By Greg Ninness
As the real estate industry slowly starts to come back to life as COVID-19 restrictions begin to ease, the biggest headache buyers, sellers and the banks that finance their deals are likely to face is trying to determine where prices should sit.
Although real estate agents can undertake a limited number of private viewings per property, much of their work at this stage will involve preparing homes for marketing campaigns that will commence once we go down to Level 2, which presumably will allow things like open homes and auction activity to start up again.
That could still be a couple of weeks away and maybe more, which means it's probably going to be around mid-May before the industry gets fully into gear again.
That suggests we probably won't see any reasonable number of sales again until at least the end of May and more likely, June.
The immediate effect the lockdown had on sales can seen in the latest figures from the Real Estate Institute of New Zealand (REINZ), which showed that March sales dropped by 70% once the lockdown commenced.
The marketing campaigns for most of those properties had probably run their course by the time the lockdown started, which would mean buyers had probably been able to view properties and complete due diligence, just leaving the final negotiations to be completed post-lockdown, which could have taken place over the phone or internet.
It's likely that in April the number of sales will have slowed even further to just a trickle and May's sales may not be much better.
If most marketing campaigns kick off in earnest around mid-May, it could be the end of May at least before sales start to flow into the system and it will probably be June before we see sales occurring again in any sort of reasonable numbers.
The problem everyone faces when sales are so low, is deciding what price to agree on, because the data that normally provides them with price guidance can be so thin that it becomes almost meaningless.
Most of the pricing information that is currently available will relate to sales that were largely agreed before the lockdown commenced and that's not likely to have changed much when April data from the likes of Quotable Value and the REINZ is released next month.
And that data could remain fairly thin in May and even June, which means it could be July before we start to see reliable data that gives a realistic indication of where prices are sitting.
That is not just a problem for people who are looking to buy or sell a property and the agents in the middle of that process. It's just as much of a problem for the banks who will be called on to finance most of those deals.
For the next few months, their biggest problem may be in deciding how much a property is really worth and therefore, how much they should lend against it.
The biggest worry most people have in a situation like this is that they could agree that the price should be $XXX, only to discover a few months later when more reliable data becomes available that the property is only worth $XXX minus 10% or $XXX minus 15% or whatever.
That uncertainty will probably make banks much more conservative with their new lending.
Although the Reserve Bank has wiped loan-to-valuation ratio restrictions on home loans, banks are likely to require reasonable-sized, if not generous, deposits, so that the risk of further price falls lies with the borrower rather than the bank.
They will also be looking a lot harder at things like the job security and credit history of borrowers and their cash flows if the loan is approved.
Loans are far less likely to be approved on properties that fall outside of the mainstream, such as do-ups or those that might be seen as less desirable for one reason or another.
On top of that many buyers and sellers will probably respond to the uncertainty in the market by simply putting their plans on hold.
They'll decide to wait and see where things end up.
Because we are heading towards winter, which is usually the slowest time of the year, it will probably be spring at least before they decide to either return to the market or postpone their plans indefinitely.
So the real estate industry could be in for a long cold winter.
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100 Comments
My mortgage payments are coming down from 4.5% to 3% next month and will for many others who were fixed for 3 years or more in the past. Low rates will be appealing to new buyers. I think you'll see the same thing that happens in any downturn, bigger areas where work is will hold up better than holiday spots.
AirBNB as a strategy always worried me because council regulation changes would zap you with a pen stroke, among other things. Here we are with one of those "other things". I wonder how people will react when they go to sell their very expensive AirBNBs and get a GST bill because they messed up their tax planning.
I wonder if the prevalence of remote working will also lead some to consider longer commutes though. If restaurants are closed and you only go to the office once a week, maybe a nice big place in dairy flat rather than a townhouse in parnell?
Like all things there will be a wide range of impacts from the lock down period. Anyone working from home is going to want excellent Internet access and an office space that is professional, but equally they won't want a long commute for the days that they have to go to the office. They will also want exercise and shopping options close by with Green space and Northerly exposure at a premium. The Southerly aspect dogboxes which are really for sleeping and not much else will be shunned.
