By Olly Newland
The news from the front seems to be doom and gloom these days if we go by the articles and news that get pumped out by the media.
But it pays to remember this about the news media: Bad News Sells.
You hardly ever see headlines that say positive things, let alone good news.
It seems that it has to be 'shock and horror' each time - and the more shock and the more horror the better.
Remember, all the media are jostling for attention and the headlines are designed to catch attention. Therefore - whatever the news is - many times the worst possible angle is portrayed in an attempt to make it penetrate the mind of the readers who are already swamped with messages from all sides.
So it is no different for news about the property market. There is no doubt that the market has slowed but it is not nearly as dead as the media would suggest.
I have personally experience several very nasty slumps and very exciting booms both here and in Australia. (Both were costly) These experiences give me some authority to comment (you are entitled to disagree, of course).
I am also sure one day, the unpleasant experiences we have witnessed or endured will pass and we will look back and wonder why many of us were so extremely nervous without good cause.
Of course many people have been badly effected and one has to be sorry for them even if it was there own greed that put them there in the first place.
Even worse are the innocent who were duped by dodgy practices or outright theft.
The fact is we live in a capitalist society and financial disasters are one of the hazards of the game.
One thing is for sure. I got my best bargains during downturns.
Remember the Asian Crisis around the mid nineties (1997-99). All the Far Eastern countries went through something similar to what we are currently witnessing and, looking back the bargains I got at that time were mouth watering.
One was a house in Remuera in one of the best streets. It was openly advertised as "Asian owner panics and bails out". The CV was $530,000 and the agent let it be known that the best offer over $400,000 would be considered.
As usual, my bargain hunting nose twitched and I offered a jaw-dropping $350,000 which I thought would never be accepted as the owner had paid $450,000 two years previously.
To my total amazement it was counter signed at $365,000 and SNAP! it was mine.
A lick of paint, and some carpet and I had it independently valued at $495,000. I sold it cash unconditional for $460,000.
Total time from start to finish: two months. Not bad at all and better than a wage. A real win-win deal - for both me and the ultimate buyer - all thanks to a panicky seller.
It got better. About the same time a block of 12 shops were advertised again by an Asian owner who was panicking himself into a state of total meltdown. (Note: panic visits all ethnic groups equally, but the troubles in the Asian economies at that time pressured Asian investors out of all proportion it seemed at the time.)
The rent on the 12 shops was (or should have been) $120,000 net per annum but because of bad management, the absentee owner, plus 'The Panic' made for a heady mixture of both greed and fear - on my part that is.
I purchased the lot for $750,000 representing a potential yield of 16% when it normally would have been 8% maximum.
Two years sorting out the leases with some very rubbery tenants saw the rents finally settle at $115,000 net which at 8% gave a paper value of $1.43 million.
I put it up for auction through a major Auckland real estate company (rare for me to sell and even rarer by auction). Spirited bidding saw it hammered down at $1.39 million. Close enough, I thought. No need to be (overly) greedy. (Always leave something in for the next fellow.)
There is still money out there
The fact is that the recent boom was the aberration. The current market is the norm.
Things are much like the period 1998-2002 following the Asian Crisis except interest rates then were 11% and rising.
It took the horror of 9/11 to drop interest rates and fire up the market - which in turn started the whole chain of events we have witnessed over the recent past.
This recent article intrigued me. It showed that people with deep pockets didn't get there by being wimps. They got there by having the courage of their convictions.
To me it also says that the market may be slow at present ... but compared to what?
Omaha bach sells for $2.6m by Bevan Hurley NZHerald Sunday Aug 1, 2010
How the agents see it
I am the first to admit that real estate agents exaggerate and push the envelope over the edge and beyond.
But they don't generally tell untruths as they would lose credibility if they were caught out.
Therefore the figures produced by Barfoots, Auckland's biggest residential agents must be taken a face value and make interesting reading indeed. Now we are dealing with facts and not the fevered scribblings of reporters, just-out-of-school, trying to make a name for themselves.
Read the facts for yourselves:
Residential Settled Sales June 2010
Period Number of Sales* Volume of Sales
June 2010 665 Properties $347,834,232
June 2009 861 Properties $449,262,820
12 Months to June 2010 9,171 Properties $4,894,674,036
12 Months to June 2009 7,682 Properties $3,924,800,491
What is most important about this article is that the actual number of sales in 2010 was 9,171 properties while a year earlier they were only 7,682. If this increased number of sales is a sign of a worsening recession then we are indeed living in a topsy-turvy world.
There has been much debate about whether now is the best time to rent or to buy. The problem with much of the debate is that the opposing parties come from completely irreconcilable points of view.
Renting is undoubtedly cheaper than owning on a strict 'money in - money out' basis.
Every accountant will agree with me when I say that - for maximum efficiency and cost-saving, renting will save thousands of dollars annually. But following that argument implies that an even more efficient way to obtain shelter is to live in a cave, rub sticks for fire and dress in rags!
