Money Matters | Unconditional | What is really going on in real estate online

Archive for the ‘Money Matters’ Category

Are property prices going to rise or fall?

Posted on: March 24th, 2010 | Filed in Buying / Selling a home, Featured, Money Matters

This is the question…..are property prices going to rise or fall?

It is the question that everyone seems to want to know – and rightly so, given the extent of investment savings NZ’ers have tied up in real estate. I am not going to make any judgment here about the rights and wrongs of that. Nor am I going to make any predictions as to where property prices are going in the next week, month or year.

If you are about to click the back browser button – thinking that I have mislead you with this title, then please wait a moment to hear the rationale.

I heard a quote a year or so ago from a credible and respected economist. He stated that there were many expectations put on him to make predictions and foreshadow future trends with all kinds of economic indicators. At the end of the day the one he was most reluctant to make a prediction on though was the property market and especially the future price of houses. I took away from that quote a very clear view that if an economist who has (a) far greater access to a far greater set of data than I do, and (b) is far better positioned to make such extrapolations due to focus and extensive financial career experience is not prepared to make such predictions – then I am certainly not going to.

However to provide some helpful insight to current property owners and aspiring property buyers and investors, I would recommend a read of this great article from the New York Times of last week titled “Great time to buy (famous last words)“. It does offer as would be expected an economists view of the 3 macroeconomic drivers of property prices: Affordability (median price to median income); Alternative options (rent vs buy) and Asset Appreciation (Asset value of housing stock to GDP). Interestingly a recent guest article on Interest.co.nz covered these metrics for NZ by Philip O’Connor who is a Senior Lecturer in finance at the University of Auckland’s Department of Accounting and Finance.

Whilst the article from the NY Times speaks to the US property market – the relevancy of a comment within it from Glen Kelman, the CEO of online real estate company Redfin is the blinding flash of inspiration in his statement:

“Instead of betting on home prices, you make a bet on whether money will become cheaper or more expensive, allowing you to buy more or less house”.

I have often read and from personal experience believed in the principle of buying a family home based on personal affordability. The key question is, or should be: “based on my current earnings and future prospects, can I afford the mortgage repayments assuming future interest rates?” This is the question that is far more important than the question of what will happen to house prices in the next week, month or year.

For the majority of property buyers in NZ the decision is a major commitment, one they will likely make only a few times in their lives. Given the average occupancy of a home owner in any one property is 7 years, the most important question is personal affordability. A repayment mortgage is a great savings vehicle and as long as property prices keep close to long term inflation then at the end of the period of ownership most people will benefit in owning more of their home as an asset than they owe their lender. To try and play the market in terms of future property pricing is the same as trying to play the stock market on a daily basis.

As to the question of future interest rates. I am not going to offer any personal opinion, again there are more qualified people to offer advice – Interest.co.nz provides a rich source of data and comment and John Bolton at Squirrel has recently written a view on 2010 mortgage rates on his blog

Asking price expectations : market impact or regulatory impact

Posted on: January 22nd, 2010 | Filed in Buying / Selling a home, Money Matters, Other interesting reads:

The December NZ Property Report featured here on Unconditional on New Year’s day highlighted that between November and December the asking price expectation of properties in NZ fell by 1.7% to $412,319. This fall had come off the back of a couple of stable months of price expectation.

At the time of writing that report, the assumption behind this decline in asking price was that the market was adjusting prices as a result of somewhat flat demand. This fall in demand was being seen in the much softer sales volumes through the last quarter of the year.

However another explanation for this decline was brought to my attention by Steve Taylor an agent in Christchurch who is a regular writer of a local real estate blog – Doctor’n the House.

His recent post “Why has asking price gone down?” highlighted the fact that with the commencement of the new legislation (Real Estate Agents Act 2008) real estate licensed sales people now have a legal obligation to provide a written appraisal for every house they propose to list on behalf of the owner. This appraisal needs to include an estimated market price of the property.

Whilst this change is in itself not vastly different from prior practices whereby a price level would have been discussed between agent and vendor – the view which Steve highlights and I tend to agree with is that this universal requirement is potentially driving a more accountable responsibility on the part of the sales agent to market the property at a price which is judged to be the market price.

