now nearly twice the cost to build the same house than our Australian cousins who are paying around $1,190 per M2. (Michael Yardney Property Update ) . Get your kids to get a trade if they are looking to be wealthy in NZ
Contents 1. Small Business Funded By House Prices 2. House Prices In The Next Six Months 3. House Prices Doubling Every 10 years .. 4. A Critique ! A Warning About The Auckland Market 5. Rental Market Headwinds ? 6. Hunterwasser Tribute 7. Wild Inflation Theory 8. Electric Cars Parity with I.C.E. 9. Fusion Energy and the Future
Welcome to the next edition of my mostly real-estate thoughts, facts and predictions for the future. The last letter was in July and as is becoming increasingly common it takes a few months for the dust to settle enough for me to get an idea where things are going in the property market. In the last issue I said that while logic told me that we had to be heading into a recession, we were seeing no sign of that in the markets, and that I though we would see the market stay flat of even rise for the rest of the year. Well half that prediction was wrong. It did not stay flat, but I was way ahead of every noted economist.
Small Business Funded By House Prices.
I managed to spend about 2 minutes walking alongside John Key, when he was Prime Minister, as he was heading from our conference for a rendezvous with a government BMW. I was desperate to get my message across that small businesses depended on house price inflation. He probably thought I was raving loony, as I garbled on about the link, that seemed so obvious to me, a business owner. He finished my monologue by saying “Small business needs rising house prices! I get it”. My teaching the then Prime Minister, who had a lengthy and distinguished career in the financial world to suck eggs, was done!
So, let me walk with you for two minutes …. Rising house prices are essential for business growth, survival, and capital expenditure. Approximately 97 % of all businesses in NZ are small businesses and they employ around 30 % of the working population. (MBIE). Any small business owner will tell you that when they need money to:- start up, buy more stuff, get an overdraft, buy more stock , buy more machinery, expand , or just survive, that when they go to their bank for funding, they are going to get asked one overriding question. . “What’s your house worth?”. While the banks are interested in other aspects of your business, what they fall back on is the security you have in your house or houses. That is what they primarily lend you money on. They know that this is the only readily realisable security they can get. They also know it motivates the hell out of you to make sure your business succeeds. The more your house is worth, the more you can borrow. The more you can borrow the more you can grow your business. The link between house prices and funding for small businesses is cast in chains. The last thing the government, the banks, and small business owners want to see, is property prices declining. That would be the beginning of a really, really, big financial disaster.
Which Segway’s into the Reserve Bank’s Chief Economist, Yuong Ha, saying the bank was not responsible for soaring house prices and cannot control them. “House prices are not something we can control, even though people put that on us”. And neither should they. Houses are a commodity and should be market driven by supply and demand. We do, and will see government intervention in house prices, but imagine if the government made legislation that controlled other asset classes, like the share market prices or Gold prices. Imagine the uproar!
Where Are Prices Going In The Next Six Months
The short answer is up and accelerating.
There is way too much pressure from the multitude of buyers to see any other result. We are seeing multiple offers on properties similar to the peak three years ago. Open homes are full, and we have people making offers on property without seeing them. What we are seeing in the streets
First home buyers. As more and more young people build up a deposit in KiwiSaver, more and more of them have a deposit for a house and are they ever in the market. Any property that comes in their price range will get 20-40 people through the first open home and it is probably going to have a deal on it, within a week. KiwiSaver started 17 years ago and after three years people qualify to remove some money for a deposit. That means we have 14 years of qualified first home buyers entered or entering the market. These people are pushing the investors out of this section of the market as they pay more than the value the investor sees. A negative side effect is that the first home buyers are moving out of rentals and widening the gap between desirable tenants and less desirable, meaning the overall quality of tenants is declining.
Money fleeing the banks. We are seeing more and more purchases where the buyer is pulling their cash out of a bank and putting it into a property. These people are often buying the one- and two-bedroom smaller properties that do not suit the first home buyer. Most of these people are older and have the cash, so we are not seeing many sales subject to finance
People relocating from the main centers. There seems to be a huge amount of movement from the bigger cities to places like Whangarei. These people are often cashed up, as they are selling more expensive homes. I mention the cash element, current Bank strategy of limiting Loan to Value Ratio’s is only going to hurt the first home buyers and not the second two groups.
With the current pressure on the available stock and with interest rates predicted to remain low or go even lower, there is no reason to believe we are going to see a slowdown in the market for the next 6 months, at least, and I suspect it for 12 months . Again, logic says that we must have an impact from the Covid recession, but every prediction of when that was going to happen has so far been proven wrong. We are through the end of July crash, when the subsidies would stop and kill the market, and through September crash when the impact of the subsidies stopping would be felt. The only predictions still standing are the ones saying next year when the impact of the subsidies stopping is going to be really felt. I’d hate to be the emperor standing naked in my new clothes but remember this Covid induced recession is not like any other recession and all the usual rules do not seem to apply. The recently released unemployment figure of 5.3% demonstrates that the predicted mass unemployment simply is not happening. We have had way worse unemployment rates even in good years. When you take out the 4% totally unemployable the real rate of active job seekers is exceptionally low, with some industries crying out for workers. The Government tax take is nowhere near as bad as predicted so again, bad news predictions proving wrong. The reality is we are being told things are way worse than they are proving to be.
We may not see the calamitous and dire future predictions that we have been foretold occurring. We do not seem to have died from lack of tourists. 10 billion of the money that was spent on overseas holidays is now being spent on NZ holidays. I thoroughly enjoyed my latest camper holiday, where the first thing you noticed was the different attitude of the camper staff to their own people, and the second you noticed was that everyone pulls over to let cars get past. You don’t see the big lines of cars following slow campers. The pickup and drop off terminals were very busy. There were plenty of campers on the roads and the holiday parks were full.In Reefton, Diana and I dropped into “Dawson’s Bar and Dining” looking to talk to a local about the town. I asked the extremely helpful bar lady to point out a local to me. Her finger waivered in the air as she used it as pointer to scan left and right over the 30-40 diners and drinkers, before finally with a sense of triumph, identifying one couple and a single manic looking gentleman. 3 locals out of 30-40 people. The point being NZers are out and about seeing their own country and spending much of the 20 billion they would have spent overseas this year in good old NZ.But for me the biggest bonus of all was the lack of social media posts of annoying family and friends basking in some exotic overseas location, while I was hard at work suffering the rain and cold.
The fundamentals of low interest rates, a shortage of houses and a growing population are still in play and have been for the last 15 years. Basically, until the supply catches up, the demand will drive prices up. (See Something to watch in Auckland)
“Do House Prices Really Double Every 10 years” by Mark Lister. Craigs’ Investment Partners
An interesting headline that always captures my eye, as these articles are invariable written by someone with a barrow to push. Mark starts off his article saying he is no property hater and recommends young people getting on the property ladder. Craigs are predominantly a share broking and investment firm and property investment takes money away from firms like this.
