Olly Newland believes many property investors are making the same mistakes they did during the last surge in property values prior to the 2008 downturn.
The only difference between the current Auckland property boom and previous ones, was that this one had lasted longer than the others, the veteran property investor and consultant told interest.co.nz in a Double Shot interview.
"But we all know that one day it will slow down," he warned.
"I'm not going to predict crashes or anything like that, but one day it will slow down and then there will be tears.
"People who have bought houses without getting independent advice and without checking what sort of structure it should go into for tax and so forth, they will be in tears one day because they've done it wrongly.
A worrying feature of the current Auckland market was that some people were getting involved in property investment schemes similar to those promoted by the infamous Blue Chip organisation founded by Mark Bryers, who is currently in the High Court seeking to be discharged from bankruptcy.
When Blue Chip collapsed, Newland attempted to assist some people who had invested through it, to try and sort out their financial mess.
"Most of them were in dire straits," he said.
"It was a very, very unpleasant situation.
"I had nightmares. I had to sit in front of people and tell them they were bankrupt and it's like offering people a death sentence in a way.
"It was the most gut wrenching moment I've had in my life, quite frankly."
Newland said people were once again getting involved in similar investment schemes.
"It has happened before. I saw it in the 70s and 80s in other forms and nothing has changed. People are still driven by greed and fear," he said.
'A day of reckoning'
While people who had bought investment properties five or 10 years ago should now be doing very nicely from their increasing capital values and rising rental income, some were over extending themselves and borrowing recklessly to expand their portfolios, he said.
"Unfortunately there's a large number of them who are dipping into the equity of their home sand borrowing against their homes, which can be done carefully, but [some] are borrowing recklessly and putting their homes at risk, by taking notice of all the outfits out there that promise how to get rich quick, and they are pouring money from their equity into new investments, which sometimes is not a good thing.
"They are making the mistake that prices will go up forever.
"One day there will be a day of reckoning, it will flatten out and then it won't be so much fun anymore."
Take a look at commercial property
Newland said some people were also making mistakes by buying properties out of town, in places where property values have actually fallen rather than risen.
More people should consider investing in commercial properties such as offices, shops and factories because returns from commercial property were generally higher than those in the residential market, he said.
"People don't understand them [commercial properties], they don't want to understand them, yet there's a huge market out there that's available."
Newland also said he didn't think Auckland was likely to see the estimated 10,000 to 13,000 new homes a year being built, that is estimated to be needed to relieve the region's housing shortage.
"The trouble is, builders can't make money form building cheap houses," he said.
"They go broke building cheap boxes. Builders make money building expensive houses.
""There's no money to talk about from building cheap affordable housing, this is the problem.
"I think it's going to be be almost impossible to supply enough properties," he said.
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41 Comments
China may help the slow down along
Macau Casino Revenue Has Record 49% Slump on Weak Demand
http://www.bloomberg.com/news/articles/2015-03-03/macau-casino-revenue-…
What a bizarre perspective this man has. After listening to this, outside cases of investment stupidity, the only factor that investors need to be concerned about is the market "slowing down." It's like major cities in Australasia are bullet proof, which has been achieved through Anglo-Saxon economic hegemony.
be good to hear it in your own words. I had to look it up which helped. tks
http://pytheasonline.blogspot.co.nz/2006/01/anglo-saxon-hegemony.html
Not what I heard. He said "prices will slow down." I'm not really sure how prices "slowing down" will drive people to tears. It's almost like people are not programmed to expect a minimum increase in the value of their home or proeprty investment as a "right." That's the only attitude I could see resulting in grief, based on the indonimatble Olly.
Olly's right about the lack of financial incentive to build smaller homes.
My solution is startling yet simple:
- sequester some or all of the DC's revenue stream for the TLA's in question
- use this to kick-start a Concision-style modular/SIP/flat-pack industry specifically to provide such houses
- contract via some appropriate Gubmint agency (Housing, CYPS) to buy and plonk down some fraction of the output of the factories, thus assuring the industry of a ready-made demand, from monies already Voted for this very purpose.