Clearly the enactment of this requirement of the new Act has only been in operation for 8 weeks so it will be very interesting to see the coming months for signs of the movement in asking price of properties coming onto the market.

Real life example of mortgagee sale

Posted on: November 24th, 2009 | Filed in Buying / Selling a home, Money Matters

I found this article from the NZ Herald very interesting in the representation of how a mortgagee sale eventuates and the experiences of the former homeowner.

The article cites the former owner as complaining that her agent wrongly advertised her property – specifically advertising it as a two bedroom apartment as opposed to a three and also identified it as being on a different floor than was the fact.

As to the issue of the accuracy of the advertising, I do not wish to comment, as the facts are not a part of this discussion. The key point of interest though is the exposure of the fact that in such a case (as with most such cases) the former owner has so little decision making role in the process of a mortgagee sale, although of course they hold a significant financial interest and consequential liability. In this case the former owner is proposing to sue the bank for damages as a consequence of the sale proceeds being less than the outstanding mortgage.

The reality is that in taking out a mortgage to buy a property the prospective owner is liable to the lender for the total outstanding borrowed sum throughout the term of the loan irrespective of the situation in the market. That is to say if you borrow $250,000 to buy a $300,000 property you are liable to the outstanding amount of the loan regardless of the value or sale price of the property at any time during which the lender is registered as the first mortgage on the property.

If as is often the case with a prospective mortgagee sale; circumstances tend to start when the borrower fails to meet the repayment obligations. The first situation which will probably arise is that the lender will try and communicate with the borrower to find out the circumstances of why the repayments have not been made. In most cases lenders are really keen to work with the borrower to assist them to continue to meet the repayments. It is worth noting that in most cases the lender has no desire to take over ownership of a property – they are far keener to continue to have the borrower owning the property and paying the loan – this is in the long-term interest of the lender.

If due to the specific circumstances the borrower cannot meet the repayments and the borrower cannot sell the property for whatever reason to repay the loan then the lender tends to see the only solution left open to them being a mortgagee sale.

Once the lender has instigated the legal proceedings to undertake a mortgagee sale then the borrower ceases to have influence in the outcome. So in this hypothetical example if the property had fallen in value to say $250,000 and the outstanding loan had risen to $260,00o (as a consequence of outstanding loan repayments or example) then the lender will try and sell the property as speedily and as efficiently to recover as much of the outstanding amount as possible.

In a mortgagee sale the original owner has no say in the sale price agreement – that is now the decision of the lender, as it is the lender that has taken over primary interest in the property and is seeking the most favourable outcome to secure their liability.

So again in this situation if the property is marketed (the control of which lies with the lender, not the owner) and is sold in an auction or other form of sale for say $240,000 then the property owner (now the former owner) will be liable for the shortfall. Within this calculation of shortfall must be considered the costs associated with marketing and selling the property including agent fees, as well as any other fees which the lender judges appropriate as is defined in a lending agreement.

So in this example the sale of the property is agreed between the lender and the new buyer of the property at $240,000. This sale price would have a hypothetical real estate agent fee of say 3% ($7,200 + GST) plus say $500 + GST of marketing costs (advert online or print). These costs would be judged as reasonable and have to be recovered by the lender. So the original owner of the property ends up with a liability to the lender of $20,000 (the balance between the sale price and the outstanding loan) together with a further $8,662.50.

This calculation and example are purely hypothetical it is not meant to represent a true example or to be taken as a normal situation – the example is provided purely to show what can be the true liability in taking out a loan on a property and recognizing the risks and liability that a borrowers signs up to when committing to a mortgage.

Disclaimer: This post is not intended to be taken as advice, it is provided so as to assist in understanding some of the implications of mortgages. I am not a lawyer, financial advisor or real estate agent. The comments and observations are drawn from reading and discussions on the subject matter over many years. As with any transaction of land and property, legal and financial advice from suitably qualified persons is always a wise move.

Building your investing skills – fast, fun and so real!

Posted on: November 20th, 2009 | Filed in Money Matters, The lighter side

The Investment Game I am sure like me there are many times when you hear about the results of an investment proposal after it has grown in value or fallen in value and you wished there was a way you could have experienced the risk and challenges of the investment market without risking your home and livelihood.

