Opinion: The gathering storm of "arrant, dangerous nonsense"

Opinion: The gathering storm of "arrant, dangerous nonsense"

Olly NewlandBy Olly Newland

In this column, I would like to cover a variety of topics, as the last few weeks have been crammed with 'news' and opinions about the property market - and much of it arrant, dangerous nonsense.

Some folk in the news media and posters on various websites have had a field day predicting the imminent collapse of the property market. They continue to be spectacularly wrong, it should be noted.

These deluded commentators seem to believe that if property prices fell by 20% to 30% (as some have predicted) then they, and their children would be able to buy a house more cheaply in the future and that would be a wonderful thing. They think a massive drop in the market would make housing 'more affordable'.

What they cannot understand is if that really happened hundreds of thousands of Kiwis would be out of work, much of our economy and industry would come to a virtual halt, the banks would collapse and New Zealand would be reduced to a nation of ragged beggars left to shuffle through the two dollar shops and rifle garbage bins.

Jobless and with an economy in ruins it wouldn't matter if houses were a third of their present price. They would still be unaffordable.

It will cause some consternation to these nay-sayers to learn this week, that house prices are still well up on this time last year despite the usual upside down view some in the media always make of these things.

I always derive much amusement in the way the media portray good news through the wrong end of the telescope. The headline in this example says: "House prices fall further in June".

It's not until you read down further that in fact house prices are still 5.2% higher than at this time last year and the slippage (if you can call it that) is a statistically insignificant  0.4%. Put another way, it is effectively a yearly increase on the current average price of $404,715 by a respectable $21,045 (or about twice the rate of inflation.)

I have no doubt a certain widely-respected Mr B. Hickey and some of his schadenfreude-ridden followers will look through the glass darkly and predict the end of the civilisation as we know it.

The Reserve Bank

It is my unshakeable opinion that the Governor of the Reserve Bank Dr Bollard blundered in raising the official cash rate by 0.25%.

It is not the amount it was raised by. It is the message it conveyed.

It is no coincidence that the property market almost came to a halt in the last month - with the lowest property sales volume in years and the lowest mortgage approvals that go hand-in-hand with this phenomenon.

So it was ironic that cuts in lending rates by the banks were announced  shortly after in direct opposition to the official cash rate being raised.  

Why did this occur? Because people are hesitant to borrow and the banks are choking on money that people are hoarding instead of spending whether it be on houses or whatever.

If the banks cannot on-lend they go broke. It is as simple as that.

If the public believe that higher interest rates are coming they will not buy. If they do not buy, then the chain reaction goes right down through the whole economy and that is precisely what is starting to happen.

The recovery of the NZ economy is still so fragile, it will only take the slightest puff of wind to knock it over. Increasing interest rates may just be the puff of wind that does the job.

It must be hard for people like Bollard who enjoy a guaranteed income, status and a pension for life, to understand what it feels like to have limited income, precarious employment and no means to influence events as they occur.

Of course we know why he did it. He has been threatening interest rates hikes for months and if he didn't follow through he would have lost all standing with the public and especially his masters, the politicians (of whom I will have more to say later).

Dr Bollard risks going down in history of being the man who ruined the country unless he is very very careful in the time to come. He's already on record as failing to pull the trigger in 2005 in the lead up to the General Election and leaving the credit-fuelled bubble to swell unrestrained. History can be very unforgiving and he should mark that well.

The Budget

The impact of tax measures announced in the May budget have fallen unevenly. Specifically, the move to scrap property and plant depreciation allowances will affect industry more than redidential investors. Commercial landlords' cash flows may drop somewhat - and in many cases significantly.

Several large public property investment companies have forecast lower returns for the shareholders - which is a strange way of rewarding those who invest in the share market as an alternative investment.   

What sort of message does that send?
How does punishing business slow down inflation in house prices?

What sort of Mickey Mouse targeting is that? Already we find that Treasury and the IRD are fighting over the impact of the measures that have been announced and it wouldn't surprise me if we see subtle amendments being made in the months ahead - watering down the unintended consequences of this ill thought out legislation.

What is also particularly galling is the suggestion that a form of land tax or capital gains tax could be introduced by stealth.

It has been suggested that a levy be placed on property of 1% or 2% if the tax take from that property was less that. (As I read the suggestion, a house worth $400,000 would have to pay a minimum $4,000 to $8,000 in tax irrespective of whether it was profitable or not.)

