David Whitburn

Posts Tagged ‘property downturn’

The volume of house sales is very slow and this has characterised the last 3 downturns.  I have been to 6 auctions and looked at over 30 properties this week which in itself is not very interesting and is particularly normal for me.  However what I am surprised about is the level of enthusiasm from some auctioneers and real estate agents in the past week, who tell me that the market is about to boom with the Rugby World Cup on and all this immigration. On looking at the statistics and being in the market I have to introduce a small dose of reality, to inform that we are not going to see a boom in New Zealand anytime soon.  I don’t see it beginning in the next two years either.  The previous property cycles that I have studied have shown that in the downturn phase the volumes of sales are very slow.  Where are the Mitre10 dream home and DIY rescue style programmes?  Look at this in terms of the median line from the annual statistics are from REINZ as graphed above.  Clearly volumes drive values and with low volumes in 1998, 2000, 2008 and 2010 we saw negative equity years as regards property prices.

In my opinion we are technically in a double dip recession and this is more clearly seen if you back out the affects of inflation which is running high now with food price rises, petrol over $2/Litre at the pump again, tobacco and alcohol price rises, and of course the impact of the 2.5% GST rise.  Yet the nominal (inflation adjusted) house prices don’t get reported by Quotable or REINZ sadly.  Back out inflation and house prices are going down and are over 10% below their November 2007 peak.

Does that mean it is doom and gloom and you can’t make money out of property? No – I like my mentoring students and property investor friends are able to get great deals well below true value and in many cases with the ability to buy below value right now.  Recently my sister and soon to be brother-in-law bought their home in One Tree Hill around 10% below value.  There are investors selling thanks to tax changes, media doom and gloom headlines, fear and lack of understanding of the market and the property cycle.

Which market are you looking at?

So it is important to remember what market you are looking at.  Is it New Zealand?  Is it Auckland?  Is it Epsom, Remuera and Parnell near Auckland’s CBD?  Is it Papakura and Takanini?  Is it small Waikato and Bay of Plenty Towns?  Is is Christchurch houses within 5km of the CBD?  We have a number of sub-markets in New Zealand and some are feeling the pinch a lot more than others, and some (eg. the Epsom, Remuera and Parnell) are selling well in excess of CV and having massive rental rises and give the appearance of being in a more advanced phase of the cycle and in a recovery.  Yet friends with a house in Taupo haven’t been able to sell it for over 12 months and will sell it under CV…  Unfortunately statistics tend to generalise though, which is the same in stockmarkets, as some stocks are performing extremely well, and other are really struggling.

Auction strategy 4 (low opening and irregular bidding pattern)

I opened an Unlimited Potential (“UP”) auction up by bidding on a property being auctioned in Sandringham at $100,000.  That low initial bid in itself isn’t a crime! It is a little bit low on a property with CV of $440,000 and my tools and research indicating that houses within a 500 metre radius of it selling in the past 12 month at 12.62% above CV on average. However when he questioned the bid I followed up that with the supporting fact that it is a double dip recession.  I wasn’t trying to throw the auctioneer (Mark Sumich) off his stride, I wanted to outline the case for my bid to get him to accept it as I wanted that property to convert into a 3 bedroom under the same roof line to transform and add significant value to what wasn’t a fabulous renovation or layout.  I then used my auction strategy four of bidding assertively with irregular increments ranging from $200 (not accepted) so bumped up to $250 – $10,000, including some increments of $300, $1650 and $800.  On chatting to a UP agent he said my bidding pattern was irregular yet sophisticated and through off his buyer as they were not up with the play being pretty new to auctions.  Unfortunately I didn’t win this well located property as it exceeded my maximum bid, as I was up against two home-owner who don’t need to buy properties tens of thousands of dollars below true value.

At Barfoot and Thompson’s Chancery CBD HQ, the loquacious Marian Tolich stated “it always a good time to buy property” and then followed it up with a very emotional statement in “you can never pay too much for a good property” while engaging both a middle eastern looking and chinese buyer for a nicely done up 3 bedroom home in Epsom (so it obviously has the extremely coveted Auckland Boys Grammar and Epsom Girls Grammar dual zones).  The battle of egos ensued and the price paid was nearly $100,000 higher than the Vendor’s reserve (when it was “on the market”) and if my memory serves me right over $250,000 over CV.  The Epsom Vendors did very well indeed.  Yet other properties in the suburbs further out from the CBD had far less attention and didn’t meet vendor’s reserve, necessitating lots of offer crunching to make a deal happen.

