The Unconditional Blog

The impartial voice of the industry

 
16

Property purchasing options: co-buying and fractional ownership

Posted on: March 9th, 2008 | Filed in Buying / Selling a home, Money Matters, Property Investing, Renting

The emerging wisdom of the crowd is clearly saying we are about to witness a significant correction to the housing market. (As a point of note the phrase wisdom of the crowd comes from the title of James Surowiecki’s excellent book which I coincidentally have recently read and would thoroughly recommend).

If it is any consolation – we are not alone when it comes to the property market hitting the wall in NZ. Most developed countries are to a greater or lesser extent are either about to witness this correction, or are deeply in it!. The only question is when and by how much, this useful chart from The Economist presented on Lance Wiggs blog shows the scale of some of the European property market corrections.

Whilst property is for some people a speculative investment from which to earn incremental income and establish a passive asset for retirement, the majority of home owners buy property for the pleasure of ownership and the very primal need to shelter themselves and their family.

As an option renting a property can and does meet this need. At this time there are clear arguments that renting is cheaper than buying. When you stack up mortgage repayments as well as repairs and maintenance and compare that to rental costs the incremental costs can be over $17,000 per year. However the downsides such as surety of tenure, inability to make the place your own and the thought of paying someone else’s mortgage still drive well over 60% of NZ’ers to own their own place.

Conventional wisdom always sees property purchase tied to the “nesting” mentality driving people to buy when setting up home with a partner. So with relatively low affordability the question for many is how to get on to the property ladder. Looking to trends overseas it shows that there is more people choosing for deep pragmatic reasons to buy property in partnership with friends and business partners as a means to take that first step on the ladder.

Naturally wherever there is a good idea involving the aggregation of interested parties around a shared need the web intercedes with smart functionality – this has proven to be the case with co-buying property. This concept has spawned a thriving business for a couple of UK based entrepreneurs who have taken their learning in facilitating the meeting of prospective co-buyers from their UK base to offer the service here in NZ as well as Australia and Canada. The NZ version of Co-buywithme has been operation for about a year and has over 500 members from all areas of the country and all walks of life; some looking to co-buy a first home, others looking for a shared ownership in a holiday bach; whilst others see the opportunity to explore investment property. As ever the web creates the facility for anonymous interaction – it is then up to individuals to make the buying decision, the parallels with online dating could not be more similar.

Utilising the same model of shared ownership, when people hear of fractional ownership they immediately think “time-share”. That concept may have slipped in the credibility rankings from the 1990s, but the idea of a more permanent holiday escape without the exposure to high property prices has seen this emerging segment of fractional ownership emerge over the past 5 years.

Fractional ownership is perfectly targeted to the “never-grow-old” mentality of baby boomers who fancy having a holiday home for more than a couple of weeks a year. Fractional ownership allows between 2 and 5 owner to collaborate in the purchase of a property with joint ownership rights to the title which can be sold independently and in so doing divide up the access to the property into meaningful time periods. There are a growing number of such properties being marketed in NZ’s vacation centers offering the chance for overseas buyers to grab a slice of NZ summer partnered with a kiwi family enjoying the winter activities, thereby allowing each to enjoy the benefits of a quality property for half the equity and half the mortgage and also half the appreciation in value (in time – potentially!).

Article Discussion

  1. Andy Hamilton says:

    Well not much doing in response to this Alistair (I have to say I would avoid fractional ownership myself, and in any case in a year or two it will have lost any appeal it has now), but it was a nice balanced piece.
    Since the last thread looks played out I be presumptive enough to post some new data on Auckland and some further comments which I have posted elsewhere (please feel free to delete if you think off topic for this thread).

    I have been collating Allrealestate data which gives the sum of sales from a number of the lesser (well compared to Barfoot/Thompson) agents (representing perhaps 12% of total Auckland sales) these past 7 weeks or so for Auckland (and many other places). The data set looks useful – it predicted the B+T data would show no recovery in February volumes (as indeed was the case).

    Now March is meant to be a pivotal month – historically it has been one of the best 3 months for volume since 2000, and you will have seen many of the agents hanging out for some sort of recovery this month (rather as they did for February – which was stymied at least in Auckland). Without some sort of recovery in volume prices can only fall as the 3 D’s (debt, death and divorce) force the hand of sellers desperate to sell, who set ever decreasing new lows, which the rest of the market has to eventually follow.

