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Statistics NZ Population Projections to 2031

Statistics New Zealand have just released their population predictions out until 2031, 21 years away.  The nation’s economic hub Auckland, is projected to provide for 60% of our country’s population growth and number 1,940,000 people.  I am very excited by this as it doesn’t take a tax lawyer to work out that these nearly 2 million will need houses.  The 2006 census showed that Auckland had 1.37 million residents and Auckland is thought to have just over 1.4 million residents currently.  This means over the next 21 years Auckland will have 570,000 more people and need 211,000 more houses (assuming a 2.7 people per household ratio).  Around 2/3 of this increase is natural (from births exceeding deaths) and the remainder is from migration internally inside New Zealand to our country’s best city, or externally from overseas.  What a great time to be a property investor!

Consent issuance is already lagging in Auckland, some skilled tradespeople are going for better wages in Australia, where there is lower unemployment too.  However

North vs South Island

The population of the North Island is projected to increase by an average of 0.9 percent a year between 2006 and 2031, from 3.19 million to 4.00 million.  Seventy percent of this growth will be in the Auckland region with an increase of 1.4 percent a year.  The remainder of the North Island is projected to grow by an average of 0.5 percent a year during this period.  By 2031, the North Island is projected to be home to 78 percent of New Zealand’s population, compared with 76 percent in 2006.

Aging Population

Mortality

Enjoy the 20/20 Cricket versus Australia tonight and Sunday

HAPPY NEW DECADE

Wishing you all an extremely happy decade as we warmly welcome the “tens”.

Whether we call 2010, “twenty ten” or “two-thousand and ten”, it doesn’t matter.  What is important is that we step back and reflect over what happened last decade.  Did things in life happen around us, as if we were merely a passenger, or did we make things happen.

Lets commit to making 2010 a good year, and this decade to being an excellent one, where you right down some long term goals and work to achieving them.  If you need help in this regard, you should get a tried and tested mentor.

Contact me if you need help with goal setting and smart wealth creation (or maintenance) strategies for the coming decade.

My Highlights of the Noughties

Well another decade has come and gone.  It has been an interesting and fun one filled with highlights.  This is a log of highlights of the Noughties Decade where I name a few of them for me:

1. My Wedding to Bridget

A very happy day and special occassion.  I had been going out with Bridget since October 2000, and we got engaged in December 2005, so my March 2007 wedding was good timing.

As with so many people, it came and went so fast and to be brutally honest I can’t actually remember that much of it, apart from the fact it was a great day!

The honeymoon to the Yasawa Island’s in Fiji was amazing – thanks Dean Letfus for the recommendation to go to Nanuya Island Resort on Nanuya Lailai Island – home of the Blue Lagoon – yes the very place where the movie of the same name was filmed, where Brooke Shields became a household name.  We spent the rest of the time at the Sheraton on Denarau Island – super stuff.

2. My son being born

Well I didn’t know quite what to expect with my first child – I got told a lot.  Being squeamish I fainted once in hearing about the delivery process, but I managed to hold my nerve and was able to talk property investment with our midwife and specialist O&G surgeon that we had on the ‘case’ during delivery and numerous consultations and scans.  The result is one fantastic baby boy (now nearly 14 months old), Liam Whitburn, who can already run up our hallway with a full size rugby ball and trip up and score a try.  He likes eating food on our plates that he lunges for whilst we are eating, as well as soil and leaves from our garden too, so he’s a real omnivore!

3. NZ Property Market

The Property Boom of 2002 – 2007 was New Zealand’s biggest highlight for me.  This is where we saw several thousand millionaires made in our country.  Yes unfortunately 2008 and 2009 tail end the decade as badly as it began in 2000 and 2001 with negative equity recorded in the 2000 and 2008 calendar years.

I am a big statistics fan and researcher, even did a stats paper at Auckland University in 1997 as part of my BSc degree. As a result lets look back at the decade’s property prices in January of each year as laid out on my blog here.  We had a 109% increase in New Zealand overall in the period from January 2000 to November 2009.  That is pretty special, and we could easily see similar growth in this coming decade.

4. Hitting my goal and becoming a millionaire in my 20s

I wrote down a very aggressive goal when I was 24 – to become a millionaire before I hit 30.  The great news was that I did it!  In addition I turned 30 in time lock in my million before the downturn and reduce my loan to value ratio to safe levels.  Fortunately my portfolio was well presented and in good locations so I had tenants the whole way through the downturn, bar 17 days in one property, and the value I lost that year has more than come back.  It’s a great feeling to have hit my goals.