Bought our first home 2.5 years ago in the Wairarapa, commute into Wellington consisted of 4 - 5 hours a day on the train & bus. Benefit is a mortgage less than 1.5x our annual household income for a house on 1/5 acre. My employer was a bit apprehensive about the idea of remote working pre-covid, despite recently moving into a role not requiring face to face interactions. C-19 is a bit of a blessing in disguise for my situation
I was in same situation. Pre Covid, our employer wouldn't even bat an eyelid at working from home concept.
Now over 300 IT staffs are working from home. To meet the demands, we set up extra VPN servers, subscribed to corporate hosted Zoom, everyone uses MS Team, Slack, and Skype for Business to communicate. We don't really miss each other and business is running as normal!
Yes our VPN took a hammering the first week of the lockdown. A lot of our systems are RDP or Microsoft Access ODBC so not heavily bandwidth intensive but when you have 50% of your workforce lumped on to the VPN at short notice, many of whom not aware that all web browsing (not just company software) including Facebook & YouTube is funneled through the VPN it's a bit of a shock to the system.
Nzdan, do you remember me advising you to talk to your employer about working from home when I learned about your long commuting time? I told you, you could propose him to do it just 1 or 2 days a week if he was not that keen, then make sure you perform while doing the work from home. You may not have listed to me but it sure sounds like you are enjoying working from home now. If your production doesn't drop there is no reason why your employer would not agree to keep you working from home after COVID
I don't recall, but yes i have been in regular dialogue with my employer while also being mindful that I need some tenure/runs on the board in the new role before I go pushing envelopes. My previous role was not remote-able due to customer interactions at a branch level so was never really an option.
COVID has been a perfect opportunity for me to show productivity.
The lower % rates go, the harder it will be for any purchaser to get finance.
Lenders become more and more risk-averse the lower rates go; lend to only the better quality borrowers, in other words. A lenders' margin for error increases.
Add in the uncertainty factor of 'what is a good borrower these days?' given job insecurity and future wages rate etc, and the cost of finance is going to be the least of any potential buyers problems.
The big problem will be - access to debt at any price.
That Credit Squeeze people saw coming a few months back? It's arrived.....
The property industry in for a cold winter ? .........Not to mention the
Insurance industry ...........IAG shares are off 65%
fuel and oil industry ........Z energy shares down from $9 to $3
Banking industry ............ANZ Bank shares from $40 to $14
Construction industry ...............its a bloodbath
and anyone making anything
We are in a very deep hole , so with a lag period , house prices will unravel , but it could take a year to bottom out
Yes.
And those workers in those industries above? They are also supposedly potential property buyers.
That's the key assumption in the underlying housing shortage numbers that the property market promoters like to frequently remind the general public.
By applying the underlying housing shortage to the house ownership market, the property promoters are assuming the following people will buy property:
1) unemployed
2) those on government welfare - sickness, domestic purposes benefit, etc
3) those who are unable to get a mortgage
a) low income / median households such as
i) single income lower income wage earners, - e.g students, people just starting out in the workforce,
ii) median income single households - divorcees with children, part time income earners, middle aged single income person, households with one parent looking after children
iii) double income low income households
iv) those with an insufficient deposit,
How real is that? The property promoters choose to ignore the above as it doesn't suit their narrative.
Effective demand makes adjustments for those above.
Diversification yeah right
Fantastic advert for diversification - the NZX50 as a whole is only 12% off the all time high and back to where it was last August. Still 6.5% up from a year ago today.
That quickly? I think this property bubble will take longer than that. Maybe 18-24 months in fits and starts. Businesses and job losses will take time to come through and effect buying potential. Many sellers will just try to hold on and wait it out until they just can't anymore but with interest rates so low, they might be able to hold out longer than you think. Upward price appreciation is like a religion in NZ, it will die hard.
Actually, having lived through crashes in NZ I can tell you that once confidence goes it all falls apart in a hurry. It will be more interesting what the Rb and Gov't try to do to stop the crash and how banks fare.
Yeah no doubt that things will start dropping quickly, but real estate bubbles tend to take a few years on average to find a bottom, wherever they occur.
as long as house prices are based on solid fundamentals, prices should be stable
@andrewj , youré joking right ?
you bet.
Boatman, a business guy was saying yesterday that he had no billing time for April, he's employing full staff as he's required to under the grant he got from Govt, but he said by May it's going to start hurting and by June there will be layoffs and it will be serious. What are your thoughts?
