Archive for December, 2011

As I predicted today’s OCR announcement was a non-event and it stayed the same at 2.50%. Also unsurprisingly Dr Bollard the Reserve Bank Governor said the European issues are weighing heavily on the global economy and there is very little upwards pressure on interest rates currently. This is great news for borrowers. Some property investors argue that we have amongst the very highest Official Cash Rate in the OECD, which is correct.  However this has been the toughest economic time in terms of growth of our economy since the Great Depression finished in the 1930s.

The majority of investors who are still floating their loans will be happy that they will have low interest rates, and fixed rates have been creeping down a bit too.  The recent upwards move in the ANZ Flexi (revolving credit) facility to be at 5.86% and BNZ’s TotalMoney (pooling and offsetting account) base rate to be at 5.75% have taken effect to a number of investors.  It may well be prudent to fix a little bit more debt for longer terms like 2 or 3 years when good rates come up.  I have just fixed some 3 year debt at 5.95%.  Great discounts from banks are available to purchasers of my quality ~250 page property investment master course which I launched today.

Taking the Mickey Out of Property Investment

I was interested to read an article on Interest.co.nz today with Bernard Hickey’s article entitled All Aboard the Property Rort by Devil S. Advocate. It starts off with:

There’s never been a better time to borrow up to the hilt and buy property.”

Whilst it is not a bad time to buy good property at present, there is little pressure for a house price boom in at least the next two years. Therefore a return towards the fundamentals and investing for positive cashflow is prudent, which may mean keeping realistic loan to value ratios when borrowing and look at ways to create positive cashflow.  I think buying property in 2000 – 2002 would arguably have been a better time to buy property, as this was just before the largest property boom in NZ’s history which lasted until late 2007, before a large reduction in house prices over 2008 and then the Global Financial Crisis hit and there has been a recession followed by a slow and stalling economy recovery with some extremely expensive earthquakes that have devastated the beautiful city of Christchurch and left our Government’s finances in poor condition with not much room to move.

The article went on to state reasons why property is a great asset:

Interest rates are at record lows and they’re about to go lower. Europe’s turmoil is brilliant because it will force central banks to cut interest rates. This means we can all afford to borrow more and pay higher prices. Banks are also desperate to lend again, even offering 95 per cent loans.

National has just won a second term and Prime Minister John Key will never do anything to hurt property-owners. During the past three years, he has argued against anything that would have a drastic effect on land or property prices. He is particularly reluctant to force the banks into fire sales of houses and farms in case it drives prices down.

He’s also doing very little to improve the supply of land. This has the effect of pushing up prices and creating tax-free capital gains.”

That of course is mainly correct as National unlike Labour this election appreciate the fact that home-owners, property investors and businesses using their homes as collateral or direct security for their businesses need to feel safe that their property prices will not collapse. That is part of the reason why National got a strong vote and Labour got one of their worst results in their proud 95 year history. Proposing a CGT was proven to be political suicide. We need to point out the factually incorrect part of Hickey’s assertion that John Key will never do anything to hurt property owners.  National slashed our depreciation expense claims by over $40/week per property according to the New Zealand Property Investors’ Federation studies that took effect on 1 April 2011 as announced on the 20 May 2010 budget by Bill English.

Safe as houses

The statement property is a great asset is of course correct.  This is not because of European turmoil, banks or the National party winning another election to confirm its place in Government for at least 3 years. It is because having a roof over your head is a basic human need. Even in the poorest countries in the world most people still have a roof over their head.

But do people in the poorest countries in the world own their own shares in listed companies, have mutual funds, have managed funds, bonds, have bank accounts let alone term deposits – NO, is of course the answer. They do not have insurance annuities, or simple term life insurance, critical trauma policies, health insurance or income protection insurance. They will not own silver, gold, platinum, or derivative products like weather bonds with the compensation linked to a certain pre-determined weather crisis happening! The have a shelter, nothing glamorous but shelter nonetheless. Food and water are there two other basic needs and they usually get just enough of this – but certainly not always sadly.

Everyone needs a home

So everyone needs shelter – a property that gives them a roof over their and their family’s heads. Shares, bonds, commodities, term deposits, managed funds, Kiwisaver, insurance annuities and policies and derivatives are nice – but you do not absolutely have to have them to survive. Yet you will most likely die in the heat of the Saharan summer without shelter or the cold and wet of a Laotian winter in the hills without shelter. You need a property to live.

The property market is insulated by the fact that:

• home-owners dominate it (around 65% of the market – and they don’t care about return on investment, discount to valuation etc)
• it takes a long time to market and then settle a property transaction (so losses take a while to come through, yet you can lose $100,000 in milli-seconds on the FX market for example)

There is money to be made in being an accommodation service provider. That is not a bad thing. If you are borrowing well over $200 million per week this financial year and have had a sovereign credit rating downgrade, then the last thing you want to do is borrow more money.  This is exactly what you would have to do to pay for more state houses.