    Weekly sales for this index showed a decreasing trend for the four full weeks of February of 70, 75, 65 and 57. However the first week of March seems to indicate that if anything March may turn out even worse than February for the pivotal Auckland market. So far a mere 38 sales have been registered at Allrealesate Auckland for the first week in March – now this number will edge up a tad (based on what I have seen in previous weeks) as some later notifications come in, but I would guess that this will put the number up to, at most, 45.

    If this trend continues ( I see no reason why it won’t) there is every likelihood that March will in fact be WORSE than February, for volume, in Auckland. The Auckland market will then face going into the winter with a vast over-hang of unsold properties. Now many of these sellers will no doubt try and sit it out – but those subject to the 3D’s will have little choice but to find sellers – and this means more and more price cuts. Everyone will be aware that the Auckland market makes up 1/3rd of the national market (or thereabouts), and where Auckland goes the rest will follow.

    The market will receive no support from interest rate cuts during this time, quite the reverse, as banks are forced to raise rates as a consequence of the credit crunch (we have already seen this happen the past 2 weeks). And all the time the recession that has taken hold in US will be spreading outwards – by the 3rd or 4th quarter I expect the NZ economy to have stalled. By then the employment position in NZ will have turned on a sixpence, and unemployment will start a gradual rise – adding a fourth horseman to the 3D’s. The government’s ability to create new public sector jobs will have come to an end (unless they wish to massively increase government debt – the money markets will obstruct this), and the Reserve Bank will be still be severely constrained in cutting rates by the hangover of our inflation surge (and even if they did the big 4 banks will be unable/unwilling to pass cuts on – as has happened already in the US and the UK).

    In short a perfect storm for NZ house prices is a few months away.

  2. Andy

    As ever a well thought through assessment with a stark reality to the likely outcome as we head through this year.

    Personally I am a glass-is-half-full kind of person and whilst not being able to counter this train of though feel that the end of the year will close with the combined effects of one of the quietest sales year on record and a price drop, not a crash – potentially median prices as reported by REINZ below $300,000.

    Just a note of caution to the data you are collecting from Allrealestate. Whilst I am not privy to the workings of their site I do know the operations of ours and would share these insights for your information.

    Their website has a more volatile customer base – the statistics are published twice a year in the reporting of their parent company in Australia which is in part (a large part) by News Corp. Whilst I cannot immediately lay my hands on the numbers, if I recall they were around 650 offices of which around 160 are on a free trial for a month or 3. This compares with our site with just on 1,300 offices all of which are long term subscribers with no free trial. This volatile database of offices could cause some annomilies in the make up of the data as offices listings come onto and off the site.

    In addition the notion of their “sold listing” is equivalent to listings being removed from our site. This process is never undertaken by the real estate with the same motivation and attention to detail as adding listings. Additionally removal of a listing is not always aligned to a sale. It can be for any number of reasons.

  3. Andy Hamilton says:

    My goodness Alistair you are even more bearish than I am! Prices below $300K would represent a 15% fall in a year – personally I think that would be on the fast side; house price crashes generally take place over a prolonged period; witness the UK from 1990-1995, Japan over a 9 year period, and the US 18 months into what looks likely to be at least a 3 year affair. A 30% fall for NZ would, I imagine take place over at least 2-3 years. By the way I think your playing semantics as to what is a ‘crash’ and what is a ‘slump’ (perhaps we should define our terms as a % – that would make a good article, with reference to overseas examples). If by the year’s end prices are down to $300K the howl’s from folk overexposed to property will make it sound like the end of the world, let alone a slump.
    RE;the Allrealestate data – I appreciate it may have problems but I am using it only as a comparator on a month on month basis, a crude arbiter of volume. Don’t forget I have back-tested it against the REINZ data for Nelson over the previous year and the correlation between the two was a good one; a low volume on one matched a low volume on the other and vice versa. The February Allrealestate data for Auckland predicted low volume with no recovery and this was then confirmed from Barfoot’s info. All I am saying is that the March data is saying the same again, if not worse; if the correlation is again robust then you have to say it has merit as a crude leading volume indicator.

    Now if you guy’s published your data then all this would be rendered unnecessary, but you don’t.

  4. I think your surrogate analysis will prove a good indicator. The reason we do not display this information is simply we focus on the needs of our audience who are interested in the efficient means by which they can identify the available stock of properties for rent or purchase anywhere in the country. From our research up till now the consumer has seen little value in viewing “sold” properties.