Well there is now a game, which having played it recently I can say is as close to real investing as you can possibly get. The Investment Game developed locally by Frank Newman brings out the real competitive characteristics often not seen since the last time you played Monopoly.

However the comparison of this game to Monopoly really starts and ends with the fact that it uses virtual money and is played on a board – this game is vastly different and far more challenging and engaging.

The game is certainly not for kids and the word game is only true as in there is a winner who at the end of the allotted time has the greatest wealth – pretty simple, but wait to see how the game operates. The game is played on a table with the ubiquitous board, player pieces and dice – however without a PC on hand this game goes nowhere – this game comes to life around the virtualisation of a marketplace defined by a share market, a property market and the financial market.

Everyone starts with identical wealth and selects their investment strategy – combination of shares, property, education and derivatives. Set against this chosen path the players face the changes and trends in the market which as perfectly life-like, especially as they are based on real data of market movements of the past 20 years.

This is as the profile and feedback says more of an education that a pure game, however it does not lack that aggressive and at times manic pace of ambition which pervades any good team game. This game is fun and having played it with the team at realestate.co.nz the other week – we collectively decided we want to play it again, a 90 minutes game certainly didn’t feel like we did justice to it, so I suspect we will have a re-match very soon.

The game is 100% kiwi owned and developed and with the support of key sponsors (full disclosure here Realestate.co.nz is a sponsor) this excellent game is available in stores or by online ordering which Frank Newman has set up through this link. The game costs $149.95 plus $10 post and packaging within NZ.

This game would make a great Christmas present or client gift – it has been rated as the best new game of the year by the NZ Games Association.

The issue with property pricing

Posted on: November 9th, 2009 | Filed in Agent Tips, Money Matters

istock_000005764971xsmall Whilst the last 2 years has been heavily focused on the issue of property prices from the perspective of valuations – have they peaked?…. will they fall?….. will they collapse? or are they rising??

The current trend seems to be clear now with both the recent REINZ and QV stats showing strengthening prices.

The real issue facing the real estate industry is how to appropriately price a house when listing it on the market. If you wanted to sell a 4 year old low mileage European car or a second hand washing machine, all you need to do is let your mouse do the researching and see what similar age / condition items are selling for. Not so when it comes to a house.

Houses are not commodity items that are replicable en-masse or even frequently transacted, as the saying goes, every house is unique and every house has a value to someone – more often than not far in excess of what someone else might pay.

With this as a backdrop you can see the challenge this industry faces in judging an appropriate price to market a property. Such difficulty has in some occurrences lead to what I discovered the other day is termed ‘bait pricing’. This system which is well documented by Carl Slade on his Timaru Homes blog is clearly not to be condoned by anyone in the industry as it is clearly misleading or deceptive.

It would have to be the biggest source of emails received by our office from the public using the website and wondering firstly why every property cannot be listed with an asking price and secondly why ‘we’ seem to be deceptive in featuring properties in price range searches where clearly they are not!

The first of these issues is something that I cannot speak for on behalf of the industry. Unlike with consumer goods a recommended retail price is what you pay, but when it comes to property the price paid is always the result of the agreement of a willing buyer and a willing seller; that final agreed price may or may not bear any relevance to the advertised price.

So turning to the second issue of searching by price. We receive data concerning a property listing from individual offices every day – often up to 1,000 listings per day. We cannot and should not alter the data we are given – we do not know anything about the property in question nor do we own that data in terms of accuracy or completeness. This does not imply that we do not take seriously our role to ensure accuracy and completeness, it just recognises how we operate.

When it comes to pricing a listing we insist that each property has a display price or if the agent does not want to display a price then we must have a price range to power the search process of the website. If we receive neither we reject the listing.

The major issue therefore comes down to the appropriateness of a price range for a property. The narrower the range the better it will be for the public searching for property. Whilst I can hear the views of some in this industry who would say the greater the potential audience will be. To this I would say – let the public decide!

The majority of users of this website are smart enough to spend sufficient time to widen their price range to ensure they adequately research the market of potential property. It is very unlikely that a keen buyer will start with a very narrow price range.

Out of curiosity I did some analysis of the residential listings on our website to see how they were priced. The following charts detail these findings:

Of the 74,000 residential listings on the site three quarters are marketed with a fixed price. The balance predominantly are ‘Negotiation’ or ‘Offers’ – just 5% are made up of Auctions and Tenders.