5. Sporting Highlights

There are just so many to choose from with the Silver Ferns win in 2003 Netball World Championships in Jamaica (beating Australia 47 – 45 in the final), the League Team winning the World Championships in Australia in 2008 (beating overwhelming favourites Australia 34 – 20 in the final) and on an individual note Scott Dixon’s Indy Car racing successes this decade including the title in 2008, Valerie Vili’s shotputting feats, Hamish Carter’s glorious Athens Olympic Gold and Nathan Astle’s 222 off 168 balls – still the fastest double century in international cricket (including 28 fours and 11 sixes).  Michael Campbell’s 2005 US Open victory at Pinehurst (by 2 shots over the legendary Tiger Woods) was a memorable success too.

However for my decade runner up I am choosing an obscure highlight of Andre Adams securing an impossible victory for Auckland over Northern Districts chasing 161 in the 20/20 game at Seddon Park, Hamilton on 28 January 2007.  Auckland needed 12 runs to win off the last ball – usually this would be thought impossible, but not for the big hitting uber talented Aucklander Andre Adams, and Graeme Aldridge bowling a waist high full toss (a no-ball) which was slammed for 4.  Then Auckland needed 6 off the last ball – surely he couldn’t achieve the dream…  However Aldridge’s bowling and Adams clean hitting ensured that defeat was snatched from the jaws of victory, as Adams absolutely pounded the ball for a big six over long off to guide Auckland to an amazing win.

The Decade Winner has to be the All Whites who qualified for the World Cup for the first time since 1982.  Despite Rory Fallon heading home the goal just before half time from an expertly taken Leo Bertos corner, and Mark Paston saving an amazing kick from the penalty spot, the whole team played like a bunch of heroes.  Well organised, structured and solid – can we mix it on the World Stage at the 2010 World Cup in South Africa.  We are drawn against Italy, Slovakia and Paraguay – can we be in the top 2 teams of this pool to qualify for the 2nd round?

As this decade rounds out I think that it is useful to show some numbers about what has happened in this past decade.  We haven’t quite completed December 2009 yet.  However the November 2009 statistics will not be too dissimilar.  Here’s the tables of nationwide median house prices this decade from the Real Estate Institute of New Zealand statistics:

The median house price has risen from 109% over the Noughties decade.  Interestingly sections went from $85,000 in January 2000 to a $175,000 median section sales price in November 2009.  This represents a 106% gain in section prices for the noughties decade.

My question for you – is what will the median house price be in December 2019 – could they double again to be $710,000?

Watch this space if you are serious about growing your wealth from investment property.  Whilst there is little or no pressure for a housing boom no, there are positive factors in certain areas of New Zealand, including increased dairy prices, increased net migration statistics, unemployment not being as bad as feared, and comparatively low short term interest rates.

Reserve Bank Governor Alan Bollard stated that “we have a hell of a long way to go” to have our economy recovering.  I set out all of the economic drivers that I like to follow and my comments on them below.  On balance and my nutshell summary is that the factors are pretty neutral to leaning towards minor house price growth at present.

Affordability continues to be an issue.  Investors geared at over 65% LVR with more than 2 houses are definitely not flavour of this month, however new immigrants with money, high income earners buying their first investment property or own house are highly desirable and the banks may even consider lending to these people at higher than 80% Loan to Value Ratio.  I have attended some of the Barfoot auctions this month and what I have observed is that property in the higher sought after Grammar zone (typically in Epsom, Parnell, Remuera and parts of Mt Eden) are going for big money and many of the buyers are Chinese.  Epsom is already one-third Chinese and with education being so vital in Asian culture, it has an amazing lure with its decile 10 glamour schools: Auckland Grammar School (Boys), Epsom Girls Grammar School, Epsom Normal Primary, Epsom Normal Intermediate, Cornwall Park Primary, Kohia Terrace School, and perhaps the country’s two finest girls private schools in St Cuthberts College and also Diocesan School for Girls are both in Epsom.  On the whole this is a neutral factor.

