New Zealand's housing market is running hot and investors are out there buying. But is it really possible to pick up a bargain in this market? Miriam Bell finds out.
31 October 2020
There’s no denying it. New Zealand’s housing market is booming, with the latest data showing sales activity running red hot and regions around the country hitting record prices. Anecdotally, FOMO (fear of missing out) is, once again, at play and buyers are snapping up whatever they can get.
It wasn’t meant to be like this. Back in April, at the height of the level four lockdown, commentators were expecting a flood of distressed sales, significant price falls and a subdued market. At that time, many investors were gearing up for a market full of bargains.
But ongoing record low interest rates, the Reserve Bank’s removal of the LVRs, the mortgage deferment programme, and a range of other factors meant that didn’t happen. Quite the reverse. The amount of housing stock available for sale is at all time lows and that’s helping to fuel prices.
Yet investors are out there and buying. CoreLogic’s latest buyer classification data has mortgaged investors share of purchases in the last quarter at 26%: that’s the highest since 2016. This suggests there are some deals, if not bargains, out there. So we talked to a selection of experienced investors to find out how to find bargains in the current market.
Rates Have Changed The Rules
iFindProperty co-owner Nick Gentle is a veteran investor but, in recent years, he hadn’t been doing much active buying for his own portfolio. But since the advent of Covid-19 he’s bought four properties, despite what he describes as a very competitive market.
He says there are not really bargains that fit the classic investor definition – of a property you could buy for much less than it was worth – around in the current market. “But if you use a new definition of what constitutes a bargain you can find them. The rules have changed and it’s ultra-low interest rates which are the gamechanger.
“We now have a market where prices are higher and yields are lower – but because you can get such low interest rates it can still work. Investors need to change their focus from gross yields to cashflow though.
Bargain Hunting Tips
1 It’s about a change of mindset: focus on cashflow and managing your interest rates rather than gross yields. Generating cashflow and equity allows you to keep building your portfolio - Nick Gentle.
2 Make sure you have bulletproof finance sorted. Agents are conditioning vendors to take the offer with the fewest financial conditions. So, it’s a major pro and can be used in negotiations - Nick Gentle.
3 Finding a bargain is often about networking and the human touch, so get out there and talk to people, build relationships with agents and other investors. Word of mouth can be gold - David Whitburn.
4 Develop expertise on a few particular suburbs. Really knowing a suburb means you know what the risks are and what is actually a good deal as opposed to a false bargain - David Whitburn.
5 Target properties that are not subdividible and are in below average condition. Rougher properties are still good buys for investors who can add value to them very effectively - Mark Honeybone.
6 Think about buying off-the-plan, new build townhouses in good areas which are likely to see growth - Mark Honeybone.
7 Search for older listings on sites like Trade Me. This can take some time but when you find one that is available, it’s often been sitting for a while and is an opportunity to get a bargain - Daniel Timmins.
8 Look out for properties that have overgrown lawns and a bad paint job. These can be cleaned up and made to look amazing very easily - Daniel Timmins.
9 If you want to make money go for returns, it’s not about capital gains. It is all about the numbers, it’s not as sexy but it is what matters - Andrew Murray.
10 Go against the grain: don’t buy where everyone else is. Often when things look dire in a market like the Auckland CBD it’s the best time to buy - Andrew Murray.
“Think about it: if you are locking in 3% debt for five years it’s a good time to knock off some debt and get in front of any future cost rises. And you’d be looking at the same cashflow on a 5-6% yielding property that you would on a 7-8% yielding one.”
If investors don’t look at the market in this way and sit back and wait for it to revert to the way it used to be, it will sail by them and they’ll miss out on the opportunities provided by historically low interest rates, he says.
“Remember there’s massive demand for housing. I don’t advise buying on the assumption that you will get capital gains. But you can buy on the assumption that you will get tenants – and generate cashflow and equity.”
Despite the possibilities, there can be no denying the market is challenging. Investors need to identify exactly what they want in a property and for their portfolio, Gentle adds. “That will help you to evaluate and identify what is a good deal for you.