It seems the pointy heads have yet to realise that the property boom is well and truly over and there is now a desperate need for time-out and a break for gentle healing during  injury time.

In the past year or two  billions of dollars were (and still are being) lost out of shonky finance companies as the horror stories continue to  mount, hundreds of Kiwis are still losing their homes as they try to balance the stretched family budget already at breaking point, receivers and debt collectors are having a field day, bankruptcies are at record levels and the courts are choked with crooks waiting to get their just desserts. (We hope.)

Now these clowns want to make it worse with onerous charges attacking the walking wounded and those just surviving.

Give me a break.

If ever there was a time to 'have a cup of tea' as the late lamented David Lange once said, now is that time.

GST & the Carbon Emission tax

Another budget measure is the imminent increase of GST to 15% (from next October) and the introduction of the Carbon Emission Tax .

The result has been an immediate rise in prices right across the board with much more to come. Ask any housewife about the impact being felt as they try to balance the already stretched family budget to breaking point.

When you do the numbers, the reduction on company and personal tax rates has been completely lost with the flow-on effect from the increase of the new taxes.

I doubt if any single person will be really better off when all the pluses and minuses have been calculated.

The politicians are of course doing all this for a reason - and that reason is not that obvious to the masses. There is a hidden agenda in all these increases and that is to deliberately create a measure of inflation. Bill English admitted as much after he presented the budget in May.

But, gentle reader, the elephant in the room is not inflation or even stagflation. It is deflation.

If you ever want to see a politician wet himself just mention the word 'deflation'.

This evil arises out of reckless political pressure, over taxation, and a fragile economy resulting in falling prices - not only for food and other basics but for all the "hard" investments of every kind.

If people think that prices will be cheaper tomorrow they will not buy today. We live in a consumer economy whether we like it or not. If we all stop consuming then business will dry up and the downward spiral begins.

And that's where I have a problem. On all sides we are bombarded with messages that we as a nation should save more and spend less.

But how can this work? We cannot save and spend at the same time.

Taken to an extreme, if we all saved our pennies the banks would have even more money on deposit. And to whom would they then lend if there are no borrowers?

Maybe some egg-head economist can explain how this can be done in words of two syllables so we can all understand.

And here's another problem to think over when to comes to GST at 15% shortly: How do the politicians expect more houses to be built when the single biggest intangible component in a house is the GST?

Take a new house for sale a $400,000. The GST alone will be $60,000 . In other words the cost of the actual house, including the builders profit. is actually $340,000.

It gets worse.

Next door or down the road there will 'second hand' house which can be identical to the new one but GST free and consequently much cheaper. How are builders expected to compete in a market distorted like this?

If the politicians were really that interested in the "new home" buyer (and keeping the building industry on its feet) you would think there would be a GST exemption or the like for new home buyers up to a certain limit - but no.

That idea is just too hard for our beloved masters as they swipe their parliamentary credit cards just one more time.

Australia has a scheme like that – and hasn't it done well?

The Banks

One of the tragedies of the past few years has been the demise of the finance company sector. Even worse: they will never be back.

We need finance companies as they provide funds for projects that banks would not touch (and never will touch).

Of course I'm not saying we need the crooked finance companies that rorted the public left right and centre. They got what they deserved. But the regular finance companies that backed sensible projects and made sensible loans.

Look about you. Where are the cranes? Where are the inspired developments? The new housing estates? Nowhere to be seen.

What lenders are we left with?

The same old tired lot that will say 'No' every time you ask for a loan unless, of course, you can prove you don't need it. I exaggerate a little I know, but the culture of the tight-fisted risk-averse bank is still alive and well at a trading bank near you.

Let me give you an example:

A very good friend of mine has an account with one of the big banks. His main "00" account has anywhere between $10,000 to $50,000 in at any one time and there is no overdraft facility.

Some time ago he opened an "01" account to run parallel with the "00" account but it was not used in the end.

However the bank charged a fee so the 01 account went 50 cents in overdraft. He has just received threatening letter from Head office (Head Office note) advising him that the 01 account was now overdrawn by 86 cents including costs and that they had transferred one dollar from his 00 account to remedy the situation followed by a stern warning not to let the situation occur again.

This type of petty-fogging attitude will hold back the recovery. Until that attitude changes I hold serious doubts if the much-anticipated, - hoped for - touted recovery will actually eventuate.

Rents - Residential

In my last column I predicted an increase in rents caused by the budget changes to depreciation, and the slow down of the house building industry. My view was echoed by Westpac  in their predictions for the coming months.

