Ron Hoy Fong - Will The Next Boom Be The Boom Of All Booms?

[RonHoyFong]

Hi Forumites

(A fair bit of reading here but I need your serious contributions!)

I have often wondered, is the next Residential Property Boom in NZ going to be Boom of all Booms? If it is, then as Residential Property Investors we should be planning our investment strategy to maximize its advantage and plan taking the necessary ACTION.

As to the Commercial Property Cycle it may a be totally different kettle of fish because that cycle is more aligned to the business and share market cycle that I am not familiar with.

In my analysis I take note of the effects of:
(1) The one million Baby Boomers born between the period 1945 to 1955 retiring at 65 year of age.
(2) The Children of the Baby Boomers who were later born between the period 1965 to 1985.
(3) Government current policy of no longer being a land lord
(4) The government coordinated “Population Conference 1997” which I attended.
(5) Robert Kiyosaki’s book “Prophecy”
(6) The anticipation of the next Property Boom approximately 2010 to 2012.
(7) Auckland City Council announcement that the city has little vacant land for new home and current capacity is likely to be used up between 2006 and 2010, and the R8 high density zoning

Of those people considered being Property Experts I have heard varying answers when asked what will be the effect on properties when baby boomer start retiring at the age of 65 years in NZ?

About 25 years ago when I was working for the Social Welfare now known as NZ Work & Income, the government took the initiative to increase the retirement age from 60 years to 65 years by doing away with the Age Benefit and changing the eligibility for National Superannuation Benefit to age 65 years. Australia incidentally pays the retirement benefit from age 60yrs so the effects of the Baby Boomers will start happening from 2005 onwards. In the UK I am told the government has changed the retirement age to 70 years.

So what will happen in 2010 to 2020?

1. 2010 will have already begun to show signs of a “recovery period” as we move into the next property boom. (Approximately every 7 to 8 years and shortening as we move further into the information age and advanced computerization, a fairly accurate and repetitive cycle.)
2. The one million or so Baby Boomer will start to retire at the rate of 100,000 people per year from 2010 through to 2020, so hence the immediate concern of reduced tax intake by government from work related earnings. (This reason alone will encourage Baby Boomers to hang onto their investment properties for fear of further changes to the Retirement Benefit because in the short to medium term the Government may no longer be able to afford it without huge increases in the tax take).
3. The reducing numbers of workers paying PAYE to the government to support the increasing number of ageing people for benefit and hospital care. Massive proportional changes to Employed versus Unemployed. Maybe the signs have already started given that we now have a postwar record of the lowest number of unemployed people under 65years of age. Earlier records would not have shown any indication of unemployed mums staying home for childcare. Today the majority of mums are also working, and this is reflected in the workforce, equal pays (EEO), large numbers of crèches’ opening up everywhere. Also this time around and something which we didn’t have in the past is the large numbers of migrants, who are on work permits. Remove these people and you will not have enough workers in the country today.
4. 2010 will be the start of insufficient numbers of workers to fill 50,000 to 100,000 job vacancies annually created by retiring Baby Boomers; this I see will reflect higher pay increases by employers competing to attract workers. As we all know higher pay means higher rents and higher cost of housing. (This may not be good for commercial properties giving consideration to reduced outputs in the manufacturing areas through loss of employees and higher labour cost)
5. 2010 will also see increasing numbers of the Children of the Baby Boomer who have already started to want there own homes and start their own families away from city apartments. This group of people are starting a little later in life caused by many factors such as, student loans, the kiwi desire to do an O/E, transient in their jobs nationally because of I.T. positions which never existed 30 years ago and was never more than just “Space Invaders” at the local diary or game parlors. The dream of home ownership is now more secondary, and as the city limits grow the attractiveness to live in the same locality of work is diminishing because of rising cost of housing. The desire to spend early income on travel, the cost to set up flatting today with additional things like videos, DVDs, computers, nice cars, microwaves and worst of all to get Credit Cards and Hire Purchase. All these things were generally purchased after getting a home and much of the early income used for deposit money is now diverted into paying rents. Prior to the 1980s government supported young families into homeownership with virtually no money down through the capitalisation Family Benefit, now the government has done a complete turn-around and has pushed the current generation into high debts and collecting a high interest through salary deduction via the IRD. Hardly much of a chance to save for a home in their early years of employment.
6. Irrespective of what happens the NZ future generation still must have accommodation to live in.
7. If NZ does absolutely nothing, all we can expect is an economic slump and a burden on the young generation today as Baby Boomer retire whilst at the same time retaining the power of control on who is to be taxed or not taxed. Refer Robert Kiyosaki – “Prophecy”