I am not at liberty to discuss the arrangements in our practice , but many of our clients are hurting
I'm in the same boat, budget is shot full of holes. At present my wife and I are considering going back to California, we have children there, it just seems an easier life. We can live such a rich life there, compared to here. My daughter tells me Ca is seriously in shut down and they are considering not opening schools in August.
I don't think anyone is going to enjoy this winter much.
Out of interest AJ, what sort of coin per year, in NZD, do two people need for a good life in Cali?
It's a lot cheaper to live, rent is about half of here, gas is cheap enough to not be an issue, food is about half the price of here. Our house was North of Sacramento , nice place on three acres with a small pool, still valued at under 300k.
It's partly better because of the attitude of my friends, they live life and the odd chance of recession doesn't stop them.
However you can move to the Bay area and spend some money of you wish.
Out of curiosity, what would be the annual property tax on that 300k house? How much would a couple in their 50s pay for medical insurance in CA?
Property tax is an issue especially in CA, we get our insurance here and fly home of there is an issue. Still way cheaper than living here, we are ahead of the UK.
Thanks for that. $300k is a steal - I am always amazed at the prices of property in the US - Especially outside the main centres. Yes we do seem to have a pessimistic outlook here a lot of the time - I feel like the yanks threw off the conservative yoke of the English, but we just threaded it through our culture instead.
For me Malaysia was the pick - very cheap,as cheap as Vietnam, but speak English and more ordered and developed. Also the influence of the Malay, English, Chinese and Indian cultures make for a varied society. If you don't like the tropics it's not for you.
That's what you get when the government doesn't artificially restrict the supply of land (which is very plentiful in Ca)
yeah like incomes
We dont know how lucky we are
Quite balanced article.Not of much help to real estate guys who may want to instill a FOMO among prospective buyers.
Exactly!
Much better to get the herd into motion by having a lower price structure established, and then commissions start flowing back through the doors.
Pity about all the personal property portfolios that RE Agent's (all) have. But, hey. In tough times the tough get going!
Yep. In general, people who are in the property field would have doubled down on property. The concept of cashing out ie "Knowing when to fold 'em" will be completely missing from their strategy.
And the so called diversity of owning property around NZ may not be the intelligent play that they thought it would be.
100%.
One agent in my area (Auckland, East) saw the writing on the wall and tried to sell her property when we were in the doldrums last year.
She was on the news this week trying to spruik with Bindi.
October 2017 purchased for $2.31m (CV of only $2.1m)
April 2019 marketed for $2.25m.
Bet she wished she just took the minor hit then.
No sympathy.
Every zig down in the house pricing graph for the last one hundred and fifty years has always had a following zag going higher. With every zig, some people have not been able to hang on for the next zag. These people sell to the people who know about the following zag. Every time so far, there have been people who say there will be no following zag. Every time so far these people have been wrong. Yet it never stops them having loud opinions on the topic!
Wow that's genius.
Why did I bother with 4 years of Finance & Economics + 3 years of CFA when all I needed was the "zig zag" theory.
CFA? All you had to do was study Edward Arthur Seykota's song.... https://www.youtube.com/watch?v=LiE1VgWdcQM
I have been working on trading floors most of my life.... if the Average Joe just followed these simple rules....
One good trend pays for them all.......
The problem with trend following is the length of time between feeds, you totally miss out on the opportunity to compound returns. A broker makes far better returns-they charge a relatively small amount but can make it every day in bokerage on buy and sell transactions. Id rather make 0.2% a day guaranteed and compounded than 30% once in a blue moon and small compounding losses the rest of the time.
" Id rather make 0.2% a day guaranteed"
Two seemingly guaranteed ways of making money every day where the investor is right more than 95% of the time:
1) off the run vs on the run government bonds - this strategy utilised by a large investment fund with 2 Nobel laureates (i.e. very smart) in the run up to 1997 - LTCM
2) collecting option premiums. Some liken it to collecting pennies in front of a steamroller. It's the other 5% of the time that people need to be worried about - Nasim Taleb's Black Swan - strategy used by Victor Niederhoffer (former employee of George Soros)
" Why did I bother with 4 years of Finance & Economics + 3 years of CFA"
cmat,
With those qualifications, what area did / do you work in? Buyside vs sell side? asset class specialisation?