In this article he quotes Reserve bank data from 1962. He writes “that at first glance, the numbers are good. New Zealand House prices have increased 8.2% per annum over that 58-year period, so they’ve in fact doubled every nine years”. He ends his article saying that “It’s also based on some periods in our history when inflation was exceptionally high, this makes the rule of thumb much less useful, and potentially a little less accurate”
And this is the argument all these writers follow, like a well-worn Wildebeest game trail into the Great Green Greasy Crocodile infested Limpopo river. They try to claim that this increase is not truly representative of true growth, because we have inflation and gross domestic product and these events must be taken off housing growth. Mark also talks about how mortgage rates have fallen and made housing more affordable, thus distorting the increases.
He mentions that the biggest rises have occurred in times of high inflation and therefore are biased increases And the answer is “Of course!! That’s the exact point and that’s why people invest in property and that why the rule of thumb of doubling every 10 years is accurate”. Do not complicate it Mark. Your article clearly shows that despite fluctuations in interest rates, despite how well the gross domestic product is doing or not doing , despite economic slowdowns and rises, despite high interest rates and low interest rates, despite plagues of locusts and corona viruses, property does on average double in value every 10 years , (or nine years in the last 58 as your research shows.) This does not just go back to 1962, but back to when property records began. 130 years in NZ and Australia and 900 years in England (the Domesday Book)
Something To Watch In The Auckland Property Market.
Auckland looks like it is making inroads into its severe housing shortage. Previously this figure has been estimated at around 40,000 by noted economists like Tony Alexander, however a new report from the Auckland Council Chief Economist David Norman has the current shortfall at around 15,000 homes. This in part will reflect the intensive building programme in Auckland, but also by the slowdown and shift in immigration trends. While net immigration figures are up on last year (79,400 this year as opposed to 52,300 last.) The people coming into NZ now are predominantly returning New Zealanders, and with our borders closed we are not seeing the number of non-NZ migrants to the country. The New Zealanders differ from the more typical overseas migrants as they head back to their areas of origin, rather than piling into Auckland as the non- Kiwis have done in the past. Along with the baby boomer retirement drift out of Auckland for financial and lifestyle reasons, we could see the pressure on Auckland house prices slow down or even stop. The result will be a stagnation of prices in this area. It is 3- 5 years away, but we may be seeing the beginning of the trend now. It looks like we will have a Covid vaccine before then ,and it will be interesting to see how open our borders are to overseas persons after this scare. You can be sure there will be more pandemics coming and some of them will be deadlier. You can also be sure New Zealand will be an even more attractive destination to people overseas, with our ability and willingness to close the borders in times of crisis. Just how open our borders are will decide the future growth in the Auckland market.
Rental Market Signs.
We are seeing an unusual set of statistics in the rental market. We have previously talked about price glass ceilings for rents. $400 per week was one of these I talked about in 2018, but that ceiling is well and truly shattered. Rents are going up fast at present with an average increase of $7 in the last month and average rents are closing in on the next ceiling which will be $500 per week. There are some potential signals that all is not as good as it seems. The days a property is vacant has increased to 26.5 days. Correspondingly we are seeing both enquiries and applications down on previous months. There are a lot of potential reasons for this, including the approach of Christmas, but one suggestion is that people are not prepared to pay the rents being asked. We will watch this closely as we know there is a chronic shortage of rental properties and we went through something remarkably similar when average rents approached $400. For the first time in my memory , it is usually cheaper to own a home than to rent it.
Hunterwasser Nears Completion.
Never has a building in Whangarei been so mired in conflict and so polarizing in opinion. You would this it was another Trump Tower. The process to fund it followed a very convoluted and twisted path, and looking back on it there were obvious signs of “clever manipulation “ of the public, including creating a referendum that split the “No” vote in half and despite assurance to the contrary, it will undoubtedly be an ongoing cost to the cities ratepayers for many years to come.
However, that said, as this magnificent structure slowly and sensuously strips from its bridal white robes, revealing tantalizing glimpses of gleaming multi coloured tiles and soft seductive and sweeping curves, even the staunchest critic must be impressed. We are seeing a masterpiece being created.
For 100’s of years after the controversial process has been forgotten, this unique building will become a symbol of Whangarei and its future. It will make national headlines as it becomes the Ohakune Carrot or the Paeroa L&P bottle of Whangarei. It will spread across the world in people’s selfie photographs and will put Whangarei firmly on the map.
Congratulations to the many who fought so hard for this building for over 12 years. Who had the vision to see what many (including me) could not see. You will be remembered in future generations as some of the current day founders of our city .
Inflation Theory A’la Barry
Here is a strange theory I have been working on. In July I mentioned that when you print money you make that money worth less, because there is more of it, and the things it buys worth more. Classic inflation theory. Historically when money gets created through “Quantitative easing “inflation gets going. But this is not happening yet. Japan has been deliberately printing money for about 5 years to try to get inflation moving, and so far, it has fallen as flat as a rice cracker!
So, what if we were in fact getting the inflation that quantitative easing creates, but it was only showing up in certain areas. Imagine that brick pavement you walk on in most city centers. The ones with brick sized pavers and lots of cracks between. As those bricks push down into the sand underlay you get sand rising through the cracks and settling in the grooves. If we look at the sand as the things that are going up in price like houses, shares, and gold. The bricks represent the things that are not going up in price, like cars, TV’s, and toasters. These things cannot go up because there are so many of them and if the manufacturer put the prices up, you would buy a different one, or hold off buying one for a while. Technology and mass production are constantly driving the prices of these items down so holding off can save you money. So, let us say there is inflation occurring, but its only in selected areas like property and shares. They are the cracks in the pavement. When we look at property it is deliberately excluded from the inflation index, as is the share market. So what we are seeing as a rising market could in fact be inflation happening, but not across the board as has previously been recorded, but specifically in property.
As I write this it seems a bit far-fetched, but I am leaving it in the newsletter for those with greater knowledge to comment. I would also point out that this ties in with the K shaped recovery we are told about, where the recovery is very uneven and favours certain sectors over others, such as medicine over travel.
Electric Car Prices Due to Hit Parity Next Year.
Just putting this prediction out there again. New electric vehicle costs are predicted to reach parity with internal combustion engine vehicles next year. If you are in the market for a new car then you should watch this closely, as once this happens, internal combustion cars are going to be hard to sell on the second-hand market. Initially the cheaper vehicles will come out of China and India, but once started the rest of the car companies will follow suit.
New Renewable and Radioactive- Free Power Source Possibility
We are all aware of the nuclear fission energy source. That is the classic atomic reactor that splits up very heavy atoms like Plutonium or Uranium and captures the energy released to create electricity. The problem being that pesky by-product radiation.
A British company based in Oxfordshire has switched on a new type of power source ( Tokamak Fusion Reactor) where they fuse two lighter elements together and harness the energy, so instead of splitting a heavy atom they fuse two light atoms together in a process called nuclear fusion, as opposed to nuclear fission . The process attempts to create the same type of energy the Sun creates with its hydrogen and helium mass. So, providing they do not turn us into a mini sun ourselves, (it is switched on so that minor setback has passed), the new type of energy source could create unlimited power with zero radioactive by- products.
This will revolutionise power as we know it, with cheap , efficient and green energy for Cities, Houses and vehicles.
