Live From Howick

A sustainable market ?

There have been a few interesting articles of late about the state of the market and what we may expect to lay before us over the next few years . 

A  description of the market today by one of our active commentators as being at ” dismally low levels ” started me thinking  and a little research into the stats indicates that although the volume is nowhere near all time highs ,its not too bad either .

Consider:

Since Jan 2000 to August 2009, the average monthly sales volume in Aucklands’ Eastern Beaches has been 245 sales/month. The highest volume was in Sepr.03 at 435 and the lowest was Jan. 1992 at 93 sales for the month.  (Jan 1992 to date the figure is 231s/m.)

The figures since May 2004 give an average volume of 228 sales/month. The Last 6 months since March have given an average volume of 221.5 s/m, not indicative of a boom by any measure but hardly dismal and certainly not a slump. 

Is this a sustainable level? I do think so. 

I accept that unemployment is high, may go higher, and that property is unaffordable to a large section of our population, I don’t accept that will automatically result in the lowering of prices. Excepting lack of any free choice, Kiwis simply hold on to their homes and wait out the storm as they have been doing.

 Mortgagee sales are, and will be, increasing given the time all the processes take but that is no surprise given the incredible excesses of the 05/07 period. There will continue to be well funded, lowly geared investors to pick up good properties, young couples who have saved a deposit in the old fashioned way, people who can obtain collateral guarantees and of course immigrants – all of whom can buy.

In the blog “The myth of affordable Housing “I detail the reasons that I believe make it impossible for there to be any meaningful drop in house prices or increase in affordability of property. In fact, as time passes, I believe a diminishing percentage of our traditional homeowners will be able to own property and that the property they will be able to aspire to will not attract them. Such property will not be located in neighbourhoods they wish to live in, will not contain the amenities considered to be necessary to support life and will not be zoned for the schools they seek to send their children to . These are the long term rental tenants of the near future and will be the engines that drive the rental investments of those that can buy.

Added to the Deaths, Divorces, Debt, Marriages, Upward and Downward mobility, immigration and the like, I see little reason to expect significant change. We have seen worldwide turmoil and plagues over time but we seem to muddle on through and enjoy good lives. Given we are working our way through a perfect storm and are not yet out of it I do not advocate recklessly increasing debt (interesting to see the Phoenix like rise of the property spruikers and their seminars) but I maintain that if residential investment is part of a well planned and budgeted retirement plan, this is not a bad time to buy.

 Similarly, if you happen to be looking to a longer term and can afford to buy, do so. Interest rates will rise and fall over time; definitely they will rise from current levels, all the commentary agrees on that. Prudent rather than exuberant optimism is the order of the day and whilst it will definitely cost money and sacrifice to take part in the property market I do believe that the cost of not taking part will be far higher.

September 29 2009 | Uncategorized | 3 Comments »

Back to trend ?

September Market report 

Satisfying numbers again, the evidence becomes more compelling by the day that our housing market has found equilibrium, we are back to trend and bar another huge shock I would expect a steady muddling set of numbers into 2010. 

Interesting to note that with the exception of the period May to November 2007 when the market was at record highs we have returned to the previous high levels of ’07.

All Kiwis who invested in real estate outside of May/Nov ’07 have seen their monies safe and sustained no loss.  A far better outcome than most alternate forms of investment.

For those of you with an interest in property who would like to know why I am confident about Real Estate follow the link and have a browse. Love to have your feedback… Read More (hyper link to  http://www.starproperty.co.nz/news.asp )

September 24 2009 | Uncategorized | No Comments »

Invest in Real Estate ? Hell Yes !

   Popular investment concern today seems to be that an unreasonable amount of Kiwi money is placed in the residential market, why is this so and what can be done to dissuade this behaviour?  The media has been full of Reserve bank warnings of a new ‘Property boom ‘, Treasury has reversed their projection of further falls in the values of our real estate, Bernard Hickey and Kieran Trass are calling a false end to the slump; its very confusing to me .

These people do not seem to understand why Kiwis love property, these are my thoughts:-

   I do not see the current market being in a state of either boom or slump. There is a state of equilibrium that gives to the public a sense that is safe to make a move and so they are.  Figures since January this year strongly indicate a return to the trends set over the past decades and apparently sustainable volumes (significantly less than at the peak levels of 07/06). 

   Tony Alexander of the BNZ, who I find to have been the most accurate and most moderate of the commentators, makes no case for gloom. He observes a significant increase in net migration, a major decline in the construction of new homes, a lack of mezzanine funders so loved by developers to facilitate any construction and no glut of homes available to purchase as factors that will inhibit decline in house prices. I think he is correct and that the balance attained will be maintained until end 2010 early 2011 after which I think they will rise as improving global conditions increase the availability of money

• Houses are a safer than average place to put your money.

