Olly Newland column: 'Panic in the market'

[PeterEmpowerEd]

Quick note to let you know Olly Newland's latest column is available at www.EmpowerEducation.com

Always worth a read, this month Olly responds to recent pronouncements from the Reserve Bank Governor, discusses the implications for the NZ property market, polishes up his crystal ball, and indulges in just a little 'I told you so' about apartments.

To download, go to Empower Education homepage (link above) and click on "Free Articles".

regards,

[SwissKiwi]

Cant get that page - is the site down ?

[muppet]

Hi Peter

Thanks for the link but having much difficulty accessing it.

Will try again in the morning.

Regards

[roseneath_rat]

Need to supply email details etc. in order to access that article.
Cut & paste text please?

[Aston]

Panic in the Market -- Olly Newland's Column, October 2005
Allan Bollard, the Governor of the Reserve bank has finally said what all of us already knew -- or should have known. He said that we are living beyond our means and a correction on all fronts, especially residential property, is now a certainty.
Just over a year ago I wrote my book The Day the Bubble Bursts where I forecast much of what Mr Bollard is now warning us about. At the time I received some flack for being a doom merchant especially by predicting the deluge of cheap apartments that would hit the market creating problems all around.
Was I right or as I wrong? Where are my critics now?

I take some justified comfort from the fact that thousands of readers of my book have in some way heeded my warnings and have now set themselves up in less vulnerable positions. Likewise in my consultancy work I have assisted many people to sell off their non-performing residential properties, reduce their debt, or switched to higher yielding commercial properties. People who seek my advice know that I represent no-one and the advice that I give is totally independent.

My latest book Climbing the Property Ladder (due to be released in a few weeks) is NOT about 'how to get rich in the property market.' It's more about my mad-cap adventures in the property world and the lessons I learnt - either bad or good - from my 45 years experiences in the market.
You will learn even more from this book, my sixth since I started writing in 1978.

With regard to Allan Bollard, he has a tough job ahead of him and I frankly cannot see what he can do other than try to jaw-bone the economy into a recession.
His problems are:
(1) Daft promises by the major parties prior to the recent elections which promise to pump billions into an already overheated market.
(2) A balance of payments deficit which puts us into 'banana republic' status.
(3) House prices at all time highs.
(4) An overvalued dollar.
(5) The highest interest rates in the Western world -- and going higher.
(6) Exporters struggling to sell overseas in the face of adverse exchange rates.
(7) Business confidence slumping.
( A lame duck parliament.
(9) Kiwi households spending 112% of their income thence no savings.
(10) Massive internal borrowings by households especially by people spending the increased equity in their houses.
(11) Oil prices 50% on 12 months ago.
(12) Inflation increasing.

Need I go on?

To make matters worse, we have the likes of the Real Estate Institute (hardly an unbiased body) advising the public to take no heed of the Reserve Bank and suggesting house prices will continue to climb.
Beware. Take anything you read from the Real Estate Institute with a grain of salt. Remember their members livelihoods depend on a booming market.

Furthermore we have reckless loan offers from various banks cutting their mortgage rates to cost (albeit temporarily), promising holidays, paying legal fees, offering interest-free periods, and, worst of all, 100% loans. I believe the offer of 100% funding is the most reckless I have ever seen. It would be far better for you to stay renting rather than saddling yourself with 100% finance and no equity. If the market should wobble ever so slightly you could end up with a 110% mortgage or worse.
Just you watch how quickly the bank which lent the money in the first place will then sell you up -- in a flash, and without blinking an eye or shedding a tear in the process, should you be caught owing more than you own.
I would insist that any 100% mortgage contains a provision where the lender promises not to sell you up in the event of any wobble in value. (And if they refuse what does that tell you?) Better safe than sorry.
It seems to me that given all the problems outlined by Mr. Bollard, tinkering with interest rates will only be a part of the answer.
If he is not careful we will end up exacerbating the situation with an old enemy: 'stagflation' or raging inflation and high interest costs on one side and high unemployment, negative growth and a stampede of our best and brightest overseas.

If those twits in Wellington would just stop pushing their greedy snouts into the trough trying to engorge themselves on the public purse and instead raise their sights a little they may actually do some good. The country needs decisive action and it needs it soon --not some willy-nilly time out in the future. A decisive government (which alas we will not have) would take firm action.
A little dull pain now is a whole lot better than a massive heart attack later which only creates panic in the market. Sooner or later the government (which government?) will take action but by then it will be, in all probability, far too late.

Governments are notorious for acting too slowly and too late. Therefore their actions will have to be far more extreme. We could see knee-jerk or panicky moves such as introducing destructive stamp duties or capital gains taxes or other nasty impediments to control a run-away market.

The property market, like any market, loathes uncertainty.
What will the Reserve Bank do next?
What flavour government will we have?
What will the economy do over the next twelve months?
My guess is that we will see a sort of inertia creep in, with many investors quietly selling off unproductive assets -- selling them to those who still think the market will climb forever egged on by spruikers with agendas to fill.

Wonderful opportunities will arise for those who are on their toes and who regard consolidation in the same light as expansion.
Consolidation and expansion are two sides of the same coin.
Get rid of your useless property and buy property that will continue to grow and pump out money. Many residential investors are doing just that.
From what I am seeing and from what the real estate agents tell me, droves of residential investors are climbing into commercial property attracted by better yields and proper water-tight leases (not to mention that there is no Tenancy Tribunal to harass the landlord from morning to night).

The great problem that Mr Bollard has is that he has only one blunt instrument to use to control the economy, and that is interest rates. Once upon a time the Reserve Bank, together with the government, controlled foreign exchange rates, how much money you could send overseas, the amount of credit the banking system had, even how much deposit you needed to buy a car, a washing machine or a bed.
All that is gone now.

We are at the total mercy of market forces and anybody with a few dollars could throw our currency and our economy from one side of the room to the other. There are many people today whether in New York, London, Paris or Moscow for that matter who could buy New Zealand in a twinkle.
Don't believe it? Go back to 1992 when the American financier George Soros took on the English pound and forced a devaluation, He 'broke the Bank of England; and made $1.1 billion for a couple of days work.
If Soros and his like can take on the Bank of England what sort of plaything does the New Zealand economy represent?

Bollard can bluster and stamp his foot and put up interest rates but the shock will wear off soon enough. Within two or three weeks it will be all forgotten.
Christmas is coming, summer weather, BBQs, holidays by the beach, latte at the sidewalk cafe. Nothing much will happen until next winter--unless of course some other unforeseen event occurs which brings matters to a head more quickly.

My message to all investors is to consolidate and do it quickly. Sell off cheap and nasty properties, get rid of cheap and nasty tenants, reduce debt, and consider investing in commercial property instead.

It's going to be an interesting year.

Olly Newland
October 2005
© 2005 Olly Newland. All rights reserved.

http://www.empowereducation.com/Olly_column_Oct05.bz