While researching this article I looked up the “ NZ Nuclear Free Zone Act 1987 “ to see if we would be allowed to use Nuclear Fusion, and guess what, this much quoted act only stops nuclear powered warships, weapons and craft. The act allows the building and using of Nuclear Power. You could knock me over with a radioactive feather!!(Thanks Rupert Morrish for putting me right on Fission and Fusion )
Some years ago, I was standing in front of this famous Van Gogh Painting “Stary Night”. (It is in the Rijksmuseum in Amsterdam). I remember standing amongst a crowd of other people and being totally under its strange and fascinating spell. I remember thinking “that’s so simple I could paint that!”. Years later I tried, and tried, and tried, and although some of my work was passable, I could never capture the movement, colour, and mood his painting drew from me. (Incidentally, the view is from his asylum window, so he was quite mad at the time.)
And strangely this relates to Real Estate sales. If you asked me today “Why would I use you , what can you do for me that I cannot do for myself?” or “What makes you different from any other agent?” I would have difficulty answering. I could give you all the standard marketing, knowledge and negotiating answers, but that is not really any different from what anyone else would say. What I have is 35 years of Real Estate sales experience and that has built a set of skills and a special kind of instinct.
It is not what I do, so much as when I do it.
It is not closing the sale but knowing when and how to close it to your advantage.
It is not simply negotiating the price, but knowing how to read the other party, so that I know what their top dollar is before they know.
It is not simply marketing your property through the various mediums but knowing how to target the right buyers and how to enhance and showcase your home’s special features and benefits.
It is not simply getting an offer on your property, but how to add value and desire to your home so that you get the best market price.
It is not about just knowing the market today but being able to guide you through what is going to happen tomorrow.
Based on my extensive experience I have a proven track record of getting the best price, far in excess of the fees you pay..
So call me if you are thinking of selling your property.
Contents • 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.
You are reading my fifth attempt to write this newsletter. Every 24 hours I have gone back and edited it again because the changes are happening so fast. The day you get this I’ll be having regrets as something will have changed, or been clarified since writing. But as they say “Fools rush in where Angels fear to tread”. So true to form: – Below are a selection of facts, alternative facts and opinions on the virus and its effect on the property market. Keeping in mind we have never had this strain of bug before and in my 35 years of selling Real Estate I have never dealt with this before, so its all new ground.
This strain of bug before and in my 35 years of selling Real Estate I have never dealt with this before, so its all new ground.
We have had many previous out of control bugs:- Polio, measles, chicken pox, Mumps, Influenza, Colds ,Ebola and many more. As humans we survived them all and will do so again. But Covid 19 is only a precursor and forewarning of more bugs to come.
The Chinese contagion looks like it has been controlled and is currently in decline. It is a military state, so enforcement of restrictions may be easier than in the west. Many of the previously closed highways, cities and factories are re-opening. This is just 3 months after the first reported illness at the end of December. Around 70% of the people who were hospitalised in China are now recovered. Spain and Italy are showing signs of the infection rate declining , so this will have an end.
Our lock-down will isolate and localize infections. I have no doubt it is the right thing to do, even though I share the frustration of many at the self-righteous and often ignorant human beings who will flout the rules.
In times of War, necessity means that technology leaps forward at a much faster pace than in times of peace. Covid 19 is a viral war against humanity and as such vaccines will be developed much quicker than in times of peace. Especially as China now has around 80,000-100,000 recovered people with effective antibodies to study. The timeline to develop an effective vaccine will be shorter than the 18 months being touted and most likely 3-4 months.
Old fashioned Quinine (anti Malaria treatment) has been touted as a preventative measure. The sales of Gin will increase as people test this for themselves. Meanwhile a man has died in the USA after listening to Trump and self-medicating with Chloro-quinine. In fairness Trump was right, he won’t be getting Covid 19.
We are an Island nation with easily protected borders and as of today only have a minor semi-controlled community outbreak, unlike China, Italy, Spain, the rest of Europe and the USA. We have been very lucky so far and we can stop this thing. But we need the majority of the population to obey the lockdown rules. We need to have confidence in our health system that they can track the virus spread and conduct the right tests on the right people at the right time. It is unfortunate that out only death to date was misdiagnosed as Flu. There is a big gap between talking pretty words in parliament and the actual implementation of the legislation.
If there is going to be a rebel group, it will be the young. They usually have symptoms milder than a cold and let’s face it, they have the most to gain by a shift in power from the old to the young. Let’s hope they remember they have parents and grandparents and remain glued to their screens in what must be a continuation of a type of self-isolation they are practiced at already.
Let’s look at what this virus is actually going to do. It’s basically going to leave our youngest kids alone. It will hurt some of our millennials, but most will be fine. By the time you are hitting fifty your personal risk factor will be increasing. Sixty and you have to be extra careful, seventy your chances of dying are about 7-8% IF YOU GET HOSPITALISED!! Remember about 87% of people who get it will recover at home without hospitalisation. 80 plus and your chances after hospitalization are about 15% of dying. If you have a chronic illness and have a weakened body or immune system you have a greater chance of dying. (in China a 100-year-old man has fully recovered from the virus)
So, while the personal picture is very scary, the actual impact on the planetary population of 7 billion will be small.
The virus will have a devastating effect on the economy in the short term, because of the necessary actions required to control it, but it may be short lived 3-4 months.
The real issue is the recovery time. How much has the economy been damaged and how long will it take to get back to where we were. Factories don’t just push a button and start again. Transport requires a lot of logistics and supplies to operate; how long will it take to get these moving again. Tourism may never fully recover. Confidence is a big driver and until that returns the economy will stagnate. The recovery could happen quickly or take a decade.
While the effects will be global, this is not a financial meltdown. The global economy could recover very quickly after the virus is either contained or sufficient people have been exposed to it and recovered with immunity. The “herd effect” where enough people have immunity to stop the spread. So, imagine if it was all over by August, September and October. In New Zealand this could be the end of April or May. It is conceivable that we could be fully trading with China by August.
The virus shutdown will not be fully over until an effective vaccine is developed. Until then we will have two separate worlds. One where countries have controlled the spread of the virus through social isolation, and one where the virus spread out of control and the population have immunity through having survived it. It looks like this divide will be rich nations versus poor nations. The continents of South America and Africa look like they will head the out of control route. Thereafter the only way the “isolation” nations can keep the virus out of its protected, yet vulnerable people, is to keep the inhabitants of the “immunity” nations out. Therefore tourism in New Zealand will be a dead duck until the vaccine is developed. The development of the vaccine will be the start of normalisation.
We will see jobs go, but New Zealand is probably in the best position it has ever been in regarding employment. We have around 4% unemployed, with many industries unable to find NZ workers. We currently have thousands of imported workers in the agricultural and horticulture sector, the building sector, and the transport sector. We have a lot of available jobs in the country simply by sending the imported workers home. (Many employers will resist this as they have found their imports are way better than the locals.) . New Zealand has some fat in the employment market. We can absorb several thousand job losses.
This recession is different from any other. It is not being driven by bad economic circumstances, nor an ailing economy. For a great comparison of the major differences have a look at Tony Alexanders newsletter.
The Effect on Property
In times of crisis there are two major fall backs. Gold and Property!.
In every financial or global crisis we see the gloss disappear off Shares. Prices drop as they are doing now. Shares in a time of crisis are a poor investment Shares are your slice of other companies and as such are subject to global disasters.