Breaking down those listings which are not displayed with a price, shows that across the range, the majority of listings for residential property on the website fall into a range whereby the maximum price is within 25% of the minimum. That is to say that the range could be from say $400,000 to $500,000 or from $250,000 to $310,000.

However at the lower end of the pricing spectrum with properties with a minimum price below $250,000; half of all of these properties are listed with a range of between 25% and 50% – so a range of say from $180,000 to $270,000.

Despite these ranges being the majority; there is no denying the fact that there are still 17% of all non-priced listings (2,100+) that have a maximum price in excess of 50% of the minimum – with the potential of say $420,000 to $630,000 at the very bottom of this range with some as wide as $450,000 to $700,000.

Could cheap money be driving the NZ property market?

Posted on: October 27th, 2009 | Filed in International, Money Matters

istock_000004562929xsmall This is potentially the most staggering news story I have read in a long time.

The London Evening Standard last week reported that banks are ‘desperately’ seeking people to lend to so as to meet the demands set on them by the British Government who want to see a healthy and active banking industry that is stimulating the economy. The problem is that it appears that banks are not surprisingly kind of cautious as to who to lend to.

So when faced with this dilemma – we need to lend – but we can’t lend to those who most need it – those that are a poor credit rating – who do we lend to?? – they have decided that the very people who naturally have very good credit rating would make excellent clients – those with huge salaries in senior jobs.

It turns out that among the top CEO’s of London City companies most have been approached to borrow large sums of money at very attractive rates of interest in some cases as low as 1.5%.

Of course these affluent individuals have the skills and capability to find many a home for such money which can earn easily a few multiples of the borrowing costs. This virtuous circle of course makes everyone happy:

Banks are lending
Banks are lending to low risk clients
The UK Government sees their role being exercised through stimulated liquidity
Money is flowing through the economy and driving up prices of shares and property – ??

It is this last comment that is of interest for in the Evening Standard article it actually cites the example of “carry trades” of currency investing whereby borrowed money in low interest countries (eg UK) can be invested in higher interest countries – example being New Zealand!

Could this flow of money from UK banks to affluent Brits be flowing into NZ property? – it would seem somewhat unlikely given the currency exchange between the UK and NZ of late. The long term exchange rate of around 0.35 has risen in recent months to over 0.45 meaning that our median priced house which a year ago at $430,000 would have cost £119,000 would today cost £153,000, whilst in NZ the median price has remained fairly static.

However despite this UK pound appreciation of our property prices; in just the last week we have witnessed a steady rise in the number of UK visitors to realestate.co.nz as a % of all traffic. The traffic has grown by over 12% – ahead of any other country going from 3.9% to 4.4% of all visitors to the site.

Hold or Fold – a single example of the madness of the US housing market

Posted on: October 9th, 2009 | Filed in Buying / Selling a home, International, Money Matters

istock_000005422577xsmall Imagine listening to talkback radio purely on the subject of real estate – in some ways this is what a recent podcast episode of The Real Estate Guys felt like – as they provided advice to a questioner who was severely “underwater“.

For reference The Real Estate Guys radio show is a US syndicated programme which through the marvels of iTunes you can listen to via podcasting wherever and whenever you like. It is a weekly show on all things to do with property, primarily based around real estate investing. It provides some great insight, discussion and ideas – thoroughly recommend!

Anyway the question the team were challenged with on this past week’s show “Ask the Real Estate Guys” was as they highlighted, not atypical of many properties in the US.

Mr & Mrs A had bought an investment property a couple of years ago in “an up and coming” satellite town of Merced, California. They were employed earning a reasonable salary and owned their family home with a good degree of equity presumably not in Merced. This investment property had presumably been an opportunistic purchase to support their retirement income.

The investment property cost them US$198,000 and they bought it with a $190,000 mortgage. It has been rented out, however the rent falls short of the mortgage payments by US$400 per month – Ok’ish when the depreciation is taken into consideration – right?

NO ….Merced is unfortunately as described by Business Week as “Ghost Town”, USA and the property is now worth around $110,000. As the Business Week article states the median price in Merced in 2007 was US$230,440 and in 2008 it had fallen by 38% to just US$144,000.