Solution

1. New Zealand solution to paying for the retirement of Baby Boomer, its welfare and healthcare can only be through IMMIGRATION. Like it or not this is a MUST.

or

2. Baby Boomers retirement age may be altered to 70 years plus as in UK to increase affordability. I doubt if this would work for NZ because it would be political suicide to any Government Party and the Kiwis would leave by the planeloads to Australia or alternatively spend 6 months in each country so as to not lose the Retirement Pension.

Consideration and Outlook

1. The population conference of 1997 indicated a gradual increase in numbers of migrants needed through to 2015 was estimated around 200,000 migrants per annum. However from by 2010 I believe the number needed will be 50,000 just to replace the present population plus another 100,000 migrants to replace the retiring Baby Boomers, making a minimum total of 150,000 migrants per annum.
2. Immigration hence means more people needing somewhere to stay, accommodation being accommodation is still needed in a overall numbers game for the Baby Boomers whether it be that they stay where they are, downsize, upgrade, or move into a retirement village or hospital and rest home for that matter.
3. But what of the new migrants? Where will he live? The answer is more housing permit on top of the expected boom that we get every cycle to house the children of the baby boomers who will also need their homes.
4. The last three years 30,000 housing permits signaled a housing boom.
Imagine in 2010 when history repeats itself except this time there will be the usual 30,000 plus an additional 50,000 building permits needed for 100,000 extra migrants assuming that they are couples plus children if any. Wow this can only mean a double boom!
5. Where will the migrants actually come from? Naturally a balanced globalization of migrants is ideal, however I don’t actually see this happening, because UK and Europe likewise will have their own Baby Boomer problem. Australia has always appeared to be a lot more attractive than NZ so its unlikely boatloads of Australian will come to NZ. China by then may not be an answer because of their one child policy since 1980 and so themselves will start to have there own employment shortage problems around 2020. Japan is having their problems already. Probably through the losses they encountered in the WWII and insufficient regeneration?
6. Migrant may either come from third world countries such as South America, Africa, or the Middle East. The alternative choice I would see is South East Asia, India and /or the Pacific region where it is over populated, has influences of Westernisation and at least many of the migrants will bring with them the work ethic and the financial means to set themselves up in NZ. I can’t see the point for NZ allowing surplus migrants from a region that will end up being a further burden on this country's finances in the earlier years. However this all comes down to an immigration policy of the day.

Resulting Outcome

There will probably be applications for housing permits at a minimum of 50,000 increasing to 100,000 per annum between 2010 until 2020. (2002 to 2004 was 30,000 permits per year and that was considered a housing boom.

If migrants come from poorer third world counties there will be a demand for rental accommodation with a lack of funds to build and hence rental increases, which in turn means better rental return for existing investors.

If migrants came from a more financial stable region this means more investors competing for investment properties, more developments, which will result in, higher property value increases in all rental areas, and but maybe a drop in rental returns. However if every investor is in there before it happens then the future can only be good for those who take ACTION now!

The Evidence Pertaining to Auckland City and surounding Region

Why an earth would Auckland want to spend so much money on Auckland’s infrastructure over the next 10 to 20 years

1. Expansion of Motorways northwards to Warkworth, freeways south of the Bombay Hills to Hamilton, spaghetti junctions developments, widening of motorways, completion of Auckland’s South Eastern Motorways to connect to the western Motorways, proposed corridors even if it has been cut back due to funds, R8 high density Zoning for housing, Widening of the Auckland Harbour Bridges and a possible second crossing between Auckland City and North Shore, Auckland Hospital and other Hospital developments, new shopping center at Sylvia park, NZ Railway workshop land in west Otahuhu to become an industrial park for 5,000 jobs and not so far away the East Tamiki industrial park to be the largest Industrial park in NZ with a proposal; of 15,000 jobs. Albany development as yet to become an even bigger city in the north plus surrounding Commercial and residential development, plus the proposals of Takanini ,Papakura, and Karaka to be designated as the new city centers by 2050 or sooner as some have suggested as early as 2035. Huge housing developments out Botony and Danemoora Southwards, and Helensville to become more connected to Aucklands growth, and what of the inner city growth in apartments, it maybe a bit early now but they will be needed in 2010 plus more, then look at the anticipated Panmure Basin development etc, etc, etc.