This is a low wage economy with a large pool of poorly educated / low skilled employees. (A high number of the skilled/educated people we do generate live overseas.) There is little chance this segment of the population will be able to save 10-20% of the cost of a home; we will see an increasing %age of our population as tenants for life.  Actually, with consumer debt levels high across society as a whole, many people today cannot aspire to home ownership. Financial illiteracy means a colossal number of our nation have no understanding of the effect of compound interest.  A car loan from the bank for $20,000.00 over 5 years at 14% will cost $28500.00 – a whopping 42.5% increase. Apply that effect to student loans, credit cards, flat screen TV’s, cars and the rest and it is clear there will be no shortage of rental tenants in the long term.

Many children of older citizens who might have expected an inheritance that enabled a home purchase will be left empty handed as a result of the Blue Chip /Bridgecorp etc. etc. brigade. Literally billions of dollars have been vaporised by these companies.

• No shortage of paying customers.

   Investors seeking to invest in vehicles other than Real Estate have some major obstacles to overcome. Lack of transparency, lack of protection from unscrupulous operators and seemingly no recourse or recovery options being not the least of them. Well defended by trusts, complex company structures and sophisticated mechanisms designed to confuse, these operators take advantage of the trusting and uninformed without being held to account. Investing in shares and business generally suffers the same drawbacks. Few Ma and Pa investors with some dollars to invest could make much sense of a prospectus and are left at a disadvantage dealing with investment advisers. I do believe the public will be a lot less trusting in future.

• Shortage of attractive options

   Investors buying property other than for speculative purposes do enjoy the ability to deduct losses they may incur from taxes they pay. In the event the property is held for a longer term the rental income will in time generate an increased tax liability as the rent rises with time. If the tax deductibility is disallowed on rental homes when they lose money it follows tax could not be charged on rental property that generates a profit. The cancellation of tax benefits would see many properties sold as the returns would become unacceptably low , rents for the decreasing number of available properties would escalate ( as in Sydney today ) and a problem would arise for the public unable to afford or secure a home to rent. Well funded investors will enjoy higher rents and less competition as the more heavily geared Ma and Pa investors sell up. I can’t see such tax free income being tolerated by the government, if it was the rush to residential would be huge. The Government already has mechanisms in place to pursue speculators and property traders; it just does so with the efficiency and gusto that it chases the financial miscreants. The situation with capital increases in share values is the same, where purchase is done with the intention to invest long term there is no tax liability and where there is evidence of trading for short term profit such profits are liable to be taxed. I hear no call for a new tax on share capital increases.

There is no evidence to support the idea that a capital gains tax plays any part at all to control house price increases, indeed Australian house prices are even less affordable than ours even on their higher average income levels.

I do not believe we will see the current conditions alter.

• Tax incentives.

    When you invest in property it’s easy, understandable and largely safe. Real Estate agents are tightly controlled by legislation, the forms and processes are common, lawyers and accountants and banks provide advocacy, valuations and information freely available to minimise risk.

Any person competent to drive a car or operate a cheque book can manage a rental portfolio if they can be bothered and no-one can steal your flat and live in Spain on the proceeds

 Mistakes are avoidable with a little prudence and my experience shows that time forgives those that do occur.  Interestingly, we should not forget it was not the real estate industry that perpetrated the grand theft, it was the finance companies and unregulated property spruikers in New Zealand and the Bankers in America and Europe with their super tricky instruments.

• Real Estate is self manageable.

   The biggest single contributor to the increasing cost of housing is actually governmental in the form of taxes, levies compliance, development charges and beaurocratic process. In Howick the tax content of the median house is between $100-150,000.00 , a staggering sum that is in many cases as much as the cost of land . (Australia is similar) These costs come about as a result of social and planning decisions that are extremely unlikely to be reversed. Accordingly, new homes will continue to rise in price and will drag the second hand homes with them. (The other effect is that the same money levels will buy smaller and smaller dwelling units.)  In any case property bought now will be worth a lot more in 15 years than it is today and is a sterling contributor to a retirement plan.

• Property will increase in value

September 15 2009 | Uncategorized | 11 Comments »

The myth of affordable housing

This comment developed a life of its own and became a lot larger and more involved than I intended. I apologise for that but I hope you find it interesting.

It is cruel to use the hopes and dreams of people against them. More so when it involves their aspirations and plans for their future wellbeing. For generations Kiwis have believed in their right? and ability to own their own home, originally a home on a quarter acre section becoming something a little more humble of recent date. Soon it will be a dream little less ordinary for the majority.

 I have noted various comments about the un-affordability of homes and that It now costs an increasing multiple of the average household income to buy a home, as if it could somehow be altered and things could go back to the way they were. It simply won’t happen for many reasons. Other comments along the lines of housing must fall to meet rental returns are equally short sighted, unlikely and misleading.

