February newsletter

Welcome to the first newsletter of the New Year. It has been great to get your comments about the contents of this publication and your positive comments. The newsletter is copied to our Blog and it too has a strong following. If you want to see older issues check archives on this site.

Warren Ellis the English comic book writer famously said ” I try not to get involved in the business of prediction. Its a quick way to look like an Idiot

With this quote in mind we are going to do our best to risk looking like idiots as this issue is entirely dedicated to what to expect this year . To date our predictions have been remarkably accurate with us picking a 10 % property rise for 2015. (the actual was 12.9%) and our predicting a 17.5%-22.5% growth rate for 2016 . (The actual was 24%)

The predictions are based on Diana and my collective 50 plus year of selling Real estate, gut feeling, some statistics and a lot of analysing market trends based on what we know about previous years.

 

predictionsMarket Predictions for 2017

We have long argued that we are in fact in a correction cycle rather than a boom. Events happen that suppress the market, such as interest rate hikes and global financial crisis’s but these are temporary brakes on the markets and a catch up cycle will always occur. Over time property values have historically grown by around 8% a year. We have tracked the Whangarei market from 1992 to help predict where prices will be at the end of 2017. We use one set of figures supplied by REINZ and the other by Corelogic. We base the amount of growth in the graph below purely on the REINZ figures as we can access these back to 1992. However during the year we will use the Corelogic figures as these give us a more accurate figure of the average home in Whangarei. For example the REINZ have the Median price in Whangarei as $390,000 as of January this year while “Corelogic” have the Average Whangarei price at $463,000. The difference of around $70,000 is in the way the information is analysed. Medians against Averages. While Median prices are considered more accurate, we note that if you wanted to buy the average house in Whangarei you would have to spend $460,000 plus. $390,000 will only get you the better of the cheapies therefore we use the Corelogic figures as a better reflection of what most people understand as the average.

The graph below is  based on House prices rising by an average of 8% per year. The  graph shows where these prices should  be at the end of the year to fully catch up with the 8% compounding growth . (Red line $517,745) The green line is where prices are at January 2017. This means we are measuring the growth for the full year, but as we only have the first month of the years actual figures so there will be a big gap between the red and green line which will close as the new months data comes in. If we compare Januarys predicted growth against actual January figures then we are  $92,000 below the line. The December 2017  figure currently has us $127,745 below where we should be at the end of the year.

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The question is “Do we see $127,745 in catch-up growth this year. The answer “Probably not! “ There are definite signs the market has peaked in, that the rate of growth has slowed some. However Corelogic have the rate of growth for Whangarei running at 19.8% for January. If that rate of growth continues then we will see over $90,000 catch up this year . The media are hammering the public with messages that the property market has tanked but that’s not what is showing in our activity levels. Far from it.

The next question is will that rate of growth at 19.8% continue for this year ? . Again. “Probably not”. The first half of the year is the busiest time for property sales. It is more likely the rate of growth will climb back over 20% for a few months and then  drop in the latter half of the year .

From what we are seeing locally and in other regional centers close to Auckland we have to be at the top of the growth curve, so just like gravity it has to be heading down. We expect this to be a gradual slowdown with the rate of growth slowing to around 12% by the end of the year . Keep in mind this is still a faster growth rate than in 2015. The big change from last year’s predictions is that we see the slowdown taking a lot longer to kick in, and growth won’t slow to anything close to the inflation rate until 2018 at the earliest. The correction cycle is going to be longer than expected  going well into 2018.

Specifically in Whangarei we are anticipating an average growth of 19.8 for the first six months then a slower average of 14% in the second half of the year. We would expect Whangarei prices to be around $70,000 to $80,000 higher than they were last year. That’s an average  growth rate in the 16% range. The final catch up to the red line won’t happen until late  2018.

Something to think about is that 16% average growth this year will be close to the same dollar amount of  24% last year . 16%  growth on a start line of  $464,000 this year  is $74,000 while last years record 24% growth on a start line of $380,000 was $91,200. A difference of just over $17,000

Putting our money where our mouth is: – This means the REINZ median price will be around $465,000 by December and the Corelogic Average will be around $540,000 in December 2018.