Interest Rates are an interest proposition with a steep yield curve at the moment.  We have typical floating rates depending on lender ranging from mid-high 5%s to mid 6%s.  However the 5 year fixed interest rates are well over 8%, the 2 year rate has gone up by 1% over the past 6 months to be around 6.7%.  One year rates remain very low at around 5.6%.  Comparing the one year rates now to those of 12 – 18 months ago is fascinating – they are around 3% cheaper!  With floating rates being typically 4% or more cheaper in the same period, it is much easier to service loans and other debt obligations.  This is helping the mindset of home owners and investors.  Finance is still hard to get though, so I view this as more of a neutral factor, and I see interest rates going up too.

Migration is increasing with August showing arrivals exceeding departures by 1,610.  For the 12 months to 31 August 2009, the net migration gain was 15,642.  Even better is that we are on track to exceed 20,000 for the calendar year to 31 December 2009.  This is particularly good news for the Auckland region that traditionally takes around 70% of immigrants into our country.   House prices typically go up with more migration, as this gives more demand for housing.

Supply/Demand Balance – this measure is an interesting one and is actually region specific.  Dwelling consents are still at very low levels.  With the natural growth rate increasing in New Zealand’s population, net migration increasing, the average household size staying much the same, we have a strong demand particularly in Auckland and Wellington.  Conversely the supply is not there with relatively few consents for new houses.  Strict council rules, length of time to get resource and building consents and of course the difficulties in obtaining finance from risk shy lenders, mean that supply is low.  We are likely to see demand outstrip supply for sometime yet.  This factor points to house prices moving up.

House sales & Building Consents – the number of house sales varies greatly across regions in the country.  In general there is an undersupply of listings, so the number of sales are lower than usual, but the houses are selling faster than usual.  The number of building consents remains very low.  These factors put pressures on house prices to go up.

Liquidity – this is an interesting factor as the growth in private sector credit relative to GDP is examined to assess the availability of credit in assisting the growth of the property market.  The credit growth is extremely low, and in light of Lehman Brothers collapse and the difficulties faced by AIG and a plethora of other leading financial and insurance institutions, lenders are still nervous and getting a loan is extremely difficult (compared with how much easier it was to get a loan in 2004 – 2007).

Global Financial Issues - the property markets in the USA, UK and Australia are recovering a little bit from the decimation and carnage that there was in the UK and USA, and Australia who not only ever had a recession, but they never had one single quarter of negative credit growth, is showing some signs of upward price movement.  These countries like New Zealand all have their own economic challenges and are faced with high level of debt, and have no overwhelming reasons or pressure for house prices to boom.  There are still difficulties and expenses in obtaining credit from offshore.  This is a negative factor still on New Zealand.

I believe that weighing all these factor together that NZ will achieve 4% house price growth in the year from 1 July 2009 – the 30 June 2010, with Auckland outstripping this largely on the back of northward drift to the ‘big-smoke’ and immigration to achieve 6 – 7% growth in this period.  Rents in the North Shore and Central Auckland to increase 3%, and in other areas to stagnate, with the exception of rents falling 1.0% in South Auckland and Papakura, as they have a higher percentage of unskilled (and unemployed) people than other areas of Auckland, and the dark hammer of unemployment hits unskilled workers harder.

Introduction

This month has been an interesting one with the market showing some signs of life, and strong demand and rent increases coming through in the desirable areas of the Auckland’s North Shore and Central and Eastern Beach suburbs (St Heliers, Kohimarama, Mission Bay & Orakei).  The house prices are climbing in Auckland, albeit on thin volumes.  The number of days to sell a house has improved too (down to just 30 days).

Fixed mortgage rates are continuing their ascent, but we now have extremely low floating interest rates.  I cover off what I think investors and borrowers should be doing later in this article, after something that is worrying me a bit at present: New Zealand’s debt.

Government Debt

Unemployment is continuing to rise and manufacturing firms and exporters (including tourism operators) continue to do it tough.  Whilst our economy is stabilising, we are not going to do an Iceland and have our sovereign nation bankrupted.

New Zealand is quite different to Iceland as whilst we have a lot of foreign debt, it is more of a hill, as opposed to the mountain that Iceland had.

If you look at New Zealand’s Financial Statements – as a registered company in the US (Company Number: 216105), we (NZ) have to file annual audited accounts, which are provided to the Securities and Exchange Commission, and stored here:  http://sec.gov/Archives/edgar/data/216105/000110465909016652/a09-7159_1ex99dd1.htm you will note that NZ has $31.9 billion of direct public debt (ie. Government debt) as at 30 June 2008.  Unfortunately this number is now rising and apparently the Government is overspending to the tune of $200 million per week.  That’s right, New Zealand is making a ‘loss’ of over $10 billion/year, and is forecasting to make losses until 2020.