They rely on a growing economy. People won’t pull their money out of shares as its too late, but they won’t be heavily investing in shares for a while either.
Gold has to be rising in value for you to make money and at $2631 per ounce it is just about as high as it can go. Gold has averaged around $1,500 NZ for the last 3 years, so it would take a bold person to buy now expecting further significant increases. Meanwhile it doesn’t earn any income for you. It has to go up in value to make money and gold is notoriously fickle. You have to pick the up cycle and sell before the down cycle. Gold is basically gambling.
Property is more stable and has historically had a steady capital increase. It’s something people simply can’t do without, unless they have a large livable boat, so its’ value remains high as long as there are people in this world. It has value while you hold it, be that rents or your personal ability to utilise it for food or other resources.
There is no long term financial comparison to property. and there is nothing like a world-wide crisis to illustrate this.
Interest rates are at an all-time low, so housing is more affordable than ever. In previous recessions we have had high interest rates so when people have lost their incomes, they have been forced to sell their property, often at a bargain price and rent. Today a $500,000 mortgage will cost you about $517 per week to repay. A three-bedroom home to rent will cost you about $500 pw. The figures to own as to rent are nearly the same. This time we are not going to see the mass of mortgage sales that we have seen in previous recessions.
There is no incentive for people to keep money in the bank. Over the last three years we have seen a growing trend of people pulling money out of banks and putting it into rental investments. This will accelerate as interest rates drop.
Lots of people with NZ passports are going to return home. We see this in every major crisis, be that war, pestilence or financial crisis, … Kiwis come home. Some to raise their kids in a safer environment along with their foreign-born partners. These people will be financially better off than the average Kiwi and they will buy property. They will be a major driver in the dearer price range.
Australia hasn’t treated the 650,000 New Zealanders living in their country very well. They are second class citizens in a country they may have lived in for 20 or more years. We will see a lot of these people either having to return due to financial hardship or choosing to return because they realise they are expendable non citizens, who are being treated very poorly.
Rural and country living will grow in popularity. People will want the safety of greater isolation and a greater ability to grow their own food. Lifestyle blocks will have a resurgence in popularity. Think of the people who have had to self -isolate in a 40-60m2 high-rise Auckland apartment. The first 24 hours are going to feel like a week, the next like a month, and after 4 weeks they will literally be climbing the walls. That urban, coffee and wine culture lifestyle is going to look a little bleak!. People are going to want to be live in an environment that allows enjoyment of the outdoors and space to roam. Animals to talk to and fruit and vegetables to grow.
People will want to get out of the big Cities and their hotbeds of disease. There will be increased migration out of Auckland, Wellington, Hamilton, and Christchurch, places with high populations and international airports. This movement won’t impact places like Auckland with its 1.5 million people, in fact they will hardly notice it , but if just 2% of these people decide to move to smaller rural places that will be 30,0000 people, over half of Whangareis’ current population.
Property prices will at worst stay steady during this crisis and most likely will accelerate after it is over. Places like New Zealand, surrounded by water and easily protected, will have huge appeal to all people, Kiwis and foreigners alike.
This demand will further accelerate if there is another viral outbreak, and as I have said earlier, this is just a matter of time.
Off-setting this is the actual physical ability of people to look at properties. With the lockdown it’s impossible to physically inspect a property. The banks have shut down mortgage processing, the valuers and builders are locked down, LIMS are unavailable, and you can’t shift in or out of a house. Lawyers cant do the Anti money laundering requirements, so basically the market will stop for the length of time during the shutdown. But once the lockdown is finished there will be a flurry of activity.
First home buyer Kiwi- saver investments have dropped along with the share market, so less first home buyers are able to meet the deposit requirements. This will have little impact on the first home buyer market, because there are so many of them. Kiwi saver was introduced in July 2007. You had to be in it for three years to qualify to use some of the money for a home deposit and the amount you could withdraw maxed out after 5 years. Subsequently for the last 10 years people have qualified and been using their Kiwi saver to help with the deposit. While many have been successful and are in their homes, there is a considerable backlog of qualified first home buyers who have been unable to find a suitable and affordable property. So much so, that the drop off in this market will not be felt. Instead of having fifteen suitably qualified first home buyers per property we may only have seven. The longer you are in the scheme the more deposit you have, so those desperate to buy a house may have wait a bit longer or drop their price bracket a bit, rather then drop out of the market.
Investors will head back into the market in increasing numbers looking for properties below market value. They may have slim pickings. We recently sold a property in Otangarei for $390,000. When I arrived in Whangarei in 1991 you could pick up a property in this suburb for $20,000-$30,000.
The Government has been at pains to protect all New Zealanders, both financially and economically. There will be considerable financial pain, but the effects of this are being minimised by the wage’s subsidy and the mortgage holidays and other accommodation.
FUTURE BUGS A CERTAINTY
The Covid 19 virus is only the precursor to other bugs that will develop and try to eat us. Humans are such a big untapped planetary food source. Viruses have been around for a lot longer than we have. It is inevitable that something is going to find a new way to harvest our nutrients. And what better adapted creature than a virus, which can reproduce thousands of times a day, and using our bodies, spread itself through our breathing and social processes. It can mutate faster than we can vaccinate against it. We will have more of these types of bugs coming.
But we will be better prepared for the next one. We know what to do now and how to contain it.
Most of the future bugs will be contained close to where they originated.
This virus will have a long-term effect on peoples’ thinking about the way the global economy works. Economies today are dependent on being able to grow internationally. That means they need a growing market to sell into, a worldwide marketplace. We see the evidence of this with all the free trade agreements negotiated in the last 10 years. But are worldwide markets the best strategy for a country? This virus may be the beginning of a reset where countries look more inside their own borders for growth.
Through necessity people have moved more towards home-based self-sufficiency. Old fashioned baking is back in vogue as are walks with the family and board games. The home environment has become more important. Isolation and avoiding people outside the family bubble has a new emphasis. People will dine out less and some values such as appearances may change. We will see less waste, such as that generated in the restaurant and dining industry. The green movement will flourish.
People will holiday more in their safe havens (NZ) so we will see more internal tourism.
NZ will still be seen as the clean green country that it is, and will still be seen as a tourist destination, but we will need protect our shores better than we have and may not want as many of these risky tourists, many of whom totally ignored the isolation requirements when entering the country.
Tourism as an industry will probably decline and it would be foolish to rely on the tourist dollar like we have. We need to promote New Zealand to New Zealanders more. We will see the end of the reliance on the tourist dollar and the end of international global travel as we know it, certainly, to the extent it is now.
This bug may be the beginning of the end for the current financial system based on economic growth. It is unlikely the existing financial global system, where countries export to each other, will last long term. There is likely to be a movement towards more ecologically sound self-sustaining economic systems. Economies are likely to head internally rather than externally. The export dollar will become less important as it brings so much potential risk with it. This will be short term initially but may gain a stronger foothold going forward, especially among the younger generations.
It’s a time the world can reset and head in a slightly different and most likely greener direction.