Indeed. FOMO is something we've already seen in the stock markets.
People can have as much FOMO as they like. But nothing is going to get bought or sold without a lender being confident of the purchasers' income and job security.
Without those FOMO is meaningless and goes unsatisfied.
Well the Banks have to be cautious in lending , thats what they do to ensure they too survive .............no matter what politicians may say or want .
Banks will do nothing more than simply batten down the hatches , deal with applications for payment holidays , restructure existing loans , raise provisions against doubtful debts and hope to God that their Balance sheets remain robust .
New lending is the last thing on their minds right now
AFR - Banks' loan losses could top $35b
https://www.afr.com/companies/financial-services/backing-team-australia…
Man $35 Bil... you are going to need a lot of bread for that Sh%t sandwich ...
Hard to buy flour at the moment as well.... so the bread may be thin
Not even 2 year's profits in regular times:
https://home.kpmg/au/en/home/insights/2019/11/major-australian-banks-fu…
Yes but NAB's raising cash off Institutional's while handing out dividends for the sake of retail investors.... Insto won't stomach that for long....
Most of a bank's profits go back out the door each year as dividends, hence NAB's need to raise cash even after many many many record years, oh yes and that tiny $900 million fine provision.....
Surely, we must all be able to see what's coming by now?
The below sort of stuff doesn't happen in any economy 'on the up'. But it won't happen here, right?!
"Lufthansa, one of the world’s most powerful airlines, is preparing to file for bankruptcy"
"British Airways to cut up to 12,000 jobs in wake of record loss. Airline warns no taxpayer bailout is waiting"
Deflation
Big time
Less and less consumers at a viable level.
Which is the opposite force of economies to scale.
The trouble is we cant just muddle through this one.
When economies to scale (as your business model) breaks then Debt eventually breaks.
The increased cost burden of overhead and debt is loaded on to any customers that remain so product costs must rise … leading to even less viable consumers … and on it goes
UNLESS the world economy can get total consumption up to prior levels (hint ; it wont) then this path is a foregone conclusion
Govts are just willy coyoting the entire world economy at the moment with fairy dust…
Deflation for a very short period (months?)
Then loooong stagflation.
"Surely, we must all be able to see what's coming by now?"
No.
1) Most of the general public do not follow the business news (most of my relatives and friends have no interest whatsoever - they are more interested in spending time with family, sports, entertainment, television. Very few even read the news or watch the news so remain blissfully uninformed). Most are unaware of Virgin Australia going into voluntary administration, or the capital raising and job cuts by Air NZ.)
2) Most of the general public do not understand economics
3) Most do no understand the linkages between macro-economics and how it affects them. (Even if friends and family are aware of the capital raising by Air NZ and job cuts, they don't know how that will impact them.) Many fail to connect the dots and the required next level thinking involved.
4) I see some property investors looking to buy, and see novice / newbie property investors looking to buy.
5) Many people believe in the "V" shaped economy
Watching the banks is the key to the game in 2020. They are already dealing with multiple troubles from the Hayne commission, and they are already asking their shareholders for huge sums of money - at give away prices - to keep the ships looking straight in the water & if I'm right(?) the worst is still in front of them. And, if things really tighten up from America (and looking at their unemployment numbers coming through, I think it will) I'm picking we (here & Oz) could lose a major bank over the coming year or so. Perhaps our wonderful QE printing govt can get back into the banking business.
"Three Pillars?" like a three legged chair.... one assumes CBA would be forced to consume the looser.... like an arranged marriage
Which bank do you think?
I live in a glass house........
I am an aspiring first home buyer (in Auckland). We've waited a while already (years), made our peace with renting, and we are happy to wait AT LEAST another 6 months, realistically probably a year or 18 months before pushing go on something in Auckland.
Too much at stake to rush in with the current sky-high prices, and recognising there's a degree of uncertainty around our jobs (all bar essential workers will/should be considering this imo!)
I hear many vacant rentals are down $100pw already in AKL....
@firsthomecryer .............sit on your hands mate , the odds are stacked against any increases in house prices for a while , and there is more downside than upside risk .