Recommendation

Buy as many cashflow properties as possible to maximise your borrowing ability.

Be in a position to raise equity on investment during the recovery period to buy some good Capital Growth Properties during the early stages of the recovery period.

Be careful not to over mortgage properties during the latter stages of the slump because if everything is locked up at LVR maximum of 80% you may not be able to raise equity to buy the Capital Growth Investments during the recovery stages. This is in particular to those who have most of their IPs outside of CBD areas. If you have sufficiently weighted your properties in the inner CBD the high LVR will not be such a problem because you can Top-up mortgage as values rise and still follow the Ripple Effect of the next Property Boom as it continues to widen it circle away from the epicenter.

Result

WIN WIN for all investors newbies and experienced alike

Training Resources

Naturally check out my DVD’s (6 hours) for all the HOT TIPS to accelerate you there before it too late!

Cheers Ron


PS- Some of the numbers here are estimate or guesses and welcome corection.

PS- As for the longer-term outlook I see 2025 to be coming Crash of all Crashes in the property boom because of the Baby Boomer buying accommodation in the local cemeteries, however that’s another matter.

Anyone wanting help or tips out of my DVD’s I suggest emailing me

I invite other FORUMITES their thoughts so a consensus can prepare us for the next BOOM !

[cube]

Good food for thought Ron, thanks.

An alternative argument is that when the Baby boomers start retiring, they will cash in their investments (Shares, IP, Gold) and cause a general bust in all investment markets.

The boomers swapping their houses for plots may be an issue, but those that have planned correctly will of course have things owned by a Trust which survives them, continuing to provide for the beneficiaries - who may or may not become trustees.

cube

[Edinburgh]

"Buy as many cashflow properties as possible to maximise your borrowing ability."

Hi Ron

Where is your focus, geographically, for the above and are you buying cashflow as easily as when you started?

Regards

[RonHoyFong]

Good food for thought Ron, thanks.

An alternative argument is that when the Baby boomers start retiring, they will cash in their investments (Shares, IP, Gold) and cause a general bust in all investment markets.

cube

Hi Cube

I initially thought that Baby Boomers will cash up on retirement, however when you think about it only 1% own 3 or more properties. If they cash up there will be even more ready young buyers and investors and migrants, around to snap up the deals. With the flow of expected migrants coming in at the rate of 200,000 from 2010 onwards I can't see an oversupply in a boom market anyway, and much of the baby boomer IPs are more than likely to be in Capital Growth areas because of "Old Money". Old investors will have had their IPs in areas such areas of CBD like Sandringham, Mt Albert, Morningside, Mt Eden, Ellerslie, Mt Wellington, etc. It is really the young investor and the large professional investors who invest in the areas such as Otara, Manurewa, Mangere, etc and who knows, its quite probable that these areas will also become capital growth areas in 20 or 30 years time as the Auckland CBD expands.

If you were a baby boomer retiring and expecting to live for 20 year I guess I may sell half of them to consolidate borrowings, or sell up the lot to buy commercial if I had enough understanding in that area of investment.

I would be worried if I sold them all because how would I secure an income against inflation and possible changes in the Superannuaton Fund.

Cheers Ron

[swapacrate]

Its nice to have a crystal ball, but your boom theory revolves around an increase in immigration.

Im against an increase in immigration to the levels you are talking about. I love NZ the way it is. I want NZ to think smarter. I want NZ to develop its products, instead of exporting raw products for other countries, we should be adding value ourselves. There is no reason a country like NZ cant produce an ikea and other types of industries that take advantage of our raw materials.

There are a million other options than just pure immigration. NZ needs to increase its competitiveness and not concentrate on basic raw materials. This takes a lot of thought and cannot be brushed aside just because some people are focussing all their eggs in one basket.