Countries will move towards nationalism rather than globalism. What happens in our back yard will be more important than the worlds backyard. We will want to be able to lock the gate at any time, with the right people on each side of the fence and have a strong enough internal economy that we can survive without the shocks.
We as a country will have a lot of new debt. We will have to pay that back either through our money being worth less, or through taxes. The piper will have to be paid and from what we have heard a lot of this will be by “Quantitative Easing “. Printing money. This should result in some inflation, although it hasn’t yet in countries that have tried it. ( USA, Europe and Japan) , but never the less it should do! You print more of it and the value of what is there declines because there is more of it! Seems simple enough.
Which brings us back to property, the only sure fire hedge against inflation.
Future Economic Changes
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The main reason this newsletter is a bit overdue is because I have been carefully watching what is happening in the news and comparing that with what is happening in our office. It will be no surprise that my personal predictions will follow just about everyone elses and that’s it’s heading back up again. However this has taken quite some time to materialise. The media predictions were rampant at the end of last year, but at a local level it wasn’t happening. We were still seeing the lower end of the market active, but the higher priced properties were selling slowly. However, this year we are seeing a large numbers of Auckland buyers moving back into the market. My personal enquiry has shifted from predominantly locals to predominantly Aucklanders. We have multiple offers on many properties with a new company record of 10 on the same property. Last year we saw a two-tier market, where properties under $500,000 raced ahead whereas properties over $600,000 were selling slower. This created a distortion as the lower priced properties were gaining on the higher half and the price gap between them closed. Logic would say that with the new interest in the dearer houses we should see a period of adjustment where these properties re-establish their price difference.
2020’predictions are: –
Continued strong interest in properties up to $500,000 from the first home buyers and the investors. This market will continue its steady 10-12% pa growth. The higher priced properties will remain at the same level for about three months, then experience a strong upward surge. This is because there are a lot of available properties in this higher price range and these need to sell before there will be upward pressure on prices. We have about three months’ supply depending on enquiry. The market will then surge over the winter months. This market will also see around 12% growth with most of it focused in the second half of the year Some key factors and points of interest: –
We are finding a surprising amount of Auckland buyers who are buying, but not selling their Auckland homes. About 30%. These people have enough equity in their current homes, that they can buy in Whangarei and not sell in Auckland. This is going to have a huge effect on the available Auckland properties for sale and push the Auckland prices up faster, as the already short supply gets shorter. The interest they pay on their new home loan will more than be covered by the increased equity in their existing loan. Not a bad strategy for a home buyer who owns an Auckland home.
Interest rates are very low and may even head down a small amount yet. Housing loans are now very affordable, and a $600,000 loan is going to cost you about $386 per week. Compare this to when Whangarei’s average house price was going up at $1700 per week. A buyer keeping their old home and buying another is going to get double the capital gain.
Nearly every general election causes the housing market to stall. I will make a bold prediction and say that will not happen this year. Historically most elections are based on a conservative government in power, and peoples fear that if a liberal, left- leaning government gets into power then we will see anti home ownership legislation, such as a Capital Gains tax. As we already have a left leaning government in power and they have stated they will not be introducing a capital gains tax, then there is no threat to home ownership. The worst that can happen is a more conservative government will take power at the end of the year. Therefore, I don’t see people holding off buying due to the election this time around. I have every chance of having egg on my face for this prediction as it will be a first, and historically elections are bad for real estate.
Building costs have skyrocketed after the Christchurch Earthquake recovery swallowed up most of the available builders. Builders have waiting lists, and many are pricing work on the basis that they can put a high cost on the quote and can afford to miss the contract. Anyone building will be looking at $3000 per sqm building costs this year, meaning that a modest $160m2 home will cost you $480,000. Add a $350,000 section to that and your new build costs are $830,000. Right now, existing homes are better value, but it will not take long for the current supply to be sold and then these new build costs will set the new prices.
Section supply is still at an all-time low. There is an adjustment period when people take time to accept the new section development prices and the new build costs, but when they do these new $400,000 plus section prices will be the norm.
The Americas cup will start 21 March next year. Impact on house prices …. none. It’s a great event but has almost no impact on the Real Estate market. It didn’t last time it was in NZ and it won’t this time either.
Almost 90% of my predictions are proving accurate, right down to the percentage growth, however there are two glaring exceptions. The first is rents. Two years ago, I predicted that average rents would hit $480 pw by the end of 2017. They are close to that now and there is continued strong upward pressure. Rents in excess of $600 pw are being achieved but the fact is I got it wrong. The pressure was there but the resistance to higher rents has taken longer to dissipate than I thought. A bit like walking through thick mud. Progress was made, but at a slower pace. The second is Rental ownership. At the beginning of last year, I predicted that many of the mum and pop landlords would get out of the rental market and there may be a small drop in prices. This has proven to be totally wrong. There was a brief flurry of mum and pop investors getting out as compliance costs and landlord requirements got harder, but this was more than offset by first home buyers picking up the properties and interest rates dropping further, meaning people with money were looking for alternative investments. In my defence I did say that if the Government raised the first home buyer assistance ceiling from $400,000 to $450,000 in their budget, that this would alter the prediction and sure enough they did. However, two mistakes are two mistakes! I apologise and will fine tune my crystal ball.
How Fast is Whangarei Growing?
I have been a long-term advocate for growth in Whangarei and have written numerous articles about how it is growing twice as fast as the WDC are planning. The WDC were planning around less than 1% growth whereas the District Health Boards’ new medical registrations was showing 2% growth. ( WDC have just released a paper saying we grew at 1.57% over the last few years.) I have read some recent press articles about rapid population growth in the district inspired by Government spending:- such as the $800 million infrastructure spend , Ports of Auckland shifting and the Navy shifting , and figures that say if the Ports of Auckland and the Navy shift north the district population could hit 145,000 in 10 years . This figure is quoted by the NZ Herald as being expounded by the current WDC chief executive Rob Forlong. Right now it”s hard to think Whangarei’s can cope with this type of population growth. It’s not that it won’t increase at a fast pace , but we simply don’t have the infrastructure to allow this growth. Sewage, electricity, roads, bridges, and then we don’t have the builders, electricians, plumbers etc to build all the houses. We don’t have the time to wriggle through all the red tape in 10 years to create the sections needed. We can handle a population of 120,000 in 10 years, but 145,000 it would be an unmitigated disaster for the city, and we would have homeless people under every lamppost trying to find a dry sewage free place to stand. With optimistic predictions showing an average of approximately 2,500 new people per year for the next 10 years , we would need over 1,000 new houses per year. Currently we are building less than half that. We currently have about 450 sections being developed or in the planning stages , so even if we had the builders we don’t have the available land, and sections take a lot of time to develop. The growth prediction has been exaggerated and I hope people are not giving it too much credence . Let’s look at some factors
The Hunterwasser Building. Magic building and I’m personally glad it’s being built, even though the reality is it’s going to run well over the given budget (already 4 Million and heading to 8 Million). It’s never going to turn a profit as sold to the ratepayers, and in fact will be a cost on us all for years to come. It will be a great tourist attraction, but it on its own is not going to pull hundreds of permanent residents into the city. People don’t shift cities because of a Noddy House .