We don't do any of those things because there is an emotional angle to consider - and what price emotion? What price self-worth? What price for the pride of ownership?
And what price for the hope at least, of making a profit one day?
The problems with renting are five fold
1. You pay forever and don't even own the letterbox
2. Once you're off the property ladder it can be very hard to get back on
3. Any improvements you make to the property will only benefit the landlord
4. You can be evicted at relatively short notice, and
5. Rents are rising.
In other countries where renting is a way of life, very long leases (decades, even lifetimes) are granted and these 'property rights' can often be bought and sold for substantial sums.
Think of it. If it were possible to rent a home for (say) 99 years with only occasional rent reviews then renting would definitely be a good alternative for you, and your children and even grandchildren as these types of leases can also be transferred quite easily (akin to long term commercial leases).
But we in NZ, regard renting as temporary and such bodies as the Tenancy Tribunal and the cavalier attitude by both landlords and tenants only make for more needless confrontation.
As first predicted here ... Auckland rents on the up
Rents are rising in Auckland as landlords try to recoup higher costs, real estate agent Barfoot and Thompson says.
Straight after this year's Budget I predicted that rents would rise because of the ill-conceived depreciation changes followed by unintended consequences.
For all the know-alls out there who boast that you are happy renters I will give you another prediction:
Within 2-3 years you will standing on the front lawns of the few properties which are available to rent, bidding furiously against the multitude just to get a roof over your heads.
For another point of view read this.
The GST Blunder
Not helping matters is another anomaly which has been brought to my attention just recently and which compounds the issue of rising rents, costs and market distortions.
I have just got off the phone to a developer friend of mine who has explained why many developers are hiding under their beds.
Other than the obvious that developers are a rare breed these days (thanks to craven bankers and shonky finance companies) there has been an eye-watering blunder with the new GST rate which kicks in next October where it increases from 12.5% to 15%.
Developers are holding back (starving the market and thus helping the rent rises) for the reason that if they start a project now (and that includes buying the land) then they can claim back 12.5% in GST refunds. Until now when they sell they pay back the 12.5% tax.
But if they haven't sold and settlement is after this coming October then they will have to pay back 15%.
A two and half percent increase doesn't add up to much on everyday items - but it's different on a house. viz: take the average $500,000 new build and ignore profits for the sake of the exercise.
Today a developer can claim GST at 12.5% and claim $62,500 by way of GST refund. But if he sells after October his refund may have been $62,500 but now he to pay back $75,000 creating a straight loss of $12,500.
But wait, there's more: a lot of properties being built today are $2 million or more, which would include many commercial new builds as well. In this case the pre October refund would be $250,000 but the repayment after October would be $300,000 or a $50,000 loss. What developer in his right mind would deliberately make a $50,000 loss from day one?
How are first home buyers ever going to get on the property ladder if the tax content alone is so high? No wonder more people are renting and rents are rising.
Is the recession coming to an end?
I am very conservative by nature and a bit of a pessimist to boot, but I am at the coal face not only on my own behalf but also as I assist my mentoring and consulting clients. Despite everything I can see glimmers of light. The world has not come to an end to the mortification of the doom merchants.
Overseas there are some good signs such as rising share markets, profitability and confidence returning, so barring unforeseen events an improvement is on its way.
Some say the world has changed for ever and people will be more frugal from now on. I don't believe that for one minute. Human nature never changes. As the economy improves we will see the same habits return as strongly as ever. People will spend, over spend, go broke,or make fortunes.
Is demand is picking up? I offer this as a portend of things to come: As recently as this week I advertised three retail shops and one large office space to lease - and received over 20 replies in just three days. Two shops have already been taken, leases signed, and the money banked. So too has the office, I have just been told, as literally I type these words.
Next week I have some one who says he will take the third shop (but I won't count on that until that's done and dusted). One of the strange things I have noticed during times of high unemployment (latest figure 7%) is a corresponding increase in enquiries for shops and factory space and to a lesser extent smaller office space.
I have seen this again and again as unemployment wanes and waxes. I put it down to the unemployed looking to start up a business as an alternative source of income.
Strange indeed are the ways of the market. So in a quirky way I must thank Alan Bollard for recently raising the OCR and compounding the unemployment problem because he has thus created another wave of prospective tenants for my properties.
I warned that the raising of interest rates in a brittle market would have unfortunate side effects and maybe now the ivory towered bureaucrats will put away their publicly-funded credit cards and take some notice. I have never quite believed statistics and rumour but believed in direct market research myself. Putting out the adverts for the vacancies and getting the responses I did was not only uplifting, but the truest market research that can possibly be undertaken.
In summary I believe we are bumping along the bottom of the cycle and real improvement may take a while to happen - but it will happen. Take your courage in both hands so that in the future you will not look back and say "If only I had taken advantage of the market during the recession instead of hesitating!"
© 2010 Olly Newland. Used with permission.