  5. Andy Hamilton says:

    Sure, but in the end your data ends up in the REINZ monthly data does it not? I am sure you could leak weekly sales to us few obsessives who hang around here – go on, you know you want to!!!
    At the end of the day mind, none of this matters much, the REINZ data comes out in its own sweet time, and thats what 90% of folk look to.
    What about those QV figures eh? I can’t fathom how they calculate them let alone how they relate to the real time market. Just one example – Nelson, where QV are reporting a supposid $10k jump in prices in the past month, yet the property papers are full of ‘price reduction’ ads on a scale I’ve never remotely seen since I have lived here, auction success rates are as low as 30% in the past weeks, and sales volume is drying up. The good old simple arithmetic mean/median has a lot going for it…………

  6. Your question prompts me to write a post this week on the issue of the data from REINZ and QV as it does tend to tell a differing story – I did write a piece back in December on this issue.

    Just for the record we receive data of listings from the real estate industry – our customers, some 1,300 offices around the country – there are around 1,450 in total if you count every physical office including “one man bands”. We do not receive sales data – this data is collected by REINZ (remember we are not part of REINZ and operate independently).

  7. Andy Hamilton says:

    Thanks for that – didn’t I also read some where that QV also employ algorithms in their data (possibly with a view to seasonal correction)?

  8. Andy Hamilton says:

    Unrelated but for those watching the UK market:

    http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article3525598.ece

    Its back to the 1990s for everyone it seems. The global house boom was a function of cheap credit. The global house bust is a function of that credit being withdrawn.

  9. Martin says:

    A thought for Andy.

    QV data is compiled “officially” which means it is subject to pressure from interested parties. House prices in New Zealand have become very much like the Dow Jones in USA. It is a barometer of how well the market is doing, and determines how people feel about things.

    Fear is always more powerful than greed. We are wired that way. Medical studies have shown that the Fight/Flight trigger does not go through logic, but runs the body automatically. That is why down moves in the market happen so fast. Sell now think later.

    I was listening to a radio broadcast on Sun from USA where they were discussing NZ/Aus $ from an investment perspective and the comments were sobering. It went something like “While the NZ and Aus economies are based on commodities (NZ agriculture, Australia mining and resources) which should see no drop in demand, they suffer from both governments and citizens having large debt levels which makes them vulnerable to economic implosion.”

    Ok.. back on topic now [grins]

    I think that the official agencies will try very hard to keep the illusion of prosperity going here as long as posible because a sign of market weakness could easily become a rout if the fat lady starts a wailing!

  10. Martin says:

    There is a real estate implosion throughout Europe. UK, Ireland, France, Spain, Portugal, Italy, Greece…

    Leveraged debt will be the killer.

    This from the UK.

  11. Kate says:

    On the subject of fractional ownership – just noticed a leading REA advertising a sale by this method. A very bad, bad idea in my opinion – what education for example have REAs been given in order to be able to advise clients in this regard? Franctional ownership is IMO simply a method designed (on a whim and a prayer) as a means to attempt to hold up what are wildly inflated prices relative to the assets real value.

  12. Martin says:

    REA = NZ equivalent of low-doc loans? As you say Kate, trying to prolong the party; Another dose of uppers.

  13. Kate says:

    Hi Martin, REA short for Real Estate Agents. Initially when the fractional ownership methodology was first proposed – it was through a specialist agency (as per link above). Now the listings appear to have expanded out to the mainstream REAs. Not sure whether the associated contracts are through the specialist agency – or whether these are simply existing owners drafting up fractional ownership contracts/proposals individually.

  14. Brent says:

    Going back to data. None are super accurate. I know of principals that do not put all their sales data through. Many sales do not show up with QV at all, some private, some from agents. And I quite often see mistakes, (usually typos I’m sure) in the sales data. Is there law that says sales have to be reported?

  15. Brent

    There is no legal obligation to provide sales statistics to the Real Estate Institute. However as a member organisation there is great value in the organisation being able to talk knowledgably of the market, it is for this reason that statistics are collated and made available to all in the industry.

    The obligation is a moral one whereby all benefit when all contribute, when anyone fails to contribute potentially the data becomes less robust and thereby less relevant.

    QV data comes directly from the local authorities or as a result of their contracted work for the local authorities, in this way there will not be any missing component of QV data as sales transactions are of public record and recorded by LINZ.

  16. NLP Zine says:

    Interesting blog post. What would you say was the most important NLP factor?

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