This achieves several worthy objectives:
- squeezes the economically clueless TLA's and puts the DC rort money to a proper purpose.
- Creates new, actual (as opposed to planned/virtual) houses/domiciles
- Creates an industry whose products have a far wider housing application once the cottage-craft builders are confined to the mansions they so evidently wish to build - a demand that will always be there.
Thanks Greg it is always great to hear what Olly has to say.....he has always provided a clear and concise view of the need for any investor to undertake due diligence and to not over-leverage themselves and ensure they have the appropriate structure for their investments.
Something has changed Bigdaddys opinion (oops... I mean Olly Newland).
What is it that you've learnt recently Olly which has had such a significant impact that you've made a complete turn around to suggest there will now be tears coming from over leveraged property investors?
Is it because the RBNZ is in the process of establishing additional investor controls which could lead to higher interest rates for property investors?
holy crap! Olly's turned bearish on property. But the bank just gave me pre-approval for a mil. What to do...? Some thoughts for and against.
The 7 year cycle doesnt apply, this time it really is different! Central banks have never ever been this painted into a corner at the zero lower bound. They're all lowering interest rates into the future as far as I can tell. Conclusion, buy property!
But what if a major bank like Deutschebank becomes insolvent, what if China introduces capital controls to reduce capital flight, that would destroy the Auckland housing market. No that wont happen. Central banks and governments will just create liquidity and stimulus, monetizing all bad debt until there's a currency collapse and hyperinflation. Conclusion buy property!
Minsys theory says that in the end-game even the skeptics get sucked in after years of watching assets rise and speculators get rich. Kinda makes me wonder, because I am the ultimate pessimistic permabear, and even I'm considering buying a crappy little 800-900 k unit.
haha, yes. after sitting on the sidelines for a few years, "surely it can't keep going up", i've also purchased.
but its for a place i'm going to live in, so my time horizon for selling is at least a decade if not more. not too worried if the market tanks in the next few years, more wanted to lock in a price that in 30 years will look cheap.
pretty silly what 900k bought me though (not much), but it's what i could afford if interest rates rocket to 10% for some unforeseen reason.
Yeah when the last of the bears turn into a bull thats when the market will change, as there are no more people to turn into bulls and provide demand, you get the seasaw all loaded up at one end, and slowly the first of the bulls (smart money) start jumping back the other way. In Auckland, people thinking about buying in next 5 years, were all forced to buy in the last 2 years for fear of missing out. Almost all regions other than Auckland the opposite is true where people have kept holding off and saving more and more seeing the media hype about flat/falling prices in their town... All these things have a season and change
Go and listen again to what Olly said.
The game changer is "deflation".
It makes no sense in a world where the price of everything is going down (deflation) while the price of housing is going up (inflation).
In most countries interest rates are at near zero and in many cases negative.
There is a titanic struggle going on to prevent deflation by encouraging people to spend.
Unfortunately just the opposite is happening.
People are becoming reluctant to spend today if tomorrow what they want to buy will be even cheaper still.
Now that was a good reply BigDaddy!
(I knew there was some wisdom in there somewhere...)
However the RBNZ imposing further costs on landlords is hardly going to help is it?
Also, if you accept the deflation argument then surely there is little chance of wage growth to support rental increases you mention?
Deflation was always coming IMHO.
Thats because we are in a new volitile, post peak oil world where the only way the Govns/RBs can stop our economy going toes up and into deflation due to too expensive energy is to print/QE.
I dont agree some Ppl are spending, but buying assets and not consuming. Those doing well or have access to cheap credit, hence assets are greatly over-valued, ditto shares, all it seems caused by QE.
The problem is these "assets" cant give a decent rate of return v risk. When that is seen and ppl exit the loss of capital will be immense I think.