Some Considerations 

 

  • Has the Auckland market stopped growing . January showed a drop in Auckland prices according to REINZ figures . This is almost certainly an aberration caused by the holiday season. A lot of people choose not to sell over this period and they are usually the wealthier people in the more expensive homes. Economists such as Tony Alexander ( BNZ) continues to argue that until the supply catches up with the demand there is only one way Auckland prices can go and that is up. While is seems absurd that Auckland prices could go any higher, until there is sufficient supply, the logic is on Tony’s side and as long as their prices rise so will ours.
  • We are an increasingly attractive proposition for the increasingly larger numbers of Auckland retirees. Lovely beaches and lovely people. You only need to drive around town and experience the increasing traffic congestion in Whangarei to know the population has grown over the last year and fast. Parking has become harder to find and there is traffic congestion in areas that never had it before. We have more Auckland buyers than we have properties so that will continue to drive prices up. • Interest rates are still at an all time low . We are getting small changes in fixed rates in an upward direction but you can still fix your rate for three year for around 5.5% . That is super low historically with some of us old timers remembering 22.5%. As long as the rest of the world is struggling we cant afford higher NZ  interest rates as this pushes up our dollar and that’s bad for the exporters and the economy . • The number of people coming into the country versus those going out is at an all time high with over 70,000 net gain. Sure most of those go into Auckland , but they then buy the houses of those who are trying to get out of Auckland , so the housing boom continues to spread out of Auckland. • The rest of the world ( most of it anyway ) is still in dire straights . NZ is one of the few countries genuinely doing well. It is away from most of the global trouble and is a very beautiful country . Why wouldn’t it be a destination point for people overseas. At home we have just had  over 50 days of overseas visitors. One of the visitors sitting in the front seat of my car , while simply driving the what to me is the very mundane State Highway 1 to Auckland said “ At every turn of the road the landscape is just so beautiful” . As Fred Dagg once sung . “ We don’t know how lucky we are “ • We have a very low unemployment rate . There is pressure now to fill vacancies so wages are going to go up. • The Reserve Bank has predicted 1.3% inflation for March this year, 1.6% for March next year and 2.1 for March 2018. Their target is 1-3% . So inflation is very much under control and within the target range and predicted to stay there. • Housing prices love low inflation. Low inflation equals low bank deposit rates, equals alternative investment strategies with housing being the most stable and secure of these strategies. Its sad but true. A low inflation environment is a high house price environment
  • Rental demand in Whangarei is at an all time high. We are getting to the stage that we have a chronic shortage of  homes and people are scrambling to find a rental. Harcourts Just rentals said rents went up by 15% across all price ranges last year, but they  don’t see that happening this year, as the average rental  of around $400 pw, is becoming unaffordable for many wage earners, resulting in the  current catch-up phase slowing down. However they also note that they have rented out properties recently at $550 pw,  which is in excess of the previous years glass ceiling of $500pw
  • Building costs just keep rising and as long as they do , existing house prices will keep up.

Sorry if its a bit of a dry newsletter. Lots of the three “F’s”  Facts , Figures, and  Foughts.  We hope the information will help you with your property planning for the year. We live in a changing environment and our reasoning is just as fallible as anyone else’s, so please seek alternative advice  and opinions before acting on our predictions .

Someone famous once said “When everyone is thinking alike, no one is actually thinking” 

 

Market Predictions.

Contents

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

 

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

price-rising-pic-by-julz

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

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

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

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

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

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

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

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

Thanks for Noticing .

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

The Recipe for Homelessness Courtesy Of The Reserve Bank!

homeless

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

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

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

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

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

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

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

Rental Comment.

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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 ..

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                                          The Great Meth’s Myth.

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

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

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

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

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

For a look at the earlier article click here

donkey

SOME INTERESTING STUFF ABOUT DONKEYS.

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

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

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

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

From the mouths of Babes

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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!”

                      

Interest rates going to stay low for a long time yet! 2-3 years at this stage.

New Zealand’s interest rates are linked to the worlds interest rates by a very simple formula. A formula that the Reserve Bank just hates, as it limits its ability to raise interest rates.

“If our interest rates are considerably higher than the rest of the world then people from around the rest of the world  want to invest in our banks. (And why not! if you can borrow money in your country for less than 1% and invest it in a safe place like NZ for 3-4% why wouldn’t you? Its making money on other peoples money . 300% return from day one.). Therefore if our interest rates are high, overseas people want to buy NZ dollars. This pushes our dollar value up against the rest of the world. The reserve bank has stated on numerous occasions that they are uncomfortable with our current dollar value at around .72c US. The problem with a high NZ dollar is that it makes our export goods more expensive overseas and therefore we have a harder job selling our stuff which harms the economy. The link between our official cash rate and our export success is a direct and real one”

Therefore what is happening in the rest of the worlds economy is of vital interest to us. particularly the USA economy as that is by far the largest economy on the world. The worlds largest economies ranked by Gross Domestic Product  as :- USA, China,  Japan , Germany, United Kingdom.

