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June 04 by Phil Jones
We have crossed the line, the BOOM is OVER! Let the celebrations begin! The volume of indications coming from the market in the last few weeks confirms that the NZ Property market has changed its course and is moving into a new and much more exciting phase for property investors.
The new phase is NOT a BUST, though many of the exaggerated media headlines may refer to it as one, it is more a return to normal speed for the market rather than the over heated property race that has taken place in the last 12 to 18 months. We are entering a period of market consolidation, moderate growth and yes even minor falls in some provincial areas.
Property cycles are not as simplistic as we all would like them to be. Often the market doesn’t move from boom to bust, it moves from boom to periods of more moderate growth before booming again. We are now in a period where the boom is over and the market has returned to its “normal” operating status. This represents a fantastic opportunity for “serious investors” and will mark the exit from the market of the “fickle investors”. I will explain the difference between the two investor types below.
What has signalled the change in the property market?
Here is just a taste of some of the influences that in recent weeks have confirmed the market has significantly changed.
1. Property is taking more time to sell. E.g. the average number of days to sell property is increasing across the country.
2. Market Activity Slowing. The total number of property sales across the country is down by over 15% across NZ.
3. Price Growth Slowing. The average median sale price in all regions apart from Auckland, Wellington, Hawkes Bay and Southland has fallen.
4. Investment Barriers have Increased. Interest rates have risen twice in four months and are predicted to continue to rise.
5. Deceleration in Market Growth. The Interest rate rise on April 29, 2004 by the Reserve Bank
has further cooled a buoyant property market and further rises will have a compounding effect.
6. Key Industry Players Confirm Barrier Increase. Many banks have already started raising interest rates in anticipation of further rate rises by the Reserve Bank in June.
7. Investor Returns Reduce. Investors’ returns will fall as interest rates rise.
8. Competing Investment Types Increasing. Sharemarket confidence is on the rise.
9. Depreciation Changes. Rumblings of possible changes to depreciation rates for property from the IRD have not been clear or given investors confidence.
10. Employment Down. Internal economy strong, further fuelling inflation and interest rates.
11. Govt Lolly Scramble & Vote Buying Exercise Announced. Two Billion dollars released into economy further fuelling inflation and interest rates.
12. More Sellers Under Pressure. The words “urgent” and “motivated” are being used significantly more in property advertising.
13. Power shift from sellers to buyers. The ratio between sellers and buyers has significantly changed
There are many more indicators that all paint the same picture … the NZ property market has changed.
Investor Strategies in the New Market - Let the feeding frenzy Begin!The property market is cyclical and smart investors work with the cycle to achieve the best results. This new property phase will create many opportunities and some challenges. So lets look at these in more detail.
Negative Media
The property market will have an increasing amount of negative media coverage in the coming months.
There will be talk of the BOOM turning to a BUST, not because it has Bust but because sensationalism sells newspapers. There will be stories of investors flocking to the share market and other investments types. Property investment will no longer be fashionable and the property bashers will come out to play. Expect to hear stories of people who have lost money in real estate. This is not hard to do if you buy the wrong property at the wrong price in the wrong area at the wrong time, a speciality of “fickle investors” who buy on emotion instead of the numbers.
Many of the uninformed around you will be affected by the negative media coverage and start questioning the wisdom of investing in property.
Smile and ignore it all! Property investment is a long term wealth creation strategy, not an old pair of
pants you hop in and out of when they are in or out of vogue. We will use the current market conditions
to our advantage as you will see below.
Will Property Drop in Value?
The market has screamed ahead at 22% growth in the last 12 months and in some areas (largely provincial) there may be minor price corrections. A recent report released by PMI Insurance one of the country’s few mortgage insurers lists a number of market predictions for growth in the next 12 to 24 months. A link to PMI report is provided with this market commentary. My view is that the general conclusions PMI have drawn are correct in terms of how the change in the property market will affect each regional centre. However, the actual percentage movements forecast for property price variances in my opinion are largely overly pessimistic and reflect an insurer trying to paint a worse case scenario to the market.
What about the Australian Market Drop?
It is likely that some individuals will no doubt attempt to draw similarities between the Australian property market, which has had quite large price corrections in recent months and the New Zealand property market.
The two markets are very different. The Australian property market has had major price corrections because the market was overdriven by frenzied speculation that pushed prices above true value boundaries and market prices raced to a peak until buyers could not sustain this any longer (like a pyramid scheme that eventually runs out of buyers, the end result is that no one is left to fuel the scheme and therefore it collapses). Some areas in Australia have had more than 50% growth in 12
months. This was never sustainable.