Naturally their predictions are tempered as they cannot be seen to be too extreme but our common agreement is that rents will rise is clear. It won't happen over night but it will happen.

Almost one third of Kiwis rent their home, so there are a lot of tenants and a lot of landlords. As rents rise we will see tensions rise as well. This happened in the 1980's and gave direct rise to the Residential Tenancy Act and the Tenancy Tribunal and the lumpy, often biased legislation that goes with it.

As our population grows, and the number of houses being built remains in the doldrums, indirect costs and direct costs rise, we may see investors either quitting (or not entering) the housing market.

Either way this will result in a shortage of rental accommodation and pressure on rents.

The shoe box apartment market

Little has changed in this market. Prices remain at rock bottom after having been grossly over priced to start with. My advice still remains. The shoe box apartment market can be a bargain hunters dream - so long as you follow simple rules and only buy the right ones. A lot of rubbish was built during the boom but among them were some better ones and these are the ones you should be targeting.  

I am currently advising a number of my mentoring client on these types of investments as real estate agents (bless then) cannot be totally independent no  matter how hard they try.

Those interested in shoe boxes could well look to Wellington for better deals.

Rents - Commercial

Commercial rents were far less affected by the excesses of the past few years because of leases effectively fixing rents for some time in advance.

The outlook for commercial is mixed. Existing tenants are still paying solid rents (but grizzling like mad as is their wont, especially in a weak economy) but it is the vacant properties that are causing the problem.

As the recession grinds on - despite some bright spots here and there - business failures and downsizing have left large numbers of buildings empty or partially empty which is a huge drain on the landlords who have to create all sorts of inducements to find tenants (or keep them).

But who wants to own, let alone buy, an empty building when new tenants are as scarce as hens teeth?

Many of my clients are in this sort of pickle and it is only by intensive marketing and innovative leasing arrangement that tenants can be found. Using these methods my staff and I have helped owners lease off spaces that have been empty for up to two years and more. It ain't easy to be sure, but it can be done.

Buying and selling commercial

As the commercial market stumbles, bargains emerge that were undreamed of a few years ago. Several 'vulture funds' have been set up already to buy distressed commercial property. I predict that if managed right they will make a fortune for the promoters.

It is not necessary to have a vulture fund of your own to take advantage of the commercial market malaise. In simplistic terms you have to find sound buildings that have nothing wrong with them except they are empty or partially empty and the vendor (often as not the mortgagee) is desperate.

I recently purchased one such property for half its registered valuation and on terms that were dictated by me and not by the seller.

The attitude I took towards the seller was to say "Look, you have a huge problem on your side of the table and I have no such problem. There is no way I am taking your problem off your hands and making it mine unless you accept all my terms without question."

You may make scores of offers along these lines before you succeed - but as I have often said to my students and consulting clients over the years: We're not running a race.

Summary

Despite some bright spots (for example, the rise of available jobs and some better news on the export and manufacturing front) we are still being held back by recessionary pressures. What is disappointing to me is that those 'at the helm' seem hell-bent in making matters worse, not better.

We can count our lucky stars that we haven't had the crisis that some countries experienced but I cannot help feeling that there is a slow rise in discontent among the people and if not carefully checked may gather into storm clouds.

Rising prices, not matched by rising incomes, and constant frustration can lead to social unrest. New Zealand may have 40 million sheep (and that includes much of the population) but even sheep will fight back if provoked enough.

Olly Newland
July 2010
www.ollynewland.co.nz
© 2010 Olly Newland. Used with permission. 

 

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KanucK
Many thanks. You make a good point about avoiding an echo chamber.
I have a point of view, but we welcome in many points of view. Interest.co.nz aims to be the focal point for debate about housing, the economy, interest rates, monetary policy, exchange rate policy and tax policy.
We hope to fuel the debate with lots of stats and reportage and opinion.
To give you and others an idea of the breadth of stats and reporting we do, here is our link to all our real estate data charts.
http://www.interest.co.nz/charts/real%20estate
 
Here is a link to our monthly home loan affordability series.
 
http://www.interest.co.nz/property/home-loan-affordability
 
And here is a link to all our property articles.
http://www.interest.co.nz/property
 
cheers
Bernard

Olly,
You're a hero. A century of comments up before lunch.
Hoping you can bat on through tea to the close of play and bring up a double ton.
cheers
Bernard