So we need to watch the USA very closely to see signs of interest rate rises there as these will eventually reflect in our interest rates . The news coming out of the States is bad, in fact it’s very bad. When the stimulus the money printing did is taken out of the economy there is very little sign of any real  growth and lots of signs of continued recession or near recession. For this reason we are seeing very little sign the USA will be able to more than pay lip service to interest rates or perhaps put a token rate  rise in to encourage investors .

This Article by Tony Sagami  in his newsletter ‘Connecting the Dots ” tracks some vital indicators of how the USA economy is really doing apart from the artificial Government spending created by printing 10 trillion dollars worth of money . The important point to remember is that 70% of the total USA economy is driven Americans buying stuff in America. If this article is true then we have a long wait for their economy to turn the corner.

“Live by the Consumer, Die by the Consumer.” written  Toni Sagami

The Dow Jones Industrial Average has been going sideways ever since the Commerce Department reported that retail sales in July came to a grinding halt (0.0%) in the month of July.

At the same time, the list of companies warning of disappointing sales—Starbucks, McDonald’s, Ford, Burberry, Gap, and many others—suggests trouble in shopping paradise.

Most recently, Target reported a Q2 drop of 1.1% in same-store sales and said it expects a “challenging environment in the back half of the year.”

There are many reasons why Americans have become reluctant shoppers, such as stagnant incomes and rising debt loads, but one of the underappreciated challenges is a distinct change in spending psychology.

According to Deutsche Bank, Americans are becoming big savers.

The saving-vs.-spending mentality has shifted for all adults, but the change is most dramatic for the live-in-mom’s-basement generation.

You know where else the evidence of shopping fatigue is showing up? In the transportation food chain.

Truck Slowdown: Truck shipments continue to decline. July shipments were down versus 2015, 2014, 2012, and 2011.

Ship Slowdown: Maersk Line is the largest container shipping company in the world, so it deserves close attention. Times have been tough for shippers, but Maersk expects the business to get even worse.

“Currently we are challenged by market headwinds,” said CEO Soren Skou during the latest earnings call, “…in the form of low growth and excess capacity in both our industries, and that has led to declining prices and declining revenue.”

And Jakob Stausholm, a member of Maersk Line’s management board, told Reuters, “It’s really tough, and everybody in the industry is really suffering, and so have we.”

Maersk isn’t the only shipper singing the blues. “World GDP growth is struggling… Combined with trade growth slowing down, this is a recipe for a very bad market,” said Evangelos Chatzis     of rival shipper Danaos.

Port Slowdown: The Port of Long Beach just reported a 7.7% year-over-year decline in the number of shipping containers passing through:

“Due to continued market uncertainty and high inventory levels, the traditional holiday peak season is off to a slow start, and several national forecasts have been revised downward to reflect this softness in cargo movement.”

High inventory levels? The inventory-to-sales ratio is climbing, which tells me that demand is weakening and businesses are having trouble selling their products.

The ratio typically increases during the late stages of an economic expansion and often represents the turning point in a business cycle.

Remember, companies accumulate inventory for one of two reasons: (1) voluntary accumulation in anticipation of booming sales, or (2) involuntary accumulation as unsold goods pile up.

You’ve heard it a million times—the US is a consumer-driven economy with 70% of GDP tied to consumer spending. That is why you need to connect the dots between the retailers’ warnings, the shift from spending to saving, and the struggles of the entire transportation food chain.

 

August News letter

Barry - Email Header

Whangarei Real Estate Market Stays Hot Over Winter

price risesWhangarei 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 am never wrong small

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 build 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. bleeding heartYes I know your heart bleeds for us, but there are nine very compelling reasons to consider this in today’s economic climate.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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
  8. 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.
  9. 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)

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• The Great  Meths (P) Myth

 

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Have you ever wondered why the smallest  amount of  residual “P” smoke left in a house is reported to have such devastating health effects and plus require massive cleanup costs,  while the person smoking the “P ” seems to be able to take copious quantities of the pure product into their lungs and not drop dead. It’s been troubling me for years as to why so many users are able to inhale what must be lethal doses , yet we don’t see them dying like  fly’s. Something did not add up.