The New Zealand market has had a much more sedate rise over an extended period of time and will have a much more sedate transformation back to normal market conditions. I, therefore do not think we will see widespread price corrections like Australia and this view is confirmed by the PMI Report as well.
Investors Leave
There are two types of property investors - “serious investors” and “fickle investors”.
“Serious investors” are those in for the long haul, they realise the importance of buying property and holding it for the long term. They will continue to work the market carefully finding sound investments and adding them to their portfolios as fast as they can without overcommitting themselves.
They relish the new market conditions as a time to harvest great buys and grow their portfolio base as wide as possible in a market where buyers hold the control and sellers are under increasing pressure.
The “serious investors” goal is to enter the next market upswing with a large portfolio of well balanced properties which can be caught by the next capital growth wave as it rolls across their portfolio and enjoy massive financial gains and financial freedom the wave creates.
The “serious investor” understands you can only reap in a capital growth boom, what you sow now.
The phase the property market is now in is very similar to the market environment that existed when David Hows and myself, started investing. For us then, the market was full of great rewards and we hope it will be for you too now.
“Fickle investors” listen to the likes of the media, taxi drivers, free negative gearing seminar presenters and their next door neighbours. They think they’d better get into property because everyone else is. They play follow the media! They don’t have a long term strategy, don’t buy well, don’t do the numbers, don’t invest intelligently, don’t structure their portfolios well for depreciation savings and get into property on a whim because it is the trendy thing to do at the time in the hope of making some fast
money.
It is these “fickle investors” who are a danger to themselves that will leave the market place, lose money and get burned. They play the game without learning or executing the rules and many will pay the price for their foolishness. Property is not a gamble unless you are foolish enough to make it one.
The “fickle investor” will be your next door neighbour or workmate who at the start of the next property boom will tell you their horror story of “how property never worked for them” or how they read a book that said…”the property market is going to crash”. Smile, thank them, and forget them!
Interest Rate management
The biggest priority most investors will need to focus on in the next 12 to 18 months is interest rate management. There is little doubt that interest rates are going up. They have gone up twice already this year and it seems another few rises are on the horizon, starting with another almost certain rise from Mr Bollard later this month.
My recommendation is: - if you have rates that are floating at the moment, fix them for 12 to 24 months. This will ensure you retain good cashflows on your existing property and are in a sensible position to move forward with more purchases into the future.
Market Wealth Strategy
Here is the investing strategy I recommend you consider for the new market conditions.
1. Revisit your investing rules and update them for the new market conditions
2. Consider getting get updated valuations on all your existing properties so you can utilise the equity increases that your property portfolio has enjoyed while the market has boomed in the last 12 to 18 months to secure more property in the coming year.
3. Focus on buying positive cashflow property. Capital growth purchases should only be made if you have enough positive cashflow from your existing portfolio to cover any negative cashflow loss caused by the capital growth property.
4. Don’t bank on capital growth. It’s just a bonus and will be received at normal levels in these “normal market conditions”
5. If you are going to invest for capital growth property in the next 12 to 18 months, go for beachfront anywhere or stay with the mainstays of Auckland, Wellington, Queenstown and Tauranga.
6. Cashflow property in some of the larger cities may come under some pressure as interest rates rise. So adjust your expectations to accept lower levels of positive cashflow accordingly or consider going cashflow shopping in some of the provinces like Rotorua, Palmerston North, New Plymouth, Wanganui, Dunedin or Invercargill.
7. Use the ESC Forums at
Sifting the Experts
An expert is someone who understands the property cycle intimately and knows how to work it in any market to grow their property portfolio and wealth. True “experts” who are “serious investors” will embrace the changes in the property market and be excited about the opportunities this new market phase brings, the new strategies that can be executed and the profits that will naturally follow.
Other “self professed experts” will expose themselves as “fickle investors” that run scared, sing songs of doom and advise people to head for the hills and save yourselves. The transparency of their shallow, uninformed advice will only serve to expose themselves as naked experts with a total lack of basic market knowledge (otherwise known as an unexpert experts or claytons experts… the expert you have when you really don’t have an expert). I applaud these jokers, after all we all need a laugh and they
serve a useful purpose by helping create the change in the market that us “serious investors” greatly benefit from.
Remember one of the fundamental rules in property is…. make your money when you buy!