The 800 plus million infrastructure spend. This is conditional upon the Labour coalition staying in power for 10 years or future governments buying into it. Then years and years of planning and resource management consents, buying properties, and dealing with objectors. Some of the roading may be done reasonably quickly, as the planning was well advanced under the previous government, and the rail line could be re-opened, but most of the spend will be 5-10 years away at a very optimistic guess.
The Navy. This is not new. Stan Semenoff tried to get them here during his mayoralty and probably a few mayors before that. It would require a massive infrastructure investment to create suitable land and buildings and at best would take 10 years of preparation, but more likely 20-30.
Ports of Auckland. Again, a massive investment in infrastructure required. Most of the 800 million plus will need to have been spent on the big five projects and all the work done, before this concept could even start. So, at best 15 to 20 years.
Whangarei is growing and fast, but at The DHB estimated rate of 2% per annum and allowing for an accelerating growth rate of 3% we could see a further 24,000 people in the city and district in 10 years. From a base of 96,000 that’s around 121,000 in 10 years.. So, let’s not get too carried away with growth projections.
What we can see now is that restaurants are getting fuller and car parking is getting harder to find. Doctor practices are full and it’s hard to get a new doctor, (a problem recognised by the DHB, who have appointed a recruitment Doctor, whose job it is to find other Doctors for Northland.) Traffic is building up and congestion is a common topic of conversation. Rentals are in short supply and the supermarkets are busier. The recreational walks and parks around the city have more people using them, so growth is happening but 145,000 is a 20 year projection, not a 10.
Auckland and the NZ Herald.
It is no wonder newspaper readership is declining worldwide. In the midst of a statistically proven shortage of listings and housing in Auckland, ( Barfoots, REINZ, Trademe, Realestate.co) the NZ Herald run with the following counter headline “ Housing U-turn: All of a sudden Auckland has a surplus of homes. (Amelia Wade 12/2/20)” The article follows a comment made by the Salvation Army based on the last years Census. Yes! that’s the one where 1 in 7 people either partially completed it or didn’t do it at all. (700,000 people) The same one where as a result of the fiasco and independent review, the CEO, Liz MacPherson resigned before she was sacked. Based on this census the Salvation army reported that the population of Auckland dropped 77,500 people in the last 5 years. They then go on the say this means there are now 7,168 surplus homes in Auckland. The Herald have swallowed this click bait and gone on to make this a morning headline. Talk about 2+2=3. Anyone who believes Auckland’s population has dropped 77,500 people hasn’t been there for the last 5 years. They haven’t seen the massive amount of housing construction that is gobbling up land faster than a vacuum cleaner sucks dust. Nor seen the arrival every year of 50,000 new permanent migrants, who mostly settle in Auckland. And what about the 40,000 estimated shortage of existing housing stock. I am sure the Salvation Army have a good purpose in using this statistic, but surely the NZ Herald don’t believe their own headline.
Tammy’s Rental Areas
I have published three newsletters where I have made comments on where to buy rental properties in Whangarei. Our rentals Business Development Manager, the very lovely and smart Tammy Drinkwater, has written her own summary of areas. For those wanting to see this follow the link to her newsletter. If you are a landlord, you should get on her database as she puts out very good material. click here to see her newsletters
Confusing legislation – about to erode your rights
Difference between Jonquil and Daffodil
No frosts in my part of the world and the days are getting longer by a surprising 1 minute and 2 seconds per day. That extra minutes daylight is a lovely warming thought in the midst of winter. We are seeing the signs of an early spring with the Jonquils and Dahlias already starting to flower and the Wild flowering Cherries looking like they will flower about the time you get this newsletter.
Our lovely Daughter in Law recently went through a medical crisis with her spending several days in Intensive care and fighting for her life. The scary thing is they know what the issue was but not what caused it, and they suspect they never will. I drove to Tauranga to pick up their three-year-old and looked after her for 11-12 days. She is an absolute angel and such a well balance kid …. but …. I have not been so exhausted for I don’t know how long. On a good day it felt like my life was on hold, on a bad it felt like it was in chaos.
So, my greatest respect to all the parents out there. The ones who sacrifice their lives daily to create a warm and loving environment for their families. And Uber respect for those amazing and rare older parents who permanently take on one of their children’s children. What courage and what selfless dedication to another.
And to all the mum’s and dads who raise kids and work. I admire your time management skills and ability to focus on your tasks and fit it all in the same 24-hour day I have. You are the best!
My Daughter in Law is slowly recovering at home now, but it will be a while.
The futurist Dr Richard Hames(NZ herald 14/7/19 ) . Has predicted that Hydrogen Fuel cells are the way forward for electric vehicles rather than electric. This could put a spanner in my very confident prediction that self-powered houses will be an option within 5 years. However he also predicts Trump will get in for another term so we will soon see if his predictions carry any weight.
I don’t know about Hydrogen Fuel Cells but do see a clear cross over between electric vehicles and self-powered electric houses. The new technology will be developed for cars and then crossed over to batteries for houses, as is already happening ( I.e. the Tesla Power wall) . If the way forward is Hydrogen Fuel Cells, then I don’t know how they will power houses.
A report from Bloomberg NEF, has electric car costs becoming cheaper than combustion engine cars by 2022. Previous reports had the crossover in 2026 which was reduced to 2024 and now to 2022. It stands to reason that as more manufacturers develop the new technology, costs will come down faster and the crossover point could be 2021 or earlier. Basically, this will be the end of the combustion motor car.
I haven’t put out a newsletter for a couple of months now, basically because I have been confused by what was happening in the market. I could see a slow down coming by it just seemed to never arrive.
We at Harcourt’s had some great selling months leading up to winter and it’s still going strong. This is contrary to many of the signs I had been seeing and to my earlier forecasts. So, did I get it wrong? I don’t think so.
The biggest driver of the market over the last four to five months has been the first home buyers. They have been out in numbers and snapping up any homes in the $350,000- $500,000 bracket. Once you move out of that price range the market has been a lot slower. We are seeing areas, Like Bream Bay, where most houses are over $550,000, hit a wall with minimal activity unless it’s under this price range.
We also need to consider that even though we are building more homes we still haven’t caught up with the under-supply. Recent reports say we are still falling behind.
Rents have been moving upwards, so those with Kiwi saver schemes, are being influenced to buy rather than pay $400 pw. plus rents into a landlord’s pocket. It’s a big incentive to beg steal or borrow to get into your own home.
Interest rates keep falling, although very slowly now. We get the combined effect of money being cheaper to borrow and the interest on money in the bank not being worth having, so many people continue to take money out of the bank and put it into an investment house.
If we look at Core logics” latest average price for Whangarei, its sitting at $548,223. This has remained reasonably stable for 8 months now, so it suggests the boom is over for now. However, a closer look shows that this figure is strongly influenced by the number of lower cost houses selling.
The fundamentals such as supply, interest rates, and immigration are still strong.
The days to sell is pushing out to around 50-60 now. Another indication of a slow down.
My prediction remains that we are heading into a stall. The market won’t drop because of the underlying positive forces, but there will be a period of adjustment for a year or two while people get used to the average property in the city being over half a million dollars.