I personally like the concept of an increase in retirement age, I would like it to be voluntary though. A lot of older people I know, would do a very good job, if they were allowed. Some people want to have other people around for social interaction. Others may just enjoy fishing and golf. But at least they have a choice.

You also say in 2010 that there will be an inflow of 200 000 people a year. NZ's largest cities are: Auckland 360,000 - Manukau 260,000 - North Shore 175,000 - Wellington 165,000 - Christchurch 320,000 - Dunedin 120,000 and Hamilton 110,000. (These figures are about 2 years old)

So an influx of 200 000 migrants will create a new large city every year. How will NZers be able to cope with schooling, hospitals, roading, infrastructure and the list goes on.

There are many things to consider.

[Glenn]

That all makes for interesting reading Ron.

One or two thoughts.
whilst Auckland is bigger than the rest of NZ and has always had a life of its own it is not the only place that us baby boomers are able to live and make a living.
Having originated from Auckland a life time ago I can sympathise with you folks up there.

Aucklanders have always suffered from myopia. It might be big by NZ standards but is a baby compared with other big cities around the world.

Ron has some flaws in his arguement.
It all sounds great and looks good to buy lots of cash positive properties. As you get older most investors are less able to handle what that implies. Most (but not all) cash flow positive residential properties need higher management skills and higher labour input. This is not a smart thing to do for aging less tolerent, slower, and timid Joe average mum and pop investors. I should know about 30% of the properties I manage are in that category. Most of these come to me because their owners have been burnt and had a good scare dealing with the trash that inhabit our cites.

I would think with Ron's can do attitude he would have the skills and patience to handle this. But many people are not like that. They might not have had the education that I got growing up in Auckland. Not that I have come from South Auckland or what ever.
As well as the street skills one needs you also need to be part social worker in order to reach empathy with your tenants and motivate them to put the rubbish out, and pay the landlord rather than the pokie man.

[RentMaster]

One other thought.

If New Zealand is reaching retirement age because of the baby boomers, then the same is going to happen in a lot of other countries around the world as well. So if people are retiring all over the world, and they too are trying to attract immigrants, then where are all the immigrants going to come from? We surely only want to accept in people with skills who can add to the economy, and not to the welfare system.

[RonHoyFong]

"Buy as many cashflow properties as possible to maximise your borrowing ability."

Hi Ron

Where is your focus, geographically, for the above and are you buying cashflow as easily as when you started?

Regards

Hi Edinburg,

My buying has slowed down because of my buying rules, I am in a situation where I am now Rent Reliant and therefore subject to different lending criteria’s. My personal goal is to buy Cash-flow properties only until I have reach a level of income that suits me, at this stage I am half way there and have allowed myself a few more years to achieve it so am not in too much of a hurry. In saying this my buying rule are to ensure anything I buy is a minimum average of 10.5% gross return before tax. Your rules may well be different so should we be both looking at the same property it may well be a profitable cash flow to you and not be for me. So the answer to your question is actually 2 fold.

A. The availability of finding investment property is best in a "Buyers Market" when vendors are more motivated to sell below value.
In a early Boom Period or the start of a "Sellers Market" there’s is a greater likelihood for rents to be a lot higher in proportional to property values before the start of the ripple effect, so hence a lot more properties returning 10% and higher. (Naturally by the end of a Boom properties have increased a lot more percentage wise than rents and so comes with it falling returns. ie the Flat Market")
We are now moving into the early stage of the slump which is a "Flat Market" where it is neither a Buyers or Seller Market. At the moment (spring, summer, schools, nice weather, outdoor living etc) I see investors who are trying to buy at WHOLESALE VALUE competing with homebuyers who are prepared to pay RETAIL VALUE. Come Winter the motivation for Home Buyers lessen and that’s when properties take longer to sell thereby increasing number of urgent sales or motivated vendors become more negotiable with Buyers. Also many vendors recently have made some quick capital appreciation on the value of his property and will be a lot more flexible on his price with this new found profit if he is motivated.
With interest rates now reaching a float of 8.75% and the availability of stock, property hunting has become a lot harder, however the REAL DEALS are still out there (see attached).. To keep the buying momentum the suggestion is to look beyond to square.
E.g. Buy properties that you can add value to, buy do-ups, renovate, look at adding a minor dwelling to existing properties, add rooms, add garages, add simple things like washing machines, fridge, microwave etc – anything that will add to the rental return. The important thing is to keep looking at the market, stay knowledgeable and be an expert in a few areas.