So the question asked by Mr & Mrs A to the Real Estate Guys was “what should they do?” – hold or fold. Stick with this devalued investment and the hope that in time it may be worth more than they paid for it, or foreclose and live with the repercussions on their credit score (and let the lender take the hit – this is California after all!).

The team provided guidance for the alternatives.

HOLD and based on 4% annual appreciation after 18 years and a US$4,800 per annum loss, then the net proceeds of sale in 2027 might just pay off the mortgage!

or.. try and finance someone into the house based on a sale and lease back deal based on the good mortgage that the owners had

or.. try and negotiate a short sale with the lender and in so doing mitigate the negative credit impact.

Whilst the team was not there to definitively advise the owners, there was a clear view that the best option was to FOLD – foreclose on the property. Hand back the keys and the title to the property- walk away not owing a $. All that would eventuate, would be a negative credit rating. Something that could be rectified in time (c. 5 years).

However what I thought was very telling was the comment that in the context of this issue with the bad credit rating – if ever in the future they were to be asked about it “you could always say – but that was 2008/9 – remember how bad things were in that recession – everyone was falling over!!”

I find this a salutary example of the double whammy of the US housing disaster – houses that should never have been built, in areas with no demand – sold to people, who should never have taken the risk – financed by debt that was fictitious – then the debt was on-sold to people who were hoodwinked. Then when the house of cards collapses everyone runs for cover – leaving ultimately the government, and thereby by default all tax payers to pick up the pieces. Unfortunately the ripples from this debacle have washed up on most shores of the world and ultimately we all end up paying.

Is the housing market killing our economy?

Posted on: October 8th, 2009 | Filed in Media commmentary, Money Matters, Other interesting reads:

There seems to be a regular flow these days of articles that firstly prophesy the re-emergence of a property price bubble and secondly seek to berate the general population for “allowing” property to be leading us out of a recession instead of exports.

The latest media to ask this question is the Listener, which this week leads with a cover story “ How to stop the rising house market kill our economy”

Dealing to the first of these issues, it is worth as ever looking at the facts.

The current price indicators of the market (REINZ and QV) are both showing a year on year recovery as detailed on the chart below. The REINZ median price showed in August a 5% appreciation, the first for over a year – the REINZ statistics tends to be more of a lead indicator as the data is more timely reflecting as it does the price of sales in the prior month.

Not only are prices of houses only just beginning to show a year on year rise, they are still languishing below the peak of the market which regardless of which data set you choose to use is now close to 2 years ago.

Added to this the most recent sales data from Barfoot & Thompson showed that prices had actually softened again in September – down 3% from August; with their figures showing the current price some 8% below the peak of the market.

So I would have to say there is as yet now evidence of significant rise in prices – more a sense that prices have at this time ceased falling.

As to this notion that somehow we as income earning NZ’ers are in someways being frivolous and irresponsible in “allowing” what is seen as our “love of property” to damage our economy. Well even the Listener article if you read it through, tends to place more weight (based on the contributors) on our commodity based agricultural biased economy being the influencer of our currency turbulence rather than anything to do with house price inflation driven by easy money.

I cannot imagine that there would be anyone who would not want to see our exporters of premium high quality products and services succeed on a world stage and earn valuable productivity efficient earnings to raise our standard of living as the article cites. But to somehow expect all of us to somehow cease our inherent desire to find a home that suits our needs and in so doing spend what we think is a market price is ridiculous. After all there is nobody out there forcing anyone to buy any property and therefore market prices are a function of a willing buyer and a willing seller agreeing on a price.

As to the issue of investment property soaking up valuable credit that could go towards investing in productive capacity – that is an undeniable fact, that money would be better for the economy if it was able to flow to seed investment that can be productively used, but again we live in an open economy – part of a global economy with largely free trade in currency and goods. Like it or not, money will flow to where it can safely earn a rate of return that satisfies those that lend. In the case of banks as in the case of Japanese housewives their investment risk profile seems to suit mortgages rather than business loans.

As the article further highlights the single lever of the Reserve Bank being interest rates, which they use to manage the inflationary effects of potentially damaging house price inflation has a consequential impact on investment attraction in our volatile tiny currency. This seem then to be arguing as some emerging voices are highlighting the set of tools available to the Reserve Bank needs to be widened.

