Wow!! Have we got an interesting market out there, or what??? It ain’t necessarily easy, but it is anything but boring, and I believe if you look into it pragmatically, the fundamentals strongly suggest NOW is a great time to be buying in Wellington!
Let’s have a look at what is happening in the market, and then I will explain why I firmly believe that the people who buy now will be the winners in the not too distant future…
Wellington Market Update
If you have been reading some of the news about the NZ property market in the last few months, you could be forgiven for thinking we are on the edge of another “boom”. However, while it appears that the Auckland market is looking pretty strong lately, and Christchurch (although for different reasons) the same, Wellington is quite a different beast all together.
www.realestate.co.nz have recently reported the following key statistics for the Wellington market in the month of April (click on the image to enlarge):
Here are my observations in respect of these key metrics:
- Asking Prices: are not increasing! However, asking prices tend to firm during peak summer months (Feb / March), so this recent easing may just be seasonal.
- Number of New Listings: are declining compared to Feb / March, but again listings peak during the summer months so this is normal. When you compare April listings with April last year, we actually had more stock come to the market last month than during April last year.
- Inventory – Number of Weeks: this measures the number of listings divided by the rate at which they are selling, to express the amount of property on the market as a number of weeks worth of inventory.
In my opinion, the last statistic (inventory) is the most relevant one. For the last 6 months, Wellington’s inventory has been 20-23 weeks. The long term average is 22 weeks. In 2011 the inventory reached as high as 29 weeks, indicating that there was much more supply relative to demand than there normally is. Therefore, our market is completely balanced at present, in the sense that the balance between supply and demand is consistent with long term averages.
However, the averages do not paint a true picture… in reality we have a two speed market.
- The quality properties (well located, well presented, well marketed, well maintained, without compliance or other such issues) are in high demand, with multiple offers being received – indeed, I have had auctions with 10-20 registered cash bidders this year, competing fiercely for good quality properties.
- But risky property is a different matter – if a property is poorly presented, poorly maintained, has bad access, poor sun, or risks such as construction issues (leaky or potentially leaky cladding) or compliance risks, this type of property can be extremely difficult to attract interest.
This makes sense – people are much more wary of risks in recent years than during boom times. There is a “flight to quality” during these risk averse times. Hence there is unusually high demand for the quality stock and comparatively low demand for risky property.
When it comes to PRICES we see more evidence of a stable market undergoing no growth to speak of (data from REINZ House Price Index – click the image to see a larger version):
In Wellington, prices have essentially gone NOWHERE since 2007. That’s a long time. The bottom has not fallen out of prices, as many predicted would happen, but it’s hardly blazing new ground in terms of prices either!!
WHY IS THE MARKET SO LACK-LUSTRE AND BORING?
This can be explained – in my opinion – by two words: Government Lay-Offs (is that two or three words!?!?). The Wellington labour market is being held back by the uncertainty of more Government job losses. In reality, most people have NOT lost their jobs. But they are WORRIED that they MIGHT. Confidence remains shaky. And the market is all about confidence:
- Young 18 year olds want to leave home and rent, but they are worried they won’t find a job, so they stay home for a few more years…
- 20 year olds would like to leave their 5 bedroom flats with their mates and rent a nice 2 bed apartment with their partner, but they are worried about their job security so they stay put until they have more money saved up just in case…
- 25 year olds want to buy their first home, but they are concerned they will not get a pay rise for years, or they might lose their job, and what if mortgage rates go up… so they continue renting and try to save a bigger deposit…
- 35 year olds are concerned about their cashflow, especially on one income, so they stay at their 2 bedroom home, even though they now have 2 kids with a third on the way… so they keep paying down the mortgage and wait for better days…
And on and on it goes! These major life events have continued on, but people are staying put, just in case they lose their jobs.
Hence the demand side of the market has been suppressed for a number of years, and it remains that way, for the mean time, in Wellington at least.
WHEN WILL THE MARKET IMPROVE & PRICES INCREASE AGAIN?
As soon as the government indicate that the job losses are over, all these people who have wanted to move to the next step on the housing ladder but have held back due to concerns over their job and income security, will come out of the woodwork. We will have 5 years (or more) worth of pent-up, artificially suppressed demand for housing, from tenants AND home buyers.
Hence rents will be driven up, as the supply of rental property is pretty static at any one time. Similarly, prices will be pushed upwards as house hunters develop confidence in their future income stream and finally commit to upgrading their homes.
THAT MEANS THAT NOW IS A GREAT TIME TO BUY!!
In my humble opinion, the market today is presenting a perfect storm for investors and home buyers looking to buy well now and settle down for great returns in the future. Here is why…
- Cheap Debt: you can borrow money at such low interest rates today! The banks have relaxed their criteria somewhat, meaning it is easier to borrow now than it was during 2008 & 2009, and the consensus is that rates will remain low for the rest of this year and then start increasing sometime next year. So get in now and borrow at 6% pa for 3 years. Click here to see today’s mortgage rates.
- Static Supply: building consents are still at very low levels, meaning the supply of property is not growing quickly enough to keep pace with natural population growth. When demand does increase again, it takes a year or two for new projects to be planned and built, ready to occupy. And the supply of tradespeople is being absorbed by Australia and Christchurch, so the ability to supply new housing is going to remain suppressed for a while yet, meaning supply can not easily be increased to meet the increased demand.
- Increasing Demand: our population is growing (slowly but surely), which gradually puts pressure on the existing housing supply. In addition, when the labour market does strengthen (when the govt stop shedding jobs), the demand will increase dramatically as detailed above. This increasing demand, in an environment of static supply, will ultimately lead to increasing rents and prices.
- Buy Well at the Bottom: if we are not at the bottom of the market now (in terms of rents and prices), then we are damn close to it! Rents will come under pressure, producing higher yields, and then prices will increase, once confidence returns to the labour market. Then those who buy in 2012 will be laughing.
- Yields are Strong: it is quite possible to buy property in good Wellington locations and earn yields of 8.0% or even higher. This means that, if you lock your debt in for 3 years at 6%, your property will easily pay for itself, even at 100% debt. If you put some cash into it as a deposit, your property should actually pay you each month. Own property AND get paid for it. Property investor heaven!!
History has shown that good old fashioned real estate increases in value over time. We have had a brief respite from increasing values for almost 5 years now. But if you look at the above fundamentals, it appears that rents and values are going to start increasing again at some point. If you buy property during these times, I do not doubt that you will be laughing all the way to the bank in the not too distant future.
Happy investing and happy house hunting!
Adam Cockburn – Wellington Real Estate Agent – 021 409 637 – firstname.lastname@example.org
PS I need more houses to sell!! If you know anyone thinking of selling, I would love to talk to them about how to get full market price for their property. Please let me know – I promise I will take great care of them.
PPS A GIFT FROM ME: My friends at Property Tutors Wellington have generously offered some of my friends and clients complimentary tickets to their MASTERS event in Wellington on May 27th. If you haven’t been to one of these events before, grab yourself a ticket (and one for a friend) by clicking HERE and using the voucher code AdamC, and they will send your tickets straight to you! Click HERE and use the voucher code AdamC. It’ll be a great day, I’m sure you will love it and learn something too!
May 14 2012 02:28 pm | Uncategorized