 

For years now we agents have been bombarded with the risks of Meths. We have had numerous experts coming to our offices and conferences, detailing the risk of meths contamination. Our poor owners have spent thousands of dollars ridding houses of low grade contamination where someone had smoked a “P” pipe in the property once or twice.  The lawyers have climbed on board and added ‘P”tests to just about every contract. The banks want a clear ‘ P”  test before they will lend on the property . We have had guidelines issued by  the Real estate institute about best practice . The REAA has fined and chastised agents for not taking due care if there is the slightest a risk of someone having smoked “p” in the house . One poor agent even got fined for not reporting a rumour that the last owner may have smoked in the property,  even though the agent had tested the property and found it had  NO  contamination.

 

It now appears, we the public have been grossly misinformed on the subject .  Dr Nick Kim, ( A Senior lecturer in Environmental Chemistry at Massey University,)  who peer reviewed the current standard tests 6 years ago recently said  We tested the residue left on walls by meth smokers and found the potential health effects of past “P” smoking was no worse than those of tobacco” ( Stuff.Co) “

 

For years we have  accepted the New Zealand Health department benchmark for safety of  0.5 micro-grams per 100 square centimeters, but it now comes out that the tests were designed to measure contamination in houses where “P” was manufactured and have ” somehow slipped sideways ” to where  it’s now being used as a guideline for all houses.  This happened when local bodies tried to find a  test for contamination and this was the only one around.
The message now emerging is that the test is designed to measure one chemical in the manufacturing process. Dr Kim says “Methamphetamine is like a marker for all the other chemicals that might be present, but you haven’t tested for, that would occur in manufacturing, but wouldn’t occur in smoking” ( Dr Nick Kim . T.V.1 Fair Go).  In this case the chemical is the end product, “P” itself. While “P” is harmful in big doses, it’s the soup of chemicals that are used in the processing of “P’ that are the real danger. Chemicals like Toluene, a solvent used in paint thinners, Lithium a heavy metal used in batteries and Acetone, another paint thinner. By taking one chemical out of the process and measuring it, the general quantities of the other harmful products are proportioned and basically assumed or guessed. If this much “P” is present then there will be that much Lithium, Acetone and Toluene.

The reality is the end processed product “P’ will have very small quantities of the harmful products in them. They have been used in the manufacture but are not part of the end product. It turns out that to test a house that has been smoked in, rather than used for manufacture, is not an accurate test .

 

Millions of dollars have been spent by trusting buyers and owners to get houses checked and if necessary cleaned,  all because some bureaucrat  misunderstood the basis of the testing.

 

To use a rather personal analogy, if you think of the toilet paper in your house. If you measure the chemicals in the paper now, you will find minute traces of Hydrogen Peroxide, Chlorine dioxide and Sodium Hydroxide, but at safe levels.  (you would assume). But if you measured the paper when it was sitting in the factory  vat, soaking in  bleaches and other stripping agents,  it would be full of these chemicals and very unsafe for your delicate posterior. But once the product is finished the chemicals will have largely been stripped out leaving the paper. So if you design a test that measures the chemical contamination in the processing factory, work out the rough proportion of each chemical in the soup, and then take one of them, in this case the  paper as your marker , then you have  a great  test for the proportions of chemicals in other  paper factories. But if that measure happens to be the end product (the paper) which then goes through a washing process that strips the chemicals out of the paper, and you apply your factory test to the residential home roll of toilet paper, you have a problem. The roll is full of “paper” which your factory marker test says is harmful. But it’s not the same product that was sitting in the chemical soup. It’s been cleaned and should be  near  perfect for purpose. ‘

 

This article is certainly not an endorsement for “P” usage as I have many friends whose families have been ravaged by “P’ usage in their children,  and you just never hear good stories about ‘P”,  but in terms of health standards  we have been lead by the nose on this one , with our wallets and common sense being raped by the powers that be, who appear to have  very little knowledge of what they were actually doing
Another Myth we have been sold is that “P” residue stays there forever.  Dr Kim says “ Households where Meth was still being smoked or worse, manufactured were obviously a risk to health , but once it stopped , the residues would break down over a matter of months . ( Stuff.co).  When asked about what is a safe level for houses where people have smoked only, remembering the current NZ health standard is 0.5ug,  Dr Kim says “10-20 ug should be safe, I’d be happy for my kids to live in a household with anything up to 12 Ug.” ( Fair Go).  The current  safety level is 1/24th of this and we have had buyers insisting on expensive cleans that take the property into the margin of  scientific  error  at 0.02.