B. Where I am Geographic buying?
Where I am buying may not necessarily be suitable to you for whatever reason. However my areas of expertise is in Mt Wellington through to South Auckland, but also have properties in Kelston, Mt Albert, Sandringham, Mt Roskill, and Onehunga and have followed a lot of “Brad Sugars Top 10 Tips” which can be downloaded from the Richmastery website.
I have promoted a triangular area from south of Sylvia Park, Otahuhu, through to Otara, which I promoted in my DVDs with all the reason why.

Cheers Ron


TIP - Just remember the REAL DEALS are not there waiting for you. They are only there briefly when you just happen to be looking in the right place at the right time.

[RonHoyFong]

Its nice to have a crystal ball, but your boom theory revolves around an increase in immigration.

Im against an increase in immigration ............

I personally like the concept of an increase in retirement age,...........

You also say in 2010 that there will be an inflow of 200 000 people a year. NZ's largest cities are: Auckland 360,000 - Manukau 260,000 - North Shore 175,000 - Wellington 165,000 - Christchurch 320,000 - Dunedin 120,000 and Hamilton 110,000. (These figures are about 2 years old)

So an influx of 200 000 migrants will create a new large city every year. How will NZers be able to cope with schooling, hospitals, roading, infrastructure and the list goes on.

There are many things to consider.

Hi Swapacrate

I absolutely agree with your thoughts and as typical Kiwis no one likes changes so hence this string to stimulate everyone’s thinking as well as mine so as to better prepare us for future property investing.

I was hoping we forumites would ourselves be the crystal ball!

Perhaps the answer is part immigration combined with increasing the age eligibility for Superannuation Benefit again over a graduated period as they did when they removed the Age Benefit at 60 years.

Sorry - when I was talking about Auckland I meant it in a regional sense, and also as an example nationally for those readers out of town. It’s just that I am a 3rd generation Aucklander and hence refer to it because of familiarity to this area. I haven’t really looked at other cities in depth in any way other than what I am picking up through property trends in public editorials.

You are correct when you say there are many other things to consider, however the over riding factor is that Baby Boomer will still start to retire at 65yrs of age either voluntarily, have a pension scheme, forced out through redundancy, health, or most likely through natural attrition by employers, and there is still the need to replace these workers somehow?

(Thanks Swapacrate – great contribution, keep it up!)

Cheers Ron

[cube]

In saying this my buying rule are to ensure anything I buy is a minimum average of 10.5% gross return before tax.

Is that on purchase, or after you have renovated?

cube

[muppet]

Hi Guys

RonHoyFong wrote

In saying this my buying rule are to ensure anything I buy is a minimum average of 10.5% gross return before tax.

Ah ha. Shades of the 11 sec rule.

Regards

[RonHoyFong]

That all makes for interesting reading Ron.

One or two thoughts.
whilst Auckland is bigger than the rest of NZ and has always had a life of its own it is not the only place that us baby boomers are able to live and make a living.

Aucklanders have always suffered from myopia. It might be big by NZ standards but is a baby compared with other big cities around the world.

Ron has some flaws in his argument.
It all sounds great and looks good to buy lots of cash positive properties. As you get older most investors are less able to handle what that implies..........


As well as the street skills one needs you also need to be part social worker in order to reach empathy with your tenants and motivate them to put the rubbish out, and pay the landlord rather than the pokie man.

Hi Glenn from Nelson (Mainland NZ)

My suggestion of buying lots of cash positive properties was aimed at all investors and not just the Baby Boomers retiring.

You are correct and your views from outside of Auckland is very much part and parcel for the NZ as a whole. I guess I was being a bit simple to speak of what energy I might have left in me when I turn 65 years in year 2013 to look after properties. However I had consider perhaps consolidation of property numbers, reducing LVRs, turning to commercial, or more than likely placing it into the hands of Property Managers so that it will allow me to secretly sit side by side with tenants at the pokies. Maybe my kids will look after the properties when it’s all transferred into a Trust?