People will be forced to sell if after 3 months they are still not servicing their debts , it becomes unsustainable , even at very low interest rates
Firsthomecryer,
A reminder for all potential owner occupier buyers and current owner occupiers - choose your scenario and act accordingly.
Which will the owner occupier regret most:
1) missing out on future potential gains in equity?
2) potential loss of their savings invested as the initial deposit for purchase of the house or even potential negative equity?
For owner occupiers, a reminder of the impact of leverage (it amplifies property price changes both on the up and down):
Scenarios of financial impact of leverage on equity, assuming an 80% LVR for owner occupier, for a recent $1,000,000 property purchase, $200,000 initial deposit, mortgage $800,000. (simple round numbers used for illustration purposes)
A) Scenario - property price rise:
1) property price rises 5% to $1,050,000, mortgage $800,000, equity $250,000, so 25% gain in equity value from $200,000.
2) property price rises 10% to $1,100,000, mortgage $800,000, equity $300,000, so 50% gain in equity value from $200,000.
3) property price rises 15% to $1,150,000, mortgage $800,000, equity $350,000, so 75% gain in equity value from $200,000.
4) property price rises 20% to $1,200,000, mortgage $800,000, equity $400,000, so 100% gain in equity value from $200,000.
5) property price rises 25% to $1,250,000, mortgage $800,000, equity $450,000, so 125% gain in equity value from $200,000.
6) property price rises 30% to $1,300,000, mortgage $800,000, equity $500,000, so 150% gain in equity value from $200,000.
7) property price rises 35% to $1,350,000, mortgage $800,000, equity $550,000, so 175% gain in equity value from $200,000.
8) property price rises 40% to $1,400,000, mortgage $800,000, equity $600,000, so 200% gain in equity value from $200,000.
9) property price rises 50% to $1,500,000, mortgage $800,000, equity $700,000, so 250% gain in equity value from $200,000.
10) property price rises 100% to $2,000,000, mortgage $800,000, equity $1,200,000, so 500% gain in equity value from $200,000. (i.e if they believe that the property price doubles every 10 years)
Remember, the owner occupier must be able to hold on under ALL economic environments (including any potential significant reduction in household income).
B) Scenario - property price falls:
1) property price falls 5% to $950,000, mortgage $800,000, equity $150,000, so 25% loss in equity value from $200,000.
2) property price falls 10% to $900,000, mortgage $800,000, equity $100,000, so 50% loss in equity value from $200,000.
3) property price falls 15% to $850,000, mortgage $800,000, equity $50,000, so 75% loss in equity value from $200,000.
4) property price falls 20% to $800,000, mortgage $800,000, equity is ZERO, so 100% loss in equity value from $200,000.
5) property price falls 25% to $750,000, mortgage $800,000, equity is NEGATIVE $50,000, so 125% loss in equity value from $200,000.
6) property price falls 30% to $700,000, mortgage $800,000, equity is NEGATIVE $100,000, so 150% loss in equity value from $200,000.
7) property price falls 35% to $650,000, mortgage $800,000, equity is NEGATIVE $150,000, so 175% loss in equity value from $200,000.
8) property price falls 40% to $600,000, mortgage $800,000, equity is NEGATIVE $200,000, so 200% loss in equity value from $200,000.
FHB are always going on about how a house is only for security, they don't want to make money off it etc.
If they are in fact looking to make money off housing, they have no moral high ground over investors. The only difference is who is doing it better.
Tldr is that for FHB, negative equity mostly shouldn't matter.
"Tldr is that for FHB, negative equity mostly shouldn't matter."
Does anyone who has been in negative equity want to share their personal experience and perspective on the above comment?
In the UK the banks in the 1990's let you move your negitive equity position to a larger value home..... (through the sales process.....)
Absolutely, there's an element of security with home ownership that appeals. Having a crippling mortgage (or living somewhere we don't actually want to) is not security – that could easily become a prison with negative equity in the mix.
Until Auckland house prices drop a fair bit we're just not interested in buying, as the current prices are do not represent value to us, or strike the right balance to achieve true increased freedom.
During lockdown we have marvelled at the life we are lucky to live, in a multi-million dollar leafy suburb, at a minuscule fraction of the cost. If you can shake the feeling of being a 'failure' for not having a house, renting really ain't so bad.