Whilst some of you may not care, for our children and grandchildren’s sake I think we should care.  This is far too much.  We need to ramp down Government services and stop the overspending.  Obviously after several quarters of recession, the policies of the previous Government and the global financial crises, we have a greatly reduced tax take.  Surely the corollary of this must be to reduce expenditure.  Sure it may mean that we have to pay more in ACC premiums, more tolls on roads, to use our national parks, but doesn’t this beat having such high debt amounts to service.  Or does having such high debt not really matter.  There are some conspiracy theorists out there that say this doesn’t matter, the money system we have is a crock, and just a system of control designed to benefit very few.  They would tell you to watch Money as Debt:

Money as Debt

As for me I think the system isn’t that bad, and that increasing your financial and property knowledge is directly proportional to your financial and personal success.  What I am uncomfortable with is New Zealanders collectively owing $303.5 billion dollars.  Refer to the C3 Monetary and Credit Aggregate table shown by the Reserve Bank here:

http://www.rbnz.govt.nz/statistics/monfin/c3/data.html

This page is updated monthly with new statistics so you too can monitor New Zealand’s level of debt.

Property Market Drivers

The property market drivers that I rely on are:

1. Affordability
2. Interest rate levels
3. Migration
4. Supply/Demand balance
5. House Sales and Building Consents
6. Liquidity
7. Global Financial Issues

I will cover off each one next week in another blog though.

Members should take note that the Reserve Bank today (30 April 2009) reduced New Zealand’s Official Cash Rate (OCR) from 3.0% to 2.5%, with Reserve Bank Governor Alan Bollard commenting:
“Overall, developments since March point to lower medium-term inflation than previously projected. The main factors behind this are weaker global growth, and an unwarranted tightening in financial conditions via both higher long-term interest rates and a stronger exchange rate than expected.  Global financial markets have showed some tentative signs of stabilisation since the March Monetary Policy Statement and governments in the major economies are continuing to make progress in resolving their banking system difficulties. However, a large amount still needs to be done and sentiment remains fragile. Negative feedback from the global recession could also still adversely affect financial institutions. The world economy deteriorated further than expected in the first quarter of 2009. While monetary and fiscal policy responses in many countries have been substantial and there are some signs of stabilisation in some countries, we still expect the adverse economic forces generated by the crisis to remain dominant throughout 2009. The timing and extent of global recovery remain highly uncertain. While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak. Business sentiment is low, investment has been curtailed and employment reduced. We expect the large decline in the OCR over the past year to pass through to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing. This, together with the stimulus from fiscal policy, will act to support the New Zealand economy and eventually see activity trough and pick up thereafter. However, the scale of the global financial crisis and domestic adjustments underway are such that it is likely to be some time before economic activity returns to robust and healthy levels.

We consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters.”
We have seen numerous cuts since the OCR peak in this interest rate cycle at 8.25% where it stood for a year until 24 July 2008.  This year we have had 2% cut off it alone with the 12 March policy announcement being a 0.5% cut, and the January 29 policy announcement being an unprecedented 1.5% cut.  The encouraging words from Dr Bollard are that there are “more in the pipeline” indicates a far deeper recession than previously contemplated, so like other Central Banks in the world he will try to stimulate the our economy with lower interest rates for business and household lenders.  This will flow onto lower interest rates for investors.  Other Reserve Bank heavyweights Tim Hampton and John McDermott were also present answering questions with Dr Bollard.  Sometime they mentioned which is important to consider is that to be competitive in International Captial Markets we can’t be like the US Federal Reserve, Canadian Reserve Bank and Bank of England who have 0.5% of lower equivalents to the Official Cash Rate.  I am predicting at this early stage only a 0.25% cut in the OCR at the next 6 weekly policy announcement on 11 June 2009, which is also where the 3 monthly Monetary Policy Statement will be presented.

While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak. Business sentiment is low, investment has been curtailed and employment reduced. We expect the large decline in the OCR over the past year to pass through to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing. This, together with the stimulus from fiscal policy, will act to support the New Zealand economy and eventually see activity trough and pick up thereafter. However, the scale of the global financial crisis and domestic adjustments underway are such that it is likely to be some time before economic activity returns to robust and healthy levels.
Dr Bollard stated that “we consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters.”