History is on the side of property investors

I am not saying property investment is risk-free.  There are risks and some properties have gone down in value in the short and medium terms.  There are some rare example where people have lost a lot of money in property, but when they look back they made mistakes, eg. buying houses in areas suffering massive population decline, or buying a leasehold apartment towards the peak of the boom off the plan with a really high valuation figure attached to it.

However lets look at New Zealand property investment over history. My great-grandfather bought around 40 acres of beachfront land and rolling hills 98 years ago in Eastern Waiheke Island, Auckland for £13. Unfortunately the vast majority of it has been sold over generations, however it would have been worth around $13 million in today’s money. That is the power of long-term property investment. An older member of the Auckland Property Investors’ Association bought their first rental in Auckland’s North Shore 1968 and got $45/week in rents. 43 years later it rents out at over $530/week. The property market is cyclical.  But over longer terms (a great number of years) the property market grows, and over the longer term it grows extremely handsomely.

They slowly but surely bought a property every 3 – 5 years Investment in real estate has proven itself to be time and time again an amazing performer. Even after two world wars, the Great Depression of 1929, the Global Financial Crisis at its 2008 peak, the Napier Earthquake of 1931, the Christchurch earthquakes of 2010 and 2011 the property market has stood up well.  There are too many days to count on the sharemarket where falls in price were far greater than those of the Napier earthquake, and Christchurch earthquakes. Bernard Hickey suggested that John Key would do nothing to harm property-owners.

All Governments are good for property investors

However it is not just the National party that does well for property investors. The Labour party were at the helm in the years preceding and during the greatest property boom in our nations history from 2003 – 2007.  The policies Labour had with accommodation supplements, taking people off the domestic purposes benefit onto invalid’s benefits with a recategorisation and all the transfer payments from the Government to low income earners really helped solidify the rental payments and underpin cashflow returns for property investors. So there is no point in only blaming the National party.

My conclusion

You really can Invest and Prosper with Property in New Zealand if you focus on the smart and savvy strategies in today’s market.  You should not have all your eggs in one basket, but I firmly believe and in fact am living proof that in New Zealand, property investment really is the best basket.  I would dearly love our equity markets to get bigger and better, and to have a fraction of the success of Australia’s sharemarket.  I would love commodity trading, FX trading, derivatives to be less risky, and bonds and term deposits to give a better return. However the insulation that home-owners give to the property market combined with a lack of liquidity from much slower transaction times are what makes it a far safer place in the perception of the majority of New Zealanders.

With over $80 million of car thefts per year in New Zealand, we have a big problem with crime. One tool to help arrest this is the NZ Police’s new webpage: http://www.police.govt.nz/stolen/vehicles

You can enter the vehicle’s registration number, engine or chassis number or VIN and it will list whether the vehicle is reported as stolen or not.  If you are buying a second hand car, not from a licensed motor vehicle dealer (LMVD) you can help protect yourself by this very quick check.

An investment banker colleague of mine has just informed me that leading global credit ratings agency Standard and Poor’s (“S&P”) has just downgraded the credit ratings of our big four Australian banks and their new New Zealand subsidiaries by one notch from AA to AA-. This impacts ANZ and its sister bank National Bank, ASB, Westpac and BNZ.  S&P have cut Macquarie Bank’s rating by two notches to BBB.  However the impact is mitigated as S&P has undergone a ratings methodology change and downgraded virtually all banks around the world.

These seem big moves and could mean it costs a little bit more to fund our banks with a greater perceived risk meaning lenders to the banks will want a greater return.  This could push interest rates up slightly.  We will need to eagerly watch this.

S&P Ratings Methodology Change

S&P has cut these rating as part of its global review of bank ratings.  We have seen Belgium’s credit rating cut to AA this week by S&P, and the two other leading global ratings agencies Fitch and Moodys have been busy too.  Fitch cut Portugal’s debt to junk status and Moodys did the same for Hungary’s debt.  Greece’s debt has been junk for a while: >29% yields on their 10 year Government stock, but who wants to take on that level of risk to buy that!

The real issues in the Eurozone are not these smaller economies, but Spain and Italy that have over 7% yields on their 10 year Government stock implying a lot of risk from huge Government debt as a percentage of their country’s GDP.

OCR review next week

Our OCR gets reviewed next week and as I said in my interview to World TV two days ago, this is very likely to remain at 2.50%, however their is a reasonable chance it could be lowered to 2.25% and it is exceedingly improbable that the OCR would be raised!  I will blog on this on Thursday.