TV drama, rather than a documentary best captures the financial crisis

Posted on: August 24th, 2009 | Filed in Money Matters

This is actually a paraphrased quote from the writer-director of the BBC drama Freefall which was aired on TV ONE last night.

The drama for me perfectly captured the immoral and hedonistic period in the lead up to the financial crisis of 2008 by showing the real life of three layers of society directly affected by sub prime mortgage creation, lending and trading in the UK.

In the consequential fall out from the crisis the drama plays out the impact on the lives of the self same parties as their lives unravel as a consequence of collapse of the financial market built on unsound foundations.

The drama I would judge is an excellent piece of education of the circumstances and the real personal impact that the sub prime debacle caused.

My only criticism is that the outcome for those at the bottom rung of the financial and housing ladder were ultimately portrayed as being able to return to some form of normal life, which as a consequence of the horror that they must have gone through with mortgagee reposition and likely bankruptcy as well as loss of job was somewhat far from reality. By contrast the party with the least moral scrupples naturally survived to battle another day in a continued effort to sell people on dreams that seldom approached reality – a very real circumstance.

I would thoroughly recommend it should be aired again or available on demand.

Helping make sense of property price statistics (Updated)

Posted on: April 11th, 2009 | Filed in Buying / Selling a home, Money Matters

The recent post “Property price data can be confusing – median price / average price / property values” highlighted how with 2 main reporting sources of property price statistics in NZ there can naturally be some confusion.

To provide some assistance to try and help better understand how from what is essentially the same data such differing trends can be reported I have provided in the graph below the tracking of the reported pricing from REINZ (The Real Estate Institute) and QV (Quotable Valuations) over the past 3 years.

The graph shows 3 price reporting statistics – REINZ Median price(blue line), QV 3 month moving average price (orange line) and REINZ 3 month moving average price (red line). Clearly none are exact matches of each other and as shown each represents a different ‘peak’ date in the market and a different level of price decline from peak – the largest is the REINZ 3 month moving average currently down 7.7% from the peak of May 2008.

As stated the prices all relate to transactions of properties in NZ, however the difference comes from the time period and the sample of data.

Timeliness

In terms of timeliness REINZ data is the most up to date, compiled as it is from reported unconditional sales in the preceding month by real estate agents submitted data. QV is based on legal transactions and therefore is is based on sales transacted 4 to 8 weeks in the past, it is for this reason that QV report based on a 3 moving average (which is statistically appropriate).

Comprehensive

In terms of comprehensive the QV data reports all transactions as legal title changes which means it includes all completed sales by licensed real estate agents as well as private sales and any related-party sales. Whilst there are no accurate records from anecdotal evidence the level of private sales and related-party sales usually amount to around 10% of all legal transactions.

The next issue in making sense of the statistics is median price vs. average price – whilst on the face of it they are similar they can be harbingers of factors that can easily skew the presentation of facts.

Average price

The average price is simply the total of all transactions divided by the number of transactions otherwise known as the mathematical mean. In terms of property prices average prices can be skewed if the sample of sales has extreme transaction values within the sample – it is for this reason that a moving average measure is used to ‘smooth’ out these anomalies.

Median price

The median price is the matherical midpoint price of a sample of transactions. With a large sample set this statistic provides a good single snapshot for the representative price and is very useful for timely data presentation. One issue with median price in the context of property sales is the fact that the transaction price is usually set at “large increments” – what I mean by this is how often have you seen a property sell for $453,635.55! – none! – sales tend to be at the level of $450,000 or $455,000. Due to this what can happen is that the median could lie within one record of the split between $330,000 and $335,000 – and the reported median price figure could based on a single transaction out of 5,000 be presented with a variance of $5,000.

Additional details on QV statistics

Whilst QV and REINZ both report sales price as detailed above, QV primarily reports the Property Valuation Growth. This % variance has been reported on since January 2005 and shows the year on year growth / decline of property valuations to sales based on a measure of the sales price of each property sold compared to its capital value.

It is interesting to compare the QV statistic of Property Valuation Growth as against the reciprocal data from REINZ – in this case the % year on year variance of average sales price (based on 3 month moving average). As can be seen from the graph below the two lines track very closely with each other.

The Unconditional Blog

The impartial voice of the industry