Successful Investing
We have crossed the line, the BOOM is OVER! Let the celebrations begin! The volume of indications coming from the market in the last few weeks confirms that the NZ Property market has changed its course and is moving into a new and much more exciting phase for property investors.
The new phase is NOT a BUST, though many of the exaggerated media headlines may refer to it as one, it is more a return to normal speed for the market rather than the over heated property race that has taken place in the last 12 to 18 months. We are entering a period of market consolidation, moderate growth and yes even minor falls in some provincial areas.
Property cycles are not as simplistic as we all would like them to be. Often the market doesn’t move from boom to bust, it moves from boom to periods of more moderate growth before booming again. We are now in a period where the boom is over and the market has returned to its “normal” operating status. This represents a fantastic opportunity for “serious investors” and will mark the exit from the market of the “fickle investors”. I will explain the difference between the two investor types below.
What has signalled the change in the property market?
Here is just a taste of some of the influences that in recent weeks have confirmed the market has significantly changed.
1. Property is taking more time to sell. E.g. the average number of days to sell property is increasing across the country.
2. Market Activity Slowing. The total number of property sales across the country is down by over 15% across NZ.
3. Price Growth Slowing. The average median sale price in all regions apart from Auckland, Wellington, Hawkes Bay and Southland has fallen.
4. Investment Barriers have Increased. Interest rates have risen twice in four months and are predicted to continue to rise.
5. Deceleration in Market Growth. The Interest rate rise on April 29, 2004 by the Reserve Bank
has further cooled a buoyant property market and further rises will have a compounding effect.
6. Key Industry Players Confirm Barrier Increase. Many banks have already started raising interest rates in anticipation of further rate rises by the Reserve Bank in June.
7. Investor Returns Reduce. Investors’ returns will fall as interest rates rise.
8. Competing Investment Types Increasing. Sharemarket confidence is on the rise.
9. Depreciation Changes. Rumblings of possible changes to depreciation rates for property from the IRD have not been clear or given investors confidence.
10. Employment Down. Internal economy strong, further fuelling inflation and interest rates.
11. Govt Lolly Scramble & Vote Buying Exercise Announced. Two Billion dollars released into economy further fuelling inflation and interest rates.
12. More Sellers Under Pressure. The words “urgent” and “motivated” are being used significantly more in property advertising.
13. Power shift from sellers to buyers. The ratio between sellers and buyers has significantly changed
There are many more indicators that all paint the same picture … the NZ property market has changed.
Investor Strategies in the New Market - Let the feeding frenzy Begin!The property market is cyclical and smart investors work with the cycle to achieve the best results. This new property phase will create many opportunities and some challenges. So lets look at these in more detail.
Negative Media
The property market will have an increasing amount of negative media coverage in the coming months.
There will be talk of the BOOM turning to a BUST, not because it has Bust but because sensationalism sells newspapers. There will be stories of investors flocking to the share market and other investments types. Property investment will no longer be fashionable and the property bashers will come out to play. Expect to hear stories of people who have lost money in real estate. This is not hard to do if you buy the wrong property at the wrong price in the wrong area at the wrong time, a speciality of “fickle investors” who buy on emotion instead of the numbers.
Many of the uninformed around you will be affected by the negative media coverage and start questioning the wisdom of investing in property.
Smile and ignore it all! Property investment is a long term wealth creation strategy, not an old pair of
pants you hop in and out of when they are in or out of vogue. We will use the current market conditions
to our advantage as you will see below.
Will Property Drop in Value?
The market has screamed ahead at 22% growth in the last 12 months and in some areas (largely provincial) there may be minor price corrections. A recent report released by PMI Insurance one of the country’s few mortgage insurers lists a number of market predictions for growth in the next 12 to 24 months. A link to PMI report is provided with this market commentary. My view is that the general conclusions PMI have drawn are correct in terms of how the change in the property market will affect each regional centre. However, the actual percentage movements forecast for property price variances in my opinion are largely overly pessimistic and reflect an insurer trying to paint a worse case scenario to the market.
What about the Australian Market Drop?
It is likely that some individuals will no doubt attempt to draw similarities between the Australian property market, which has had quite large price corrections in recent months and the New Zealand property market.
The two markets are very different. The Australian property market has had major price corrections because the market was overdriven by frenzied speculation that pushed prices above true value boundaries and market prices raced to a peak until buyers could not sustain this any longer (like a pyramid scheme that eventually runs out of buyers, the end result is that no one is left to fuel the scheme and therefore it collapses). Some areas in Australia have had more than 50% growth in 12
months. This was never sustainable.