We have seen numerous cuts since the OCR peak in this interest rate cycle at 8.25% where it stood for a year until 24 July 2008.  This year we have had 2% cut off it alone with the 12 March policy announcement being a 0.5% cut, and the January 29 policy announcement being an unprecedented 1.5% cut.  The encouraging words from Dr Bollard are that there are “more in the pipeline” indicates a far deeper recession than previously contemplated, so like other Central Banks in the world he will try to stimulate the our economy with lower interest rates for business and household lenders.  This will flow onto lower interest rates for investors.  Other Reserve Bank heavyweights Tim Hampton and John McDermott were also present answering questions with Dr Bollard.  Sometime they mentioned which is important to consider is that to be competitive in International Captial Markets we can’t be like the US Federal Reserve, Canadian Reserve Bank and Bank of England who have 0.5% of lower equivalents to the Official Cash Rate.  I am predicting at this early stage a final 0.25% cut to the OCR in this economic cycle at the next 6 weekly policy announcement on 11 June 2009, which is also when the 3 monthly Monetary Policy Statement will be presented.

Westpac have already slashed 0.4% off their 6 month rate, and I understand all major lenders are reviewing their interest rates today.  The effect of this announcement is likely to pull down the floating, 6 month, 1 year rates, and 2 year fixed term rates and perhaps a trimming to the 3 year rate, as Dr Bollard in an unusual move suggested that the rates would remain low until at least the end of next year.  This strongly implies for the next 18 months that rates will not rise from where they are now.  Expect to see more cuts to the short term fixed rates and floating rates from various lenders today!

What Should I Do About This?
I would encourage all members to review their current loan portfolio and to work out an interest rate and loan strategy with their brokers or bankers.  It will be interesting to watch good sites like http://www.goodreturns.co.nz/mortgage-rates.html to get up to date interest rates, and www.sorted.org.nz to see the reaction to the Reserve Bank’s move to state they expect interest rates to be low until the end of 2010.  This move was possibly learned from the Reserve Bank of Canada where they found a way to impact longer term fixed rates (which Dr Bollard is frustrated by them rising).  In an unorthodox move they stated that they would not raise the OCR until at least the 2nd quarter of 2010.  We have implied no rise in the OCR at least from current levels until the end of 2010.  Watch and hope for medium term interest rates to fall with this significant level of certainty.

Interest costs are typically the greatest expense for property investors, so I look forward to hearing from the Deputy Reserve Bank Governor Dr John McDermott at the Auckland Property Investors’ Association meeting in July this year.  It will be great to understand where various interest rates are heading and why.

Well there have certainly been a number of changes in the market recently, with the OCR having dropped from its peak in this economic cycle of 8.25%, down to just 3.00%, and I believe it will drop a little bit further.

Just remember that the OCR was put up to 8.25% on 26 July 2007, and stayed that high until 24 July 2008 where 0.25% was shaved off to lower the OCR to 8.00%, and every 6 weeks since then we have seen cuts, including the 1.0% cut on 23 October 2008, as well as the massive 1.5% cuts on the 4th of December 2008 and the 29th of January 2009. These cuts made Thursday’s 0.5% cut to 3.0%, seem like a bit of a let down.

Whilst I feel for term deposit savers, and pensioners that have a lot of their money in term deposits, we are a nation of net borrowers, not net savers.  Therefore lower interest rates are of benefit to the country.  Take note that our OCR is far cheaper than those in developed countries of the world like the UK, USA, Japan etc.  These changes to financial markets are interesting for us as property investors and/or home owners as our lender’s interest rates have come cannoning down.

Look at the current rates now and compare them with just 6 months ago.  I was paying over 10.5% as a floating rate in September and most fixed rates were pre-fixed with a 9.x%.  Now most rates are pre-fixed with a 6.x%, as well as several 5.x% rates too. The long term fixed rates look like outstanding value to me.  I think that with the US 5 year swap rate at cyclical lows, and the 5 year fixed interest rates at levels not seen for 6 years in New Zealand, that it is a great time to fix your buy and hold investment properties for a long time.  I am throwing my interest rate averaging schedules out the door, and I am fixing as much as possible for 5 years at 6.50%.