Investor buyers will find increasing pressure from the Government to get out of rentals, but this will be offset by the low interest rates, rising rents and the wave of first home buyers wanting their properties. I still think that if you want to get out of rentals this is the time to do it. But similarly if you are wanting to get into long term rentals, get in while there is a slower period.
Warning !!! You and the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Bill
Firstly, what a mouthful and secondly what a deceptive title for legislation that takes away landlord’s rights to offset their loses in owning a rental property against their main income. I have read the legislation and unlike most law changes, this one is about as murky as it can get. I think I have found the actual wording in the legislation but am still not 100% sure.
Here is what appears to be the relevant section
Sub-part EL— Allocation of Deductions for excess residential land expenditure
The provisions in this sub-part, in general, –
Limit a person’s deductions for expenditure incurred in relation to residential land to income derived from the land; and
Suspends deductions for the excess expenditure for the income year in which the expenditure is incurred;and;
These words mean you can no longer claim your rental loses against your main income.
Ashley Church, a writer for NZE, has written
“Investment property in the major metropolitan areas generally makes a loss for up to 10 years before it starts to make a profit”
he goes on the say that the ability to offset business set up costs against other income
“ Isn’t a subsidy or a loophole, it’s a standard tax practice that is applied broadly against hundreds of thousands of businesses across New Zealand and is based on the principle that the costs associated with establishing a business and running a business should be deductible from overall income”
However the bill does appear to shift the loses to future years, so rather than reduce your tax liability the year it was earned you can offset it against profits from future years.
c Provide that the excess amounts are carried forward to later income years in which the person derives residential income.
Some will think these changes fair and good. What I am concerned about is the way this change has been achieved and the longer-term consequences. To place it under this innocuous title is deceptive and give the appearance it is being hidden.
Secondly it is going to have a devastating effect on rental supply and our country is not ready for private landlords to withdraw from the market. I have written many times about how, we as a country need the private landlord, but yet again we are steadily driving them out. Remember that 4/5 rental properties are privately owned. There is already a shortage of rental properties in most centers and this will only get worse. One of the key reasons to buy a rental property is now gone. The inevitable result is we will see the most vulnerable and marginalized people unable to find rental accommodation and an increase in homelessness.
Example . My daughter and son in law were fortunate enough to move into their own home last week. They have been paying $450 pw for a very basic three-bedroom house in a pretty rough area. I personally thought they were paying $50 a week too much. That same house is now being advertised at $490 pw and from what the kids have told me, has a queue of prospective and desperate tenants lined up to take it.
Useless fact .
Jonquils are basically Daffodils but have multiple flower head clusters and a strong scent . Daffodils are the yellow headed flowers we all know and associate with spring. They all come under the family “Narcissus” . Narcissus was a very good looking ancient Creek bloke who walked by a pool of water while hunting, decided to have a drink, saw his reflection in the water, fell in love with his own reflection and because he couldn’t have perfection decided to kill himself . I’m sure it made sense to him at the time! Out of his remains grew the Narcissus or Daffodil.
I invite you to give me some comments or what your thoughts are on the articles that I have written. I look forward to hear from you
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!
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 .
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!
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.
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 ..
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
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
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!”
Whangarei Real Estate Market Stays Hot Over Winter
Whangarei property price rises continue to accelerate. The average price, as per Corelogics latest August release, is $421,750. Rising at 19.9% year on year. That’s growth at $1,614 per week for the average home in the city. While the press gnash their teeth in fury at the ‘Housing Crisis’ most home owning New Zealander’s will be rubbing their hands together as they see their wealth growing. At the beginning of the year I predicted we would see growth between 17.5 and 22.5% this year. I also predicted that this growth would accelerate in the first part of the year and start to slow towards the end of the year.
I suspect I will be wrong on both counts. Growth is very likely to accelerate beyond 22.5 % as Tauranga has now hit 25.7% and Hamilton has hit a massive 31.5%. Hamilton’s growth rate is now faster than Auckland’s ever was. So the chances are Whangarei will hit a growth rate of around 24-26% before starting to slow early next year
Meanwhile Auckland has slowed down to a mere 16%. Auckland’s growth rate has been consistently slowing for over 6 months now, showing it is heading towards it peak. But keep in mind inflation is running at less than 1%, bank deposits are around 2% so 16% growth on an average Auckland price of $992,000 is still $2,836 gain per week. So 16% growth in Auckland is worth nearly double the value that 20% is to Whangarei. At the current slowing growth rate Auckland will peak towards the end of next year.
The reserve bank has been doing it level best to reign in the housing market and the latest rise in deposit requirements is the latest bucket of water on the Auckland housing inferno. Investors now require 40% deposit. This may have a short term effect but as investors usually have other property they can use to leverage deposits and as house prices are rising rapidly therefore increasing the same investors property equity as we speak this will have, at best, have a short term effect. The issue which is still there is supply. When you have a shortage of houses then the market will continue to push prices up regardless of any other tinkering.
Jono Ingerson, Head of Corelogic says:-
“The Reserve Bank’s own analysis expects these measures to slow property value growth by 2% to 5% less than would have been the case without these restrictions. So if values in an area were going to increase 15% then they would now slow to say 10%. They don’t expect prices to crash.
If we apply this thinking to Whangarei then we could see growth over the short term slow down to around 19-20 % from the projected 24%. That’s still very rapid growth.
He goes on to say: – “However investor groups I have spoken to over the past two weeks are not talking about pulling back, instead how to get around the lending limits. This includes splitting their portfolio across different lenders, including non-bank lenders who at this stage are not subject to the RBNZ restrictions.
The reality that keeps coming up is nothing is going to change long term until the building supply is increased. Investors are smart people and they will find their way around the restrictions until its no longer worth their while.
The most important part of the latest tinkering is that new building is exempt from the deposit restrictions. . I think we will see more investor interest in new builds which will be great for the economy and will over time sort the fundamental issue of housing supply. This translates directly into rental demand with our sister company “Harcourts Just Rentals “who experienced their highest ever demand for rental properties with over 1000 requests in July. Rents are rising and the time is ripe for investors to look at the European tenancy system where rentals are more like commercial leases. Longer terms (up to 20 years) with rights of renewal so the tenants can on sell their rental lease which encourages them to develop the grounds and improve the décor of the property.
We see no evidence, be that, level of enquiry, open home attendance, or the number of contracts being presented, to suggest there is any lessoning in activity. Whangarei House prices are still headed to an average sale price of $500,000.
The problem with Real estate is trying to find the right information to assist with decision making. There are a huge number of people who constantly get quoted in the media who have massive personal barrows to push. The list is long, but specifically includes Financiers, share brokers, many economists, and basically all journalists. The most unreliable source of Real Estate opinion you will ever get will come off the pages of your newspaper, or from the screen of your TV or smart phone. News stories are written to shock and intrigue you, and they seldom get their facts right before launching forth. The opinions come from everywhere except from the people at the coal face. For example the press, based on some pretty weird interpretation of the real estate statistics, have been predicting the Auckland market has peaked and is about to burst for over two years now, while the evidence says its slowing down a little but has some way to go before it peaks .
