We recently attended a property event presented by one of Beyond Recruitment’s Chartered Accounting clients, and we were captivated by three hours of informative presentations regarding the economy, and how it relates to current and future property market trends.
Our attendance was not only to stay up to date to add value to our clients and candidates, but also because we are both interested in the property market personally, so the information received was very relevant. The two speakers had some similarities in their outlooks blended with varying points of view.
Property Inflation
The first speaker, Tony Alexander produces regular economic commentaries for BNZ. A seasoned presenter, he entertained from the moment he started speaking right up to his final word. He started by recalling his first house purchase in 1987 when mortgage interest rates were at 18.5%. Whilst house prices were a lot less in 1987, we paid interest rates that today’s first home buyers simply cannot relate to.
In a recent LinkedIn post I made the comment that in 1985 I purchased a 650m2 section for $21,000 in South Auckland. It was sold for $45,000 in 1991 and I purchased a three bedroom home in Papakura for $120,000. That home is now worth over $600k! I failed to mention in the post that the interest rates were around 20% at that time, and credit card debt was at around 24% interest. It was a very different property game to the one we face today.
The 10 Year Cycle
As most who are interested in the industry already know, we are facing trends that are taking us away from the previous repeated ten year property cycle. There are several factors making an impact on this change which I’ll go into shortly. If history repeats, we have one year to go with 2017 being year ten in the cycle.
One impactful statement Tony Alexander made is that the economic models we’ve previously used to offer growth and trend predictions for the property market are no longer working. So how can we look at trends accurately? An interesting question to ponder.
Shock Events
The second speaker of the evening presented solid information about developing and investing in the property market, but delivered his address from a slightly different view. Matthew Gilligan, one of the Directors of Gilligan Rowe CA, spoke from a qualified space, having assisted many developers and investors with property decisions as well as investing significantly in his own development projects. Gilligan presented the idea that a shock event could create fast change. He also said that yields are not making sense right now, which is a concern, and that an increased risk of interbank lending is possible. This unpredictability in the market could push rates up.
Impacting Factors:
1. New Zealand Economic Growth:
While dairy is weak, there is a lot of strength in tourism, export education, wine, pip-fruit, kiwifruit, honey, manufacturing, and construction, which offset the weakness in dairy.
2. Auckland Growth:
Auckland is different to the rest of the country and able to deliver something to NZ that no other NZ city can. It is New Zealand’s agglomeration, delivering growth from the fast interaction of talented young people from diversified backgrounds. Auckland was 21% of NZ’s population in 1961 and now it is over 34% and heading towards 40%.
3. Migration:
It is not feasible to change the migration laws. We can all use Google to get statistics on net migration, but here are some interesting numbers presented by Tony Alexander:
“In a nutshell, the surge in net migration inflows from three years ago to 67,000 from 1,100 has been driven by 28,000 fewer people leaving, an extra 9,000 Kiwis and Aussies leaving a weakened Aussie economy, and 14,000 higher student numbers. Only 15,000 of the 66,000 three year net inflow surge is true foreigners coming to live here.”
Migration is strong, and will remain so for some time yet.
4. Construction:
The Auckland house supply is not close to a boom. There is a shortage of builders, a shortage of developable land, a shortage of land and with Auckland not simply being land banked, development costs to finance infrastructure can be huge. Supply will rise but the shortage is still getting worse.
5. Interest Rates:
No they are not about to rise strongly. What Tony presented here was obvious. Historically the cycle is that economic growth starts with jobs growth, followed by wages growth (which is not happening right now) and spend growth which goes on to create inflation growth followed by interest rate increases.
Interestingly, wages are holding and not increasing, meaning there is not an increase in spending.
A simple example given here is that we used to work all week so shop late nights and weekends. We’d see a piece of furniture advertised during the week for say $300. When we arrived at the store on Friday night, the price had increased to $350 and the options were limited, so chances are we’d buy it at $350. Today, we’d likely get out our smartphone, ask Google to help us find comparative options at a better price, and head to another store, or better still, buy it online!
6. Regional Investing:
It was suggested we be very careful about population growth assumptions. Gilligan also spoke of key fundamentals when deciding where to invest in property, and it fits well under this heading. Consider these points:
- Population growth (demand for housing)
- Tight land supply (asset value growth)
- High average incomes (when we experience shock events and rates increase, income certainty will have a significant impact)
Investors are questioning growth assumptions and will eventually wonder whether they can liquidate their asset quickly, should the ability to rent again get tough in the less popular places.
7. Aging Population:
There are more houses required for the same population. Baby boomers are likely to hold their housing assets for the income they yield.
8. Overseas Buyers:
While this dried up from 1st October, it was only a temporary pause. They are returning in force going by the reports over the past six weeks with sales increasing again.
9. Backlog:
There is a backlog of frustrated buyers, but prices are not scaring buyers off. They want to buy and eventually will raise the deposit to do so.
Summary
The overall advice was, buy now in Auckland if you can, with the next best locations being Hamilton and Wellington. Prices are not about to go down, more people are raising their deposits and many investors are waiting in line to buy at auctions.
Interestingly, Matthew Gilligan had a slightly differing view, pointing out that we are at year 9 of a 10 year cycle and that an unexpected shock event can impact interest rates and buying power overnight.
A little similar to psychologists attempting to prove their theories; there is no absolute proof and there are compelling arguments for and against.
Is it time to buy a property? The ball is in your court.