I am reminded of a lecture I heard in the Mental Health field many years ago. The lecturer was a visiting American Psychologist and he was talking about the rapid growing in mental health issues. He said the following.   “ When you are up to your a**e in alligators, its hard to remember that your initial objective was to drain the swamp, but you also have to remember that not everyone wants the swamp drained as there is a lot of money in Alligator skins”

 

 

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Please Don’t Sue Me Just Because You Can !

The article from my last newsletter contained the sentence.  “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.”

With my permission this article was copied,  and published in the local Harcourt’s publication “Blue Print”. I have since been  approached by a senior member in the company  with a caution. “If members of the public take your words as gospel and act on them accordingly, and you turn out to be wrong , then you have left yourself open for possible law suites, and  disciplinary action from the Real Estate Agents Authority. “

I  accept there is a risk in putting any predictions in the public arena,  but based on over 30 years experience , reading the Real Estate tea leaves is the one thing I can do better than most.  I can add opinion, analysis and knowledge to your buying or selling decision. No one can know what the future truly holds, but there are footprints showing the way. These foot prints have been there in previous cycles and lead in  certain directions and based on my and Diana’s experience we try to interpret the signs we see from inside the industry and pass these on to you. It’s no guarantee that they are right, and I would think they would only be one part of your decision making process. I dread the day when people don’t share information because they fear the shadow of the bureaucracy. I think its called Communism

The warning  led me to think hard about what could go wrong with property prices and why the  prediction could be wrong. After much thinking there are some factors we have to consider.

• Tony Alexander the BNZ Chief Economist has put the case that the population growth is restricted to Auckland, along with the housing shortage The price drivers are specific to Auckland and that people are taking a risk investing in the provinces as there is little population growth in these areas.  That may be fair in some provinces but we  are seeing huge population growth in Whangarei. The District Health board figures are showing population growth way beyond the 1 percent the Whangarei District Council has predicted.

The building  companies are seeing an unprecedented demand for new houses, with some people not being able to book a builder for 12 months or more. As agents we are inundated with Aucklander’s buying in the district. So while I have the greatest of respect for Tonys’ undoubted ability, the evidence we are seeing here on the ground, says this is not a factor in Whangarei .

 

That only leaves international factors to think about. I don’t feel qualified to talk about these events and their repercussions as its not my area of expertise but will  lightly touch on two of them to highlight possible concerns

  • The Brexit. I know of people who lie awake at night worrying about this,  mostly English people.  If England leaves the EU what will happen? Will the EU collapse? There is no doubt the EU is in trouble  regardless if England leaves, and if it deteriorates further it will badly affect the world economy. And when the world economy sneezes little old NZ gets a cold. So this is a possible hiccup to our price rises.
  • The USA economy. I subscribe to a publication by John Maudlin , an investment adviser in the States who is aptly  named ‘ Maudlin” and he and his writers scribe a lot of “End of the financial world as we know it”  stuff. One article that I paid attention to was an analysis of the growth in The USA. The growth is almost entirely made up of three sections. Government spending, Military spending and Health Spending. All the other major productivity sectors were either flat of heading down. They argued that the USA recovery was an illusion based on huge quantities of printed money going into these three sectors while the engine room of the USA, its productive sector was stalled. They highlight the inability of the USA Fed to raise interest rates as further proof of an ailing economy.  There is no doubt that if the USA economy is still very sick, as they suggest, then we too could  get a rather nasty stomach bug.

 

  • There are numerous other overseas concerns such as oil prices, Russian aggression, disease, The Middle East and Donald Trump to name a few, but the reality is we can’t do anything about any of them. We are a small isolated country at the bottom of the world. A small isolated country that seems to have its act together, a country that is punching way above its economic and financial weight and while we do that we have every chance of coming out of any future global financial crisis better than most . And if the s**t really hits the fan we can unleash our secret weapon.  We have Ritchie McCaw retired from Rugby and ready to unleash on any misfortune. Our future is safe!

Our problem is we don’t have enough houses. Houses are a commodity like any other commodity, like cars, coffee and root beer. If there is good supply, prices stay constant, if there is a shortage prices rise. We have a shortage of houses in New Zealand. The greatest shortage is in Auckland but this shortage is being shipped to the provinces by Aucklanders’ leaving Auckland and moving to the provinces.