“Also, be aware that in any market there is always something that is difficult and right now that is finance. Having your finance pre-approved when looking at a deal is a big pro at the moment. Three of my buys have come about due to other people’s finance falling over. So ensure you have bullet-proof finance and use it as a negotiating tactic.”
The Power Of Networking
Prominent Auckland investor David Whitburn agrees that it’s hard work to find a bargain right now as buying a property 20% under value is, in reality, extremely rare these days. Having said that, he found a bargain in the most traditional of ways about five weeks ago. While working on one of his rental properties in Mangere, he got chatting to the neighbours. It turned out they wanted to sell and so he offered to buy.
“It’s not the steal of all time: they named their price and it worked for me. It was a $5,000 deposit from me and it’s about $10,000 under value. I’ll be adding in a new bathroom and kitchen to boost the value immediately. Additionally, I now have two neighbouring properties which can be combined for a development. So there’s potential there.”
That’s an example of how finding a bargain is often about networking and the human touch, Whitburn says. “Just having a yarn with the neighbours got me that deal. So talk to people! Get out there and network. Talk to agents. Build up relationships with them and with other investors. Go by word of mouth.
These things will lead you to deals.” Keeping an eye out for private sales is a good thing to do as for some vendors it’s not about price, he continues. “For various reasons, people often just want to get a property sold. Another tactic can be looking for mortgagee sales of new builds that haven’t been completed.
“They can turn out to be good deals. They can be hard to get funding for as banks don’t like lending on properties without a Code of Compliance. There are always non-bank lenders though.
With these types of properties, the due diligence is crucial. “But tread very carefully with them. It’s not something for the faint-hearted to do. Make sure you know what you are doing and have people on board who are experienced and know what to do.” Whitburn also recommends developing expertise in a few specific suburbs. “Some people go for everything and look at properties in 30 different suburbs. But that means they don’t really know much about any of those suburbs. If you are a master of a particular suburb, you know all about it, you know the risks and you’ll be able to identify what is a real deal.”
Think Old And Rough
The market might be hot right now, but it’s easier to find a bargain than it was four years ago and there are some good deals out there, according to Property Venture’s Mark Honeybone. He says that up until the market started to heat up there was a lot more stock around and there were people wanting to sell who didn’t want to. Now those vendors are coming back on to the market and they’re desperate to sell.
‘If investors sit back and wait for the market to revert to the way it used to be, it will sail by them and they’ll miss out on the opportunities provided by historically low interest rates’ NICK GENTLE
“So look for older listings. Those people want to sell so they are open to negotiation. Also, look for private sales for similar reasons, but they also tend to be better priced than properties at auctions. Talk to agents who deal with these sorts of listings. Also, talk to agents who specialise in distressed sales: we aren’t seeing many more yet, but there might be more going forward.”
It’s sub-dividable properties that are the ones going for outrageous prices right now, he says. That means there are opportunities in properties that can’t be sub-divided or developed, particularly if they are a bit rough. “Most home buyers want a nice place, not a do-up. So those places that are in very average, or below average, condition make for a buy that you can add value to quickly and cheaply. You can renovate to trade or renovate and hold to boost rents and get some gains.”
Another option – which had fallen out of favour recently - is buying off-the-plan, particularly in Auckland and Christchurch. Honeybone says they are selling a lot of small two to three-bedroom townhouses. “It’s not an auction situation after all. Developers set their price, often with more affordable Kiwibuild prices in mind and that is it.
“But, if you go down this route, make sure the property is in a good area which is set to do well in the coming years. Somewhere like Howick, for example: The median house price is up around $1.2 million, but prices are much cheaper for townhouses there, so they are good value as you’re likely to see some gain.”
He also recommends actively networking and talking to agents regularly to find deals. “Investors always need to make sure they have a clear plan for they want to do with a property and how much they are willing to pay for it.”
Regional Hard Yards
It’s not just big city markets which