I read with amusement an article by Real estate Legend Sir Bob Jones who wrote in May this year, about two “media darlings” who are constantly quoted as reliable sources of market trends. Bernard Hickey and Shamubeel Eaqub. Jones with his usual wit and satire writes “ As an aside , his ( Eaqub’s )” wisdom” on this issue , along with Bernard Hickey’s, the latter a doomsayer without peer, should be seen in the light of both some years back ,selling their Auckland homes and fleeing to the capital to avoid their claimed imminent Auckland Housing price collapse. In light of subsequent events, those brilliant judgements have cost them considerable loss of wealth, which rather weakens my life long militant atheism. “
The Current Case for Buying New.
If you are looking to invest new, or to replace what you have, there is very strong argument to buy new. Most real estate agents won’t push for building new as the builders have their own salespeople and the agent gets left out of the commission loop. Yes I know your heart bleeds for us, but there are nine very compelling reasons to consider this in today’s economic climate.
20% deposit will get you in. Unlike existing homes, the new 40% deposit criteria do not apply to building new. Therefore building for the average New Zealander is now a lot cheaper in terms of how much you have to have saved yourself.
It’s going to cost you more than the second hand house you were looking at (around $550,000 in Whangarei) but consider this. You will get a long term (5-10) guarantee on the house. It’s a bit like buying a new car, you know you won’t have any maintenance costs for a number of years. Your home will have the latest weatherproofing systems and treatments. It will have the latest technology in insulation and heat retention with most new home buyers saying their power bills halved. You can guarantee it’s all new and has none of the maintenance issues an existing property may have, nor is “P” contamination going to be an issue.
You will get a higher rental as these properties are sought after by tenants who will pay a premium for new properties. Most new builds are renting for around $500 per week, which is a return of 4.7% on a purchase of $550,000. Your tenant is going to come from the top of the rental heap and is more likely to stay longer and look after the property better.
New build suburbs have a two year period when they look like a jumble of roofs and bricks. But then the planting kicks in and the boundaries become clearer. The subdivision takes on a new appearance and historically prises rise. Established planting seems to put around $50,000-$70,000 in value onto all the properties in the subdivision.
New house prices are based on the value of the land plus the building costs. Building costs rise steadily while land is more sporadic in its rises. So the next house that gets built, that is similar to yours, is going to be dearer than yours thus ensuring your value is increasing also.
The work required to add value is going to be within most people DYI skills. Planting gardens and lawns, building birdbaths, and maybe some painting are going to be easy projects that most people can do themselves.
Chattels Depreciation. While you can no longer depreciate your building costs you can depreciate your chattels. With a new build there is clear evidence what the chattel actually cost so there is a start figure to base the depreciation on which is not the case with existing properties. The depreciation rates are high with many items around 25-30% and when you sell you don’t have to pay any of this back. The average new build will have a long list of depreciable items. (Carpets, Hot water cylinder, fencing, Driveway, Decking, Dishwasher, Oven, Drapes, Heat Pump, and light Fittings, to name a few.) . You will need to get a chattels valuation done which will cost about $600 (tax deductible) but as can be seen from the list above, this cost could easily hit $40,000-$50,000. Depreciation in your first year could be around $12,000. It will drop quickly after this but at the top tax rates this is worth the effort
You are doing your country proud. We do have a shortage of houses in many parts of New Zealand. Whangarei is one of these areas. The only way that property prices will stabilise is when there are enough houses. So by building new you are doing your bit to alleviate a very real problem we have. This is in direct contrast to both the USA, Ireland and parts of China where the number of houses was greater than demand therefore causing prices to drop.
It is very good for our economy. New building creates jobs. Building is a high labour intensive industry that flows through all the groups of tradesmen, to the suppliers, to the landscapers to the draftsmen and so forth. Building new gives the council another rating opportunity thus increasing the wealth of your district. Building is currently one of the driving forces in New Zealand’s economic recovery, being recognised by the Reserve Bank along with tourism and immigration. Starting with the Christchurch rebuild and now driven by Auckland it is one of the main factors setting our economy apart from most of the rest of the world.
Rental demand increasing
The statistics from Harcourt’s Just Rentals show a growing amount of inquiry for rental property. This is unusual activity for the winter months when people tend to stay put more. It is another sign that the Whangarei population is growing more rapidly than the WDC has planned for . We would expect a small delay and then for rents to increase in line with the demand for properties. All great news for landlords. ( Figures supplied by Renee Wilkinson the person to talk to for property management ph. 021892443)
In last Septembers newsletter article headed ‘”Is it a Boom or a Correction ?” we argued the case for where property prices in Whangarei were heading. (To see the article click on the link Here ). This article based growth on a conservative 8 % growth year on year. Conservative because the historical growth figure for property in NZ is actually 10%. We tracked both the Auckland and Whangarei markets as we tend to play follow the leader with Auckland.
We have updated the graphs below to show how prices are tracking against the 8% predicted line. These graphs are based on the REINZ figures which are based on median prices. These are different from the figures CoreLogic provide as theirs are based on average prices. As a rule Corelogics’ average figures are higher than REINZs’ median figure.
As you can see Auckland is just below the 8% line and looks like it will reach it this year. The dip in the red line is because we have only included the first three months of the full year. This will straighten out towards the end of the year. The scary aspect to this graph is, if we were to use the historic 10% Auckland growth line that history dictates, then the red line would currently be sitting at just over 1.3 million.
We chose the more conservative 8% because when we first graphed this trend, Auckland prices were sitting at just over $600,000 and a figure of $900,000 seemed like moonbeams! 1.3 million seems like moonbeams now but in 12 months time it may surprise.
As can be seen from the green line Whangarei is in catch-up mode, with $70,000 added to the median price since 2014. If this chart is correct then we have another $110,000 to go before we hit the predictive line of $450,000.
While this amount seems hard to believe, the figures from Corelogic are showing huge growth in the provinces, with Hamilton and Tauranga now hitting 23.3% and 22.6% growth per annum, faster than Auckland which is now down to 16.9%. (16.9% is still dramatic growth rate and based on the average Auckland price of $931,061 that will add another $157,339 dollars to the average Auckland house by this time next year. Million dollar houses will be the average Auckland house price)
It’s hard to find any evidence that this type of growth won’t happen. We would have to see at least one of the prime drivers going in the wrong direction and we don’t. Interest rates are heading down, emigration is rising, housing supply is diminishing, building materials are rising, and rents are rising.
This week the NZ Herald had an article on Aucklanders’ buying in the provinces. This was based on research by CoreLogic and contained the following statement.
‘Auckland investors and movers bought 23.9 per cent of all properties sold in Whangarei, 19.5 per cent of Tauranga sales and 17.2 per cent of homes in Hamilton……..CoreLogic senior research analyst Nick Goodall said Auckland investor interest in Whangarei had “kicked up” over the past year or so,”
It is fair to say more of this interest has been in the investment sector, but we are getting our share of people moving into the district to live. It has been said that only a very small proportion of Aucklanders are selling up to move to the provinces but if you do the maths, a small percentage is all it takes. For example let’s say 1% of Aucklanders decide to relocate. It’s a small proportion of the Auckland market but it is it still 14,000 people and that is a huge amount of internal migration when you consider the size of the populations they move into.
So do we predict the Whangarei market still has $110,000 growth in it? The answer is YES!. At this stage there is nothing standing in the way.