Sorry - when I was talking about Auckland I meant it in a regional sense, and also as an example nationally for those readers out of town. It’s just that I am a 3rd generation Aucklander and hence refer to it because of familiarity to this area. I haven’t really looked at outcomes of other cities in depth in any way other than what I am picking up through property trends in public editorials. This is where I call on thoughts of other forumites for input

I acknowledge my can do attitude won't last forever but hopefully I can achieve most of my goals by 2010. (Didn’t seem so long ago we were all celebrating New Years Eve 2000 millennium.)

Even if us retiree are cashing in our properties, I still see an even number of migrants needing a bed wanting to buy and therefore don't see a drop or crash in property values.

Conclusion - Is there "to be or not to be" a "Boom of all Booms?" (by William Shakespeare + Ron)

Thanks Glen, your input is valued

Cheers Ron

[Julian]

The trouble with trying to second guess what might happen in the future is that there are so many variables that could change everything. It relies on the status quo continuing.

For example, China and Taiwan look to be squaring off at each other more strongly than they have for a while. Suppose that evolved into WW3. Or suppose the government was to lift the age of retirement to 75 one piece of legislation could change the playing field considerably.

There are just too many variables. Ron you may have hit it spot-on, but equally, you could be so far off the mark that it will be laughable. Only time will tell.

Personally, I'm having more than enough fun trying to come to terms with what is, without trying to fathom what will be.

Julian.

[RonHoyFong]

One other thought.

If New Zealand is reaching retirement age because of the baby boomers, then the same is going to happen in a lot of other countries around the world as well. So if people are retiring all over the world, and they too are trying to attract immigrants, then where are all the immigrants going to come from? We surely only want to accept in people with skills who can add to the economy, and not to the welfare system.

Hi RentMaster

(Your software for Landlords and Property Managers is brilliant)

Your other thoughts regarding the same problem happening with baby boomers in other countries I covered in the beginning under "Consideration + Outlook" paragraph 5

5. Where will the migrants actually come from? Naturally a balanced globalization of migrants is ideal, however I don’t actually see this happening, because UK and Europe likewise will have their own Baby Boomer problem. Australia has always appeared to be a lot more attractive than NZ so its unlikely boatloads of Australian will come to NZ. China by then may not be an answer because of their one child policy since 1980 and so themselves will start to have there own employment shortage problems around 2020. Japan is having their problems already. Probably through the losses they encountered in the WWII and insufficient regeneration?
6. Migrant may either come from third world countries such as South America, Africa, or the Middle East. The alternative choice I would see is South East Asia, India and /or the Pacific region where it is over populated, has influences of Westernisation and at least many of the migrants will bring with them the work ethic and the financial means to set themselves up in NZ. I can’t see the point for NZ allowing surplus migrants from a region that will end up being a further burden on this country's finances in the earlier years. However this all comes down to an immigration policy of the day.

Yes I absolutely agre with your thoughts, but will there be a BOOM OF ALL BOOMS around 2010 to 2012. If so, what is the ACTION to follow?

Cheers Ron - and thanks for your valued input

[RonHoyFong]

In saying this my buying rule are to ensure anything I buy is a minimum average of 10.5% gross return before tax.

Is that on purchase, or after you have renovated?

cube

Hi Cube! Hi Muppet

I look at it on the after I have renovated cost.

e.g. I look at the potential gross annual rent I expect to achieve after renovations divided into the purchase price plus renovation cost to achieve the % return.

However if my current rental % should increase over the existing properties I will be a little flexible on my rules when that happens. On the other hand if the current floating interest rates drops below 8% again likewise I will also relax my 10.5%.

For most non-Rent Reliant Borrowers the following simple formula should apply
Current Floating Interest Rate (CFI) + 1.5% = Minimum Gross Rental Return % (MGRR%)

As a Rent Reliant Borrower I use CFI + 2.5% = MGRR%

My suggestion to all newbies is to stick to nothing less than 10% untill we see a relaxation of interest rates.

In saying this I think there is another more accurate rule where Gross Rents x 70% is used?

Cheers Ron