  1   Consider the following:-

• The median section cost in 1992 was $71,000, and reached a high median of $480,000 range. There were months where distortions took the median price as high as $750,000 but I choose to ignore those months.
•  Section prices went up a staggering 676% at their peak.
• Today with median section value at $322,000 that represents an increase of 453% since 1992.
•  Houses by comparison rose some 330% ($160,000 to $528,000).
•  What that means is that some where between $250,000 and $400,000 of the increased cost of homes is due to land increases (only $118,000 or thereabouts, is due to increased cost of materials and labour).
•  Even if the use of medians distorts the exact position, the picture represents what is happening is accurate.
• In 1992 the introduction of GST caused median household incomes to drop to $32,800
• Household income (before tax) has doubled, houses (after tax) more than trebled. 

How does this situation come about? The new biggies in the mix are taxes and levies.

• The median sale price of a home (new) is $528,000 of which $58,700 is GST.
• To develop a section you will pay the council somewhere between $0-90,000 in levies fees ,contributions and environmental compliance costs
• Holding costs accrued from delays due to the inefficient resource management act add significantly to the increase.
• The monthly cost on a $100,000 mortgage to pay all these taxes is $640 and will use the first       $10, 900 of the average household income of $67,800.
• It is an outrage committed by stealth upon the public generally. 

The major cause for the rise is the subtle change in the way councils have sought to fund infrastructure. In the past infrastructure costs associated with growth had typically been funded by the government through public service debt. The debt servicing was through community wide taxes (rates).

 The current approach has been to abuse the user pays philosophy and tax the new homes via levies to fund the infrastructure.

 In Sydney Australia a new home will incur infrastructure charges of $68,000 compared to an actual cost estimate of $1750 – the difference of some $66,000 is used to cover a range of infrastructure that benefits the broader community including libraries, new roading, public pools and transport. These levies may or may not be spent in the neighbourhood that was taxed. I.e.: new home buyers are subsidising the replacement and upkeep costs of infrastructure that they may not even benefit from. This is effectively happening here today in NZ.

The councils also continue to levy the community at large (rates) and seem to be able to avoid being held to account. I see no likelihood that this situation will reverse. 

A further contributor to the cost increase of land is relative scarcity. In one of the worlds least densely populated lands we have a scarcity of sections – not a shortage of suitable land. Increasingly development of land has been restricted by various forms of government, essentially to reduce their contingent infrastructure costs.

Major components in the increased costs are as a result of land rationing, excessive amenity requirements, excessively expensive infrastructure fees and approval processes and a general increase in inflation – Are these factors reversible? I doubt it! 

2     We have heard calls for the removal of negative gearing taxation benefits for rental properties as an aid to increasing affordability. The same calls were heard in Australia and in 2006 Earnest & Young prepared a comprehensive report submitted to the Henry-Warburton enquiry in 2006. The report identified the following :

• a) The majority of Australians taking advantage of negative gearing was in the $40-80,000 pa. tax bracket.
• b) Negative gearing encouraged private investment in rental housing, without which rental yields would be prohibitively low and cause investors to quit the market.
• c) Negative gearing helped place a lid on rental pressure by increasing the stock of rental housing and taking pressure off rents.
• d) Removal of negative gearing as occurred under the Hawke-Keating government in the 1990′s would immediately lead to an exodus of investment in rental housing causing rental shortage and rapid rise in rents (the Hawke-Keating government rapidly reversed their decision).
• e) Removal of negative gearing in today’s climate, especially given greater land shortages and higher development costs would have a dramatic impact on the rental housing market.
• f) I am confident the above would be broadly similar and apply in New Zealand. 

I conclude from the above that the taxation benefits of rental property ownership will remain and that we will not again see home ownership levels in the 80-90% range. Currently hovering around 63-64% in Auckland.

Home ownership will become the province of those with above average wealth, or those with parents who can help. Dependency on rental housing will increase and future generations of Kiwi’s will not be able to aspire to own a home of their own and will suffer from rising rental costs.

I have yet to see Tax/Levy reductions and have no belief that they will come about in my lifetime. Conversely, there is no lack of example of increases – often indirectly. The local and national governments will not relax land supply and neither will the cost of raw land or development cost of that land fall.

There will never be a better time to buy property than today and it was always so. It makes no difference whether you are buying investments for your future needs or homes for the kids or even just to move, this is a great time to do it and you can move with confidence.  If you think it is difficult today, I am sure it will be more so tomorrow.

September 07 2009 | Uncategorized | 9 Comments »

Hello world!

Welcome to www.unconditional.co.nz. This is your first post. Edit or delete it, then start blogging!

September 04 2009 | Uncategorized | No Comments »