This is cheap money, and my business banking managers and brokers that I network with are saying that they are being inundated with requests to fix long.  This will also mean that you have to hurry up, as the supply/demand argument will kick in, and banks will be able to charge more for the certainty that this 5 year fixed rate will offer you.

Don’t miss the boat on this one – get some interest rate and cashflow certainty and fix long today.  Long term fixed rates will go up from here, not down on the most part.  For those lucky enough to be with BNZ, consider their 7 year 6.79%  (this is not a misprint, I do mean seven year) fixed interest rate.  That is rate certainty out until 2016 when the market should be well recovered and booming by then.  Note that if you are expecting an inheritance, redundancy payout or other lump sum, that you are best to keep a good portion of your borrowing on a floating rate or short-term fixed rate, to allow pay downs without incurring significant penalties.

We are well in truly into a recession now, and the property market is in its downturn phase of its cycle in all areas of New Zealand.  Tourism is feeling the pinch, as are many manufacturing firms and exporters, and the construction sector is taking a right hammering.  The number of section sales has plummeted from 709 in July 2007, to just 295 in July 2008.  The number of properties sold in July 2008 was 6,660 with a median sale price of $345,000, which dropped nearly by 50% in volume down to 4,489, with the median price retrenching to $340,000.

With interest rates still high and considerably above their corresponding 10 year average rates, and pressure for rising employment, and with business and consumer confidence down, there is little pressure for rents to increase and house prices to rise.  In fact the pressure is downwards.

US Subprime issue deepens

There have been some interesting developments with subprime mortgage lending in the United States. Subprime lending evolved with the realization of a demand in the marketplace for loans to high-risk borrowers with imperfect credit.  Many companies entered the market when the prime interest rate was low, and real interest became negative allowing modest subprime rates to flourish; negative interest rates are hand-outs, such that the more you borrow the more you earn.  Traditional lenders were more cautious and historically turned away potential borrowers with impaired or limited credit histories.  Statistically, approximately 25% of the population of the United States falls into this category.

In the third quarter of 2007, subprime Adjustable Rate (essentially like floating rate) Mortgages only represented 6.8% of the mortgages outstanding in the US, yet they represented a truly massive 43.0% of the foreclosures started.  Subprime fixed mortgages represented 6.3% of outstanding loans and 12.0% of the foreclosures started in the same period.

Beginning in late 2006, the US subprime mortgage industry entered what many observers have begun to refer to as a meltdown. A steep rise in the rate of subprime mortgage defaults and foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, most prominently New Century Financial Corporation, previously the nation’s second biggest subprime lender.  The failure of these companies has caused prices in the $6.5 trillion mortgage backed securities market to collapse, threatening broader impacts on the US housing market and economy as a whole.  The crisis is ongoing and has received considerable attention from the US media and from lawmakers during the first half of 2007.

However, the crisis has had far-reaching consequences across the world. Tranches of sub-prime debts were repackaged by banks and trading houses into attractive-looking investment vehicles and securities that were snapped up by banks, traders and hedge funds on the US, European and Asian markets. Thus when the crisis hit the subprime mortgage industry, those who bought into the market suddenly found their investments near-valueless – or impossible to accurately value. Being unable to accurately assess the value of an asset leads to uncertainty. With market uncertainty, banks reined in their lending to each other and to business, leading to rising interest rates and difficulty in maintaining credit lines. As a result, ordinary, run-of-the-mill and healthy businesses across the world with no direct connection whatsoever to US sub-prime suddenly started facing difficulties or even folding due to the banks’ unwillingness to budge on credit lines.

Observers of the meltdown have cast blame widely. Some have highlighted the practices of subprime lenders and the lack of effective government oversight. Others have charged mortgage brokers with steering borrowers to unaffordable loans, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the underlying loans. Borrowers have also been criticized for entering into loan agreements they could not meet.

Many accounts of the crisis also highlight the role of falling home prices since 2005. As housing prices rose from 2000 to 2005, borrowers having difficulty meeting their payments were still building equity, thus making it easier for them to refinance or sell their homes. But as home prices have weakened in many parts of the country, these strategies have become less available to subprime borrowers.