 

While we know the solution is to build more houses , if we look at the cause its  been created by a combination of :-  world events and by Government/ Reserve Bank “solutions” that cause boom bust cycles.  The reserve bank lifts interest rates to stop house inflation and kills building, which creates a shortage of houses and so on. Building is always the first to get hit in a world crisis and in an interest rate hike. We have seen this pattern over and over . Muldoon did it in 1980 when he put in the price and wage freeze. When he lifted the freeze house prices boomed. The Share market crash  of 1987 was next. When the crash was over, house prices boomed. Then Don Brash as reserve bank governor raised interest rates through the late 1990’s to stop house prices, when this was lifted by Wheeler in the early 2000’s house priced boomed. The G.F..C of 2007 led to the market crashing and now we are in yet another boom. . The more the disruption to housing  growth, the fiercer the recovery.

And that is why the government is finally doing the right thing by not interfering with house prices. If left alone they will find their natural level and grow at an average of 8 % per annum. Building companies can work in a stable environment , supply will increase and demand will balance out. But the more outside interference we get,  be that internal or external, the more boom and bust cycles we will get. If we don’t have the boom bust cycles real estate will become a steady investment rather the current all in, or all out, cycles we currently experience .

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A Quick Snapshot of  Other Real Estate Matters

 

  • Whangarei year on year property prices are accelerating again.    May’s sales price was up 15.6% (Corelogic May). that means the average Whangarei home is going up by $1200 per week and as predicted the growth is accelerating again. My December prediction of 17.5% – 22.5% growth is looking good and there is a risk this may be conservative.
  • The average Rental Price from Just Rentals for May is $362 per week, with the number of inquiry’s for properties steadily increasing to over 750  per month . The demand for rental property in the area has increased by over 35% in the last 5 months

 

So Where Are Prices Going Now ?

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.

Auckland graph

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.

Whangarei Graph

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.

 

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What makes us Kiwi’s?

I want to be a kiwi

I recently had a special insight into what is so special about rural and provincial New Zealand. Some friends of mine who own a house in the local countryside,  had left to chase the big $$ and live in Northern Australia for the last 6 years, returned last week to renovate the house and move back for good.

A growing sense of disillusionment swept over them as they landed in Auckland to grey clouds and a rare cold snap. Upon arriving at the first set of traffic lights into Whangarei, they were met by the small scrum of scruffy window washers who pester all our new arrivals at this junction. They had a foreboding sense that the city had gone downhill since their departure. The occasional beggar added to the overall negative look.

They arrived at their house to find the lawns were up to their knees and the beautiful rock landscaped section was overgrown and untidy. The driveway full of weeds and their old home felt neglected and unloved. Australia suddenly beckoned with its sunshine and snakes. The much anticipated return was slowly turning to dust and fallen dreams. They cancelled delivery of their container of belongings, cancelled their job interviews and asked me to list the home for sale, they were returning to Australia.

And then the magic started. Acquaintances and strangers came forward to help with tools, time and encouragement. Neighbours introduced themselves and offered spare beds and furniture, meals and conversation, friendship and laughter. To the fore burst the natural warm friendliness that is so infused and inborn in every rural and provincial New Zealander. So instinctive  that they don’t even know it’s there. It’s more than a willingness to help others; it’s a desire too. They will go out of their way to look for opportunities to make a stranger feel welcome.

The Aussies in waiting were moved. The comment was made:-

‘We have been looking to settle into a community and this place feels like just that. People actually care! “

Now I don’t know if they will settle here permanently or not, but I felt proud! Very proud! That deep down glowing sense you feel deep in your heart when you sense something great just happened. . Proud of the people who are my fellow countryman and women, the people who make this great nation what it is. A friendly, warm, caring place where strangers and friends are genuinely welcomed into the community by real people, who have real Kiwi hearts and Kiwi values. Values so entrenched that most Kiwi’s don’t know just how friendly they are. No wonder it’s such a great place to live and why so many want to live here.

I’m not sure if these heart felt values are still the norm in the big cities like Auckland and Wellington, where a new breed of people seem to be emerging. The Cosmopolitan Kiwis or “Cosiwi’s” for short. Where it appears the name of a preferred Coffee or Wine is more important than the name of your neighbour. Where what you do for a living is more important than how you do your living. For their sake and their communities sake let’s hope the real Kiwi values remain underneath those moisturised and spray tanned skins.