Firsthomecryer,
Be a trougher, not a peaker.
Refer the following - https://www.irvinehousingblog.com/2008/08/11/timing-does-matter/
Here is an actual example of a PEAKER.
A) Purchase: December 2006 purchase price $164,500 (CV was $106,000 at the time, so price paid to CV was 1.55)
B) Sale: December 2019 (after 13 years of ownership) - sale price $140,000 or 15% below their purchase price. (CV was $150,000, so price sold to CV was 0.93)
https://www.qv.co.nz/.../56-romilly-street.../1055725
Some mathematics
A) Purchase price $164,500
LVR 80% mortgage $131,600
Equity deposit $32,900
B) Sale price $140,000
mortgage $131,600 (assumed to be interest only for illustration purposes)
Equity value $8,400 - loss of 74%. (which excludes the payment of interest and sales commissions of say another $3,000 -$4,000)
Now they look to upgrade or downsize - what can they buy using that $8,400 to use as a 20% deposit (assuming no other additional funds)?
That one purchase decision has potentially severely jeopardised their future financial security, and their ability to upgrade. (or in the case of downsizing, resulted in a vastly smaller amount for their retirement funds)
Alternatively lets look at three different buyers for the same asset above with the same equity deposit of $32,900 (exit price unchanged).
A) The ignorant / uninformed buyer (peaker above) pays a price to CV of 1.55 above (55% premium to CV)
B) The educated buyer instead chooses to pay a price to CV of 1.00 (i.e no premium to CV)
C) The savvy buyer instead chooses to pay a price to CV of 0.85 (i. a 15% discount to CV)
A) uninformed buyer pays price to CV of 1.55 (55% premium to CV)
Outcome as above
Equity value after 13 years: $8,400
B) informed buyer (0% premium to CV)
1) Purchase: December 2006 purchase price $106,000 (CV was $106,000 at the time, so price paid to CV was 1.00)
2) Sale: December 2019 (after 13 years of ownership) - sale price $140,000 or 32% above their purchase price. (CV was $150,000, so price sold to CV was 0.93)
Some mathematics
i) Purchase price $106,000 (CV was $106,000 at the time, so price paid to CV was 1.00)
Equity deposit $32,900 (same as for uninformed buyer)
Mortgage $73,100 (LVR is 69%)
ii) Sale price $140,000 (unchanged from above)
mortgage $73,100 (assumed to be interest only for illustration purposes)
Equity value $66,900 - gain of 103% (which excludes the payment of interest and sales commissions of say another $3,000 -$4,000)
C) savvy buyer (pays a price equivalent to 15% discount to CV)
1) Purchase: December 2006 purchase price $90,100 (CV was $106,000 at the time, so price paid to CV was 0.85)
2) Sale: December 2019 (after 13 years of ownership) - sale price $140,000 or 55% above their purchase price. (CV was $150,000, so price sold to CV was 0.93)
Some mathematics
i) Purchase price $90,100 (CV was $106,000 at the time, so price paid to CV was 0.85)
Equity deposit $32,900 (same as for uninformed buyer)
Mortgage $57,200 (LVR is 63%)
ii) Sale price $140,000 (unchanged from above)
mortgage $57,200 (assumed to be interest only for illustration purposes)
Equity value $82,800 - gain of 152% (which excludes the payment of interest and sales commissions of say another $3,000 -$4,000)
The only difference between the three buyers is that the purchase price is different, and this resulted in different financial outcomes, and future financial trajectories.
Agent valuation is crux, and as you imply, this needs to be 15% below CV minimum at present , given state of economy
I saw an property buyer pay a high price for their property. If they were an owner occupier using an 80% LVR, by my calculations, based on probabilities, it will likely take them 15 years to get back to their initial deposit. That is essentially ZERO return for 15 years, (and the owners will likely be in NEGATIVE equity for an estimated 7 years). That equity value will be the basis for upgrading their house in the future or downsizing for retirement. So the size of their retirement fund potentially takes 15 years to recover, and is being eroded by inflation.