The New Zealand market has had a much more sedate rise over an extended period of time and will have a much more sedate transformation back to normal market conditions. I, therefore do not think we will see widespread price corrections like Australia and this view is confirmed by the PMI Report as well.
Investors Leave
There are two types of property investors - “serious investors” and “fickle investors”.
“Serious investors” are those in for the long haul, they realise the importance of buying property and holding it for the long term. They will continue to work the market carefully finding sound investments and adding them to their portfolios as fast as they can without overcommitting themselves.
They relish the new market conditions as a time to harvest great buys and grow their portfolio base as wide as possible in a market where buyers hold the control and sellers are under increasing pressure.
The “serious investors” goal is to enter the next market upswing with a large portfolio of well balanced properties which can be caught by the next capital growth wave as it rolls across their portfolio and enjoy massive financial gains and financial freedom the wave creates.
The “serious investor” understands you can only reap in a capital growth boom, what you sow now.
The phase the property market is now in is very similar to the market environment that existed when David Hows and myself, started investing. For us then, the market was full of great rewards and we hope it will be for you too now.
“Fickle investors” listen to the likes of the media, taxi drivers, free negative gearing seminar presenters and their next door neighbours. They think they’d better get into property because everyone else is. They play follow the media! They don’t have a long term strategy, don’t buy well, don’t do the numbers, don’t invest intelligently, don’t structure their portfolios well for depreciation savings and get into property on a whim because it is the trendy thing to do at the time in the hope of making some fast
money.
It is these “fickle investors” who are a danger to themselves that will leave the market place, lose money and get burned. They play the game without learning or executing the rules and many will pay the price for their foolishness. Property is not a gamble unless you are foolish enough to make it one.
The “fickle investor” will be your next door neighbour or workmate who at the start of the next property boom will tell you their horror story of “how property never worked for them” or how they read a book that said…”the property market is going to crash”. Smile, thank them, and forget them!
Interest Rate management
The biggest priority most investors will need to focus on in the next 12 to 18 months is interest rate management. There is little doubt that interest rates are going up. They have gone up twice already this year and it seems another few rises are on the horizon, starting with another almost certain rise from Mr Bollard later this month.
My recommendation is: - if you have rates that are floating at the moment, fix them for 12 to 24 months. This will ensure you retain good cashflows on your existing property and are in a sensible position to move forward with more purchases into the future.
Market Wealth Strategy
Here is the investing strategy I recommend you consider for the new market conditions.
1. Revisit your investing rules and update them for the new market conditions
2. Consider getting get updated valuations on all your existing properties so you can utilise the equity increases that your property portfolio has enjoyed while the market has boomed in the last 12 to 18 months to secure more property in the coming year.
3. Focus on buying positive cashflow property. Capital growth purchases should only be made if you have enough positive cashflow from your existing portfolio to cover any negative cashflow loss caused by the capital growth property.
4. Don’t bank on capital growth. It’s just a bonus and will be received at normal levels in these “normal market conditions”
5. If you are going to invest for capital growth property in the next 12 to 18 months, go for beachfront anywhere or stay with the mainstays of Auckland, Wellington, Queenstown and Tauranga.
6. Cashflow property in some of the larger cities may come under some pressure as interest rates rise. So adjust your expectations to accept lower levels of positive cashflow accordingly or consider going cashflow shopping in some of the provinces like Rotorua, Palmerston North, New Plymouth, Wanganui, Dunedin or Invercargill.
7. Use the ESC Forums at
Sifting the Experts
An expert is someone who understands the property cycle intimately and knows how to work it in any market to grow their property portfolio and wealth. True “experts” who are “serious investors” will embrace the changes in the property market and be excited about the opportunities this new market phase brings, the new strategies that can be executed and the profits that will naturally follow.
Other “self professed experts” will expose themselves as “fickle investors” that run scared, sing songs of doom and advise people to head for the hills and save yourselves. The transparency of their shallow, uninformed advice will only serve to expose themselves as naked experts with a total lack of basic market knowledge (otherwise known as an unexpert experts or claytons experts… the expert you have when you really don’t have an expert). I applaud these jokers, after all we all need a laugh and they
serve a useful purpose by helping create the change in the market that us “serious investors” greatly benefit from.
Remember one of the fundamental rules in property is…. make your money when you buy!
Successful Investing
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