Several industry experts have suggested that the crisis may soon worsen. Lewis Ranieri, formerly of Salomon Brothers, considered one of the inventors of the mortgage-backed securities market in the 1970s and 1980s, warned of the future impact of mortgage defaults: “This is the leading edge of the storm. … If you think this is bad, imagine what it’s going to be like in the middle of the crisis.” Echoing these concerns, consumer rights attorney Irv Ackelsberg predicted in testimony to the US Senate Banking Committee that five million foreclosures may occur over the next several years as interest rates on subprime mortgages issued in 2004 and 2005 reset from the initial, lower, fixed rate to the higher, floating adjustable rate or “adjustable rate mortgage”.  Now there is nothing new about securitising mortgages – I was exposed to this as a commercial law solicitor when I worked at leading NZ law firm Russell McVeagh – our banks and credit card companies do this too.

Some economists, including legendary free-marketeer and former Federal Reserve Board chairman Alan Greenspan in March 2007, expected subprime-mortgage defaults to cause problems for the economy, especially so if US home prices fell dramatically.

In late March 2008, massive Real Estate Investment Trust (REIT), Friedman Billings Ramsey, reported the default rate on securitized subprime loans hit 25.2% in December 2007. (The default rate includes loans 90 days or more past due, in foreclosure, and real estate owned.)

Conclusion

As for what this means for us – watch out.  House prices have been dropping since November 2007 and there is more coming with the subprime debacle meaning it will be harder to raise finance offshore.  Since NZ spends more than it saves (like so many other ‘western’ countries) we need to borrow from abroad.  Debt has fueled NZ and clearly US house price growth for much of the past decade.  Now it is pay back time and balance is getting restored.  I just hope their is not too much collateral damage along the way.

Through my Vice Presidency of APIA, as well as being a property mentor and well networked in property investment circles, I know that there are may investors that have bought what turns out to be massively overpriced sections and apartments that they bought off the plans in NZ and Australia who have settlements due or due shortly that are about to face default or financial ruin.  There is some carnage ahead.  For those with good equity resources, keep it that way and enter the market to cherry pick the bargains that make the difference in your portfolio, that are well below value and provide a sound cashflow for your portfolio.

Sources: Real Estate Institute of New Zealand, ANZ National Bank, BNZ, Wikipedia, Professor Niall Ferguson.

I haven’t blogged in a while but I have been thinking and networking a lot lately. I do a bit of public speaking particularly within the Auckland Property Investor association local groups and also around the country (next stop Northland Property Investors’ Association in Whangarei on Wednesday 28^th May). So I am meeting and talking to many hundreds of people, and most of them I speak too are very worried about the market.

I want to help explain a few things about where we are at in this market and give some insights as to how you can succeed in this down market.

Firstly success in this market comes in many different forms. For some it is buying a lot of heavily discounted property, for other it is keeping their portfolio intact, and for other investors it may simply be them able to sleep at night.

Where is our market at?

Property values are declining at the moment, the number of days to sell has gone up, building consents have gone down, Interest rates are high, NZ banks are tightening credit criteria and many major media sources are slamming property at the moment.

We also have a high foreign exchange rate, comparatively low levels of immigration, an offshore meltdown (sub prime market collapse in the USA), International banks tightening credit, and high oil prices.

Many factors are not pretty right at the moment. But does that mean we should panic sell what we have got and get out of the market now? For the vast majority of people, the answer is no.

Holding property long term is a fantastic way to get ahead. What were houses in your area worth 10 years ago, 20 years ago, 30 years ago. I have told you the story last year of my grandparents house in a subdivided farm in Kohimarama, in the central-eastern suburbs of Auckland. It was bought for $2,000 pounds in 1955 and is now worth over $2 million dollars. Looking back at Residential property Investor Magazine adverts and market Data from 1999, I see the median house price for Mt Eden and Epsom was $365,000. You all know this, but I constantly have to remind people – property always goes up in the long term.

Trading properties and timing the cycles is a property investing strategy but it should not be your main or only one. I believe that holding property long term is the way to wealth, and then use complimentary strategies like property development and trading and its derivatives (lease options, sandwich Lease Options, deriving finders’ fees etc) to compound your returns.

Now the market doesn’t always generate solid capital growth every year. We have been conditioned to expect that over the past few years though. Unfortunately too many of us have short memories. Property can go down temporarily. This graph below shows the annual percent change in New Zealand’s house prices from 1990 – 2007 in blue, with the total value of all New Zealand housing in red (yes all $600 billion worth).

The blue line shows we had negative growth in 1991, 1998, 2000, and we are highly likely to see negative property growth in 2008 too.

As you can see property values usually go up hence why the lines is usually over 0%. The periods of over 10% capital growth (upturns), eg in 1994-96, 2003-2007 show that.

What do I do then?

Get a thick skin. Become a Rhinoceros. Don’t let various media commentators get you down. I see so many glum faces out there. Cheer up! Don’t sell if you don’t have to.

It is the time to review rents, raise them if they are below market levels. If cashflow is tight change your Mortgage to an Interest only one rather than principal and Interest.

We are experiencing a property market downturn. But as sure as the sun will still rise tomorrow, there will be a property market upturn after this slump. With the baby boomers retiring and various economic factors changing (higher net migration into NZ, lower Interest rates, wage rises, rent rises etc) we will be in for a massive boom.

This is the time to steady the ship, maybe pick up absolute bargains, remove any clutter in your portfolio to fine tune it and get yourself in the absolute best position ready when the upturn starts so you can purchase a lot of property.

Realise that good times occur and bad times occur in any given market. Don’t blame the government, yourself, your neighbour, your tenant. It is not about blame, it is about what you can do to be the best you can be. Study the market, go along to your local property investor association meetings, read blogs, to investment events and educate yourself. Listen to all the speakers and make decisions based on facts and information.

Some of the very best investors I know are counter-cyclical, they invest in down markets, and quieten down in up markets, merely holding and watching their wealth accelerate rapidly. So my challenge to you is instead of being worried about the market, learn to understand the market and let it run its natural course. Take some short term pain, for medium and long term gain.

A powerful Warren Buffett quote comes to mind (thanks to www.about.com):

“Be fearful when others are greedy and greedy only when others are fearful.”

We have a down market at the moment, we can panic and sell everything and join in the negativity on property, or we can learn more about the market to understand it, and use this information to make sensible business decisions.

My question for you to ponder is:

What do you want to hold when this down market ends?

The New Zealand property market is in for challenging times over the next little while.  Whilst most investors I talk with believe the boom is over, there are still a few holding on to the hope that this boom will continue.  Whilst I don’t like shattering people’s dreams, I do like to share my well considered opinions.  The boom is over because the economic statistics tell us so, and we know that the property market is cyclical.  Sure we have some pain to go through, and those over leveraged investors are best to reduce debt asap (which may include selling properties now).  Properties values are heading downwards. I think that 2008 will eventually turn out like 1998 and be a negative equity year.

Statistics

Here are some of the facts. The REINZ nationwide median sale price in November 2007 (the peak of the cycle) was $352,000 (on 7,837 and $3.28 billion of sales).  In January 2008 despite the great weather that this month virtually always provides, we have the REINZ nationwide median sale price as being $340,000.  This is a considerable decline when paired with the REINZ reported 32.1% decline in the volume of sales in the latest quarter.  Auckland’s largest Real Estate Firm Barfoot and Thompson said that last month (January 2008) was their worst January since 2001.  They sold 604 dwellings which was a decrease from a year earlier by an appalling 42%. The average sale price fell to $518,000 from $559,000 in December.

Immigration numbers are nowhere near as strong as they used to be and currently are on track to be just half of what the 10 year average migration rate has been.  Interest rates are extremely high and well ahead of the weighted (across floating, 1, 2, 3, 4, 5 year fixed terms) 10 year average interest rate of 8.0%.  Floating interest rates are around 10.75%, and the various fixed rates are high too (typically 8.8 – 9.6%).

American Market

There is strong evidence that the American Housing market is under severe pressure with subprime (low doc, no doc) lending that often had low introductory rates resetting onto standard rates.  Loans of $400,000 where the applicant on a single income could self declare their income (to a level their mortgage broker told them would get them their house) or not have to declare their income would often have an interest rate of 4% for a couple of years.  This in itself was usually fine to service, but now the introductory periods are coming up and the interest rates are falling between 7.5% and 12%, and many tens of thousands of buyers cannot keep up with their commitments.  Just as to how far the ripple effect will reach is an interesting question – we will have to watch eagerly.

The issue is the huge amount of debt injected into the housing market – this empire of debt America has, causes me concern, as I think it is unsustainable and reckless lending.  But then again I may be being overly conservative.  Watch this space over the coming year.

Now is not the time to go out and buy lots and lots of properties – the market will go down in value.  The boom is over and there is going to be little pressure on prices to go upwards for a while.  Businesses will hurt more and more and unemployment will head far higher over the course of the year – particularly in unskilled jobs, and in the construction sector.