REINZ House Price Index

Just a quick one to respond to two reader’s emails after my Quarterly Market Update seminar on Tuesday – here’s a statistic from REINZ mentoring students of mine have asked about.  It is the REINZ House Price Index.  I like REINZ and their work and the many fantastic agents we have in NZ, but I don’t rate this index as highly as the Quotable Value Quarterly House Price Index and nor does the Dr John McDermott (former Chief Economist of National Bank and a current Deputy Governor of the Reserve Bank).  Yes the market was low in January 2009 and that shows well, but it doesn’t show the 2010 mini dip very well at all, whereas the QV one does.

The take home message is that the market is a confusingly large one and there are many sub-markets.  Rents are skyrocketing in inner suburbs and eastern beaches (Kohi, Mission Bay etc) of Auckland and well located areas of the North Shore (eg. eastern beach suburbs) – more on that later.  There are opportunities in this market.  Ensure you buy below value and renovate to add value.

Property Masterclass

If you want to know more on how you can do this come along to Property Masterclass on Saturday 19th and Sunday 20th of March.  I will be presenting for 2 days on relevant market conditions, strategies and techniques to succeed in this environment, as well as covering off property investment basics for those contemplating investing.  Hope to see you there!

Before I jump into my next blog on New Zealand house prices, we have scored a remarkable 1-1 draw against Slovakia.  The highlight for me was the perfect Shane Smeltz cross and then a powerful Winston Reid header to score this vital goal in the World Cup, which meant that the mighty All Whites claimed New Zealand’s first ever FIFA tournament point.  I’m supporting our country in the football World Cup, and know most readers will be doing so too.  Our next game is at 2:00am Monday 21 June against Italy – thank goodness for replays and MySky.

Now it’s time to review what the market has been doing recently.  Here are the latest house prices to May 31 as reported by the Government Valuation agency, Quotable Value.  Over the past 12 months from 1 June 2009 to 31 May 2010, New Zealand’s average house sale price has gone up by 5.6% to $403,070.  This is an interesting statistic as it shows a decline in the rate of annual change, meaning last month nationwide house prices fell.

It was the first decline in the annual change since March 2009, since the rate of annual change was 6.1% to in the 12 months to April 30th.  Nationally, values are now 4.1% below the market peak of late 2007, which is also down from the 3.9% reported from the 30 April 2010 statistics.

Regional Breakdown

My prediction is for a cold winter both temperature wise and house price wise.  The Reserve Bank is raising the OCR which will cause interest rates to eventually rise relatively sharply, and credit criteria with our lenders is very tough, especially when compared to the prevailing conditions of late 2003 – early 2007.  There is a lot of fear and uncertainty around still in light of the continuing global financial crisis, particularly in light of Greece being downgraded to ‘junk bond’ status and fears of defaults by large banks and countries in the Euro zone.

Where are we in the Property Cycle?

I would note that we are in the downturn phase of the property cycle, and there is still much more time to go.  Property market researcher Kieran Trass and Author of Grow Rich with the Property Cycle (whom I worked with and got a lot of advanced property investment mentoring from, in 2003 – 2004), showed me research that every property slump or downturn, laster longer than the boom immediately preceeding it.  Leading economists from ANZ National Bank Ltd – Khoon Goh and Chief Economist Cameron Bagrie have written and spoken in the past comparing the events of the last 15-20 years, including the last two property cycles.  They have predicted this downturn to last for several more quarters.  I am picking the recovery to begin in late 2012, and currently I predict that the next boom will begin in late 2013.

This will happen on the back of house prices reducing very gradually across the country over the next part of the year. Then wage inflation will help, combined with increased immigration (and indeed internal migration will continue to help Auckland), easing bank credit criteria once the global financial crisis is over, simple supply and demand with the under-building of houses (especially in Auckland where the majority of immigration is to), affordability easing in slight of slightly lower house prices & increasingly higher wages, and higher rents.