Agreed. Only the precious metal pumping morons thought there was going to be inflation. With regards to stock prices - there really is only two major 'things' that influence them and that is interest rates and earnings. Companies in te DJIA have mostly enjoyed record earnings for a few years now.
Wage growth will be close to zero for most workers in the foreseeable future.
Instead wages will be increased by lowering living expenses.
For instance the halving of crude oil prices and the lowering of petrol prices at the pump plus the flow on effect is in fact a wage rise of hundreds if not thousands of dollars for every man women and child.
Record low interest rates have the same effect for borrowers.
That's how you give wage rises without giving wage rises.
Rents will continue to rise gently until they reach the point when it will be cheaper to own, which is some way off yet but will eventually arrive.
All the above depends on minimal interference in the market by the Reserve Bank.
If it does meddle then all bets are off .
Governments should in theory do everything they can to avoid deflation because deflation increases the burden of debt & unfunded liabilities. At the same time deflation increases peoples purchasing power in a way that's not taxable by governments.
Banks probably dont care about a bit of deflation as it increases the profit margin on their loan books. If people default however, then that's an instant transfer of wealth from creditor to debtor.
If all else fails then governments could resort to Bernanke / Steve Keen helicopter cash drops to create the desired inflation.
I'm just going to disagree about "everything". Everything is a rather large and open scale manipulation. Far better to monitor the cause and ease the market into a controlled fall than to fight until catestrophic collapse is only option.
And when tax (ie stealing other peoples' private property) or increasing interest (same) is seen as the major control lever then many more questions must be asked. Why is it happening? Can we keep peoples' wealth and redirect it to more benefical means without disempowering them? Encouragement and empowerment are far more useful and profitable than NZ's usual constant punitive approach.
If 'something' does happen that triggers the Aukland bubble to pop then the only tears that will be shed will be the ones from the savers and depositors with cash in the bank as their funds are used to 'bail-in' the banks (OBR). does anyone really think that the worlds central banks wouldn't do everything and anything they can to prevent deflation? Well they would and they will.
What hapened to the old Ollie? I liked his predictions better..
The RBNZ changes could produce completely unknown results. Either property prices will go down or they'll go up. In either case I'll hold my stock. Rents will almost certainly go up. It's like a conspiracy. The government sells off HNZ stock to let the private sector take care of housing lower income earners then the RB throws down a policy to increase rents!
All this talk of deflation is depressing. I guess the upside is no OBR risk for me. Apart from the few hundred dollars in my wallet I have no assets in cash. They won't ake my debt off me, surely.
We've almost been completely distracted from the major housing supply shortage in Auckland. What say you BidDaddy? What about that little issue in all this?
The median rent jumped 4.65% to $450 in Auckland City.
Looking at three-bedroom homes... They increased by... 12.64% to $597 in Auckland City.
Do you have any data on that frazz? Landlords will follow the market. I have tenants 6 months through a 12 month tenancy in Mt Eden. Once that term comes to an end the rent will be reviewed. For the next 6 months they are getting a great deal!
If an existing tenant isn't happy with market rent good luck to them finding another new place to rent below market.
Probably about 7%. They are a great young couple, never miss a payment and never give me an issue. If they move out I'll increase by 10%. If I have to re-rent I'll bet you a dollar I will have people lining up at the door. As you know Mt eden is a great place to live and prospective tenants always tell me it's hard to find really tidy rentals... as they fill in the tenancy application.
It's not about anecdotal evidence though is it. Let's look at the stats!
Thanks..sounds like yes you will have tenants at the door. However on trademe there are 46 1-2 Bedroom properties available to rent in Mt Eden. Average rent is $400 per week. To me thats a great selection and I dont see a shortage looming. Also I dont see eveidence of a sharp rent increases that you have quoted...?
Olly is a classic Sensing peronsality in MBTI terms. Great at perceiving what is right in front of him and cutting through the nonsense to see the facts. While things are business as usualy but you wouldn't want to rely on him to see a new paradigm. He will get caught with his pants down one day, just like he did badly once before.
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