Take an example (numbers kept simple for illustration purposes here)
A) PEAKER
House price currently $1,000,000
Mortgage $800,000 (80% LVR)
Equity $200,000
House price falls 10% to $900,000
Mortgage $800,000
Equity $100,000 (fall of 50%)
B) TROUGHER - waits and purchases house at $900,000 (after 10% price drop)
House price $900,000
House deposit $205,000 (initial 200,000 plus some interest income from bank)
Mortgage $695,000
So lower mortgage, lower debt servicing payments.
It would have been better for them to have deposited the initial deposit into the bank and rented, until house prices were more attractive (i.e trougher).
"A home is a place for families to live. It is not a financial investment that one sells and buys as the market fluctuates.
Short term fluctuations in house prices are not uncommon"
The property price risk in certain locations is now very high for some recent owner occupiers buyers - such as Queenstown. Imagine a possible scenario for a recent owner occupier buyer there:
A) Peaker
House price currently $1,000,000
Mortgage $800,000 (80% LVR)
Equity $200,000
House price falls 20% to $800,000
Mortgage $800,000
Equity is ZERO (fall of 100%)
Now how long will it take for that owner occupier to get back their initial equity of $200,000?
The owner occupier's future financial security at retirement just took a massive hit and may take years to recover. If they had instead deposited the $200,000 into the bank this would have been the possible scenario
B) Trougher
Deposit: $205,000 (initial deposit $200,000 plus some bank interest)
House price $800,000
Mortgage $595,000
Lower mortgage, lower debt payments for the NEXT 30 YEARS ...
Ye, but with inflating the ten billion CV debt away, property prices will go through the roof in the next ten/fifteen years. Good time to purchase with low deposit once the market bottoms out and starts climbing again.
Key caveat - "once the market bottoms out"
hard asset cash paid prices..... NOT debt funded levels
Thanks CN, great advice. I will strive to be a trougher! They say you shouldn't try to 'time' the market, but I figure I might as well try!
And, if it goes up in Auckland any more we don't want in anyway!!! :)
Valuation is really what matters, not timing.
Offer a low price relative to CV or a low price relative to market value estimates (e.g. homes.co.nz)
Only pay a price which is at a discount to CV or the market value estimate. Avoid paying a premium. That discount is your margin of safety.
In the peaker example above, if the purchase price was a discount to CV (instead of a massive premium to CV), the financial outcome would have been very different.
Good luck to you.
Firsthomecyrer,
Have provided the example of three buyers above for you
1) Uninformed, ignorant buyer
2) Informed buyer
3) Savvy buyer
Different financial outcomes for the same asset.
Firsthomecryer,
FYI, here is an example of an uninformed buyer of a property in Queeenstown.
They paid a price to CV of 1.79. (79% premium to CV) in December 2019.
Assuming 70% LVR financing for a property investor, and the property is substantially unchanged, this owner is highly likely to go into negative equity. They could lose about 166% of their initial deposit if they are unable to hold on for the property price recovery (about $850,000 possible loss), assuming the property is substantially unchanged.
https://www.qv.co.nz/property/107-frankton-road-queenstown-9300/1469607
Since you now have a property valuation framework to use, you can see the above purchasers error, and you are less likely to significantly overpay.
Most owner occupiers buyers don't have a property valuation framework to use when determining how much to pay for a property, and quite frequently overpay in bull markets (and let their emotions drive the purchase decision, leading to overpaying).
It’ll be the 2nd quarter 2020 results for many industries, including real estate, that will really show what damage there has been. It may be as bad as it has ever been, for one quarter anyway. The question is, how long will it continue after that?
It will be after the mortgage deferrals (6 months from the 23rd of March is end Sept.... just before elections, perhaps another 6 months of deferrals)...... like a student loan write off.....
Most of the Banks current provisioning appears to be aimed at business loans, commercial property, I expect H1 2021 will be the domino of residential. Patience grasshopper
After the 2007-09 financial crisis, the imbalances and risks pervading the global economy were exacerbated by policy mistakes. So, rather than address the structural problems that the financial collapse and ensuing recession revealed, governments mostly kicked the can down the road, creating major downside risks that made another crisis inevitable. And now that it has arrived, the risks are growing even more acute. .....These risks, already looming large before COVID-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s....leadership may be able to reduce, resolve, or minimize many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression.
https://www.project-syndicate.org/commentary/greater-depression-covid19…
"Giving rise to a more inclusive, cooperative, and stable international order."
You are clearly based offshore, smoking that stuff is not legal in NZ yet.....
We have one of our off-spring looking to purchase and the banks are being careful but there is no problem getting a loan at present. My pick will be in the last quarter of 2020 will provide the best opportunities for a great purchase in a decade.
Out of curiosity , why the last quarter of 2020 ?
@shoreman , it could take longer than that to bottom out , and only after the mortgagee sales have wound down will it be a rising market
Thoughts and prayers.
Unlike the US where the % of most peoples wealth is in liquid financial products, most NZers are Donkey deep in property already. It is actually a systemic problem in NZ (due to lack of capital gains tax and historic ability to transfer negative geared property losses against other income streams).
I am not sure there is a huge pool of un-allocated capital (read cash) sitting on the side lines waiting to pounce on the coming property bargains....... maybe at the lower end there will be some FTB's who will grab the 750 down to 500 properties, but who is in a position to buy 1.5-2.5 million properties? even after big writedowns?
Don’t underestimate the impact of working from home on inner city prices. These were premium areas/prices because of their minimal commute. No longer worth the premium as the need to be near a work place no longer matters.
I dont think we need to wait for figures as the trend will be obvious. Currently the market is a stagnant pond with everything listed as by negotiation. This will change very quickly to list prices and low ones at that if they really really need to sell fast and try and beat the looming crash. Could move pretty quickly from FOMO to FOSI or the fear of staying in.
FONGO.
Fear of not getting out.
nah FOBF
Simply put
Sell now if you want to take profits before prices go through the floor but you will have to be prepared to meet what the buyers are offering
Buy now if you are cashed up and dont care that the value may decline significantly
Basic reality is the values will be "what buyers are prepared to pay" so the banks will have to be dynamic with how they are continuously evaluating that.
I reckon the current uncertainty will curtail most property transactions bar those in train. Winter is usually the slowest selling season which will diminish sales as well so Sept Oct will be the real first reliable indication of the future or real Estate. If the recession is as deep as Sir John Key said to Paul Henry last night sales & prices will retrench and possibly reduce the multipleof earnings to purchase price, a depression will mean all bets off and absolute carnage across prperty & business's will result. NZ in common with most other countries lacks the innovative/adaptive leadership required to guide their countries onto to a sustainable new path.
There is a reason why AFR article is calling for $35bil of looses...... not the traditional Chinese happy ending.
The key to your last sentence is sustainable ... which is incompatible with the current capitalist/monetary system, where we keep having to borrow to pay interest on previous mis-adventuresses..... Luckily the rich only have one vote...
Jk....the man who led us down this dead end path... who celebrated and encouraged more and more debt. Couldn’t stomach to watch the man.
Excuse...if the housing market falls going future blame it on winter.......
What will this doom and gloom deflation look like when they are printing money via QE infinity? For sure there is every possibility that house prices could fall a substantial amount, it just won't be in their nominal value. That million dollar house might hover around that nominal value for the next 5-7 years while the dollar is trashed. Do you think policy makers across the world are going to step back and allow a banking system failure, caused by the massive devaluation of assets? The only thing that will lose value for sure is the dollar in your pocket. This is just the start - money for nothing!
RBNZ to implement $30bn Large Scale Asset Purchase Programme of NZ Govt Bonds
As a REA who does pricing, I think it is important for readers to be aware that in a falling market (price wise) it is crucial that an evaluation reflect where market is headed, NOT where it was. Usual approach is to examine what Property Smarts tell agent about what has sold that is comparable to house OTM, and also what is for sale that is close and similar in characteristics. Given a frozen market from roughly 23.3 - 23.5, those stats will be pretty sparse and Agents are going to have to use more judgement. The number of buyers v amount of stock will be a v important metric in this calculation. Pricing something or doing by negotiation with a fixed figure in mind that is based on market prior to 23.3, will be a poor idea and result in sales being delayed further. Broadly, Agents will probably price in a 10% reduction on what price was prior to 23.3, for next 3 months, and then see what market info is available then
Mike, how is real estate going for you?
You don’t appear to have any listings whatsoever if you are still a practicing agent!
Why do you maintain that you are a real estate agent when you are not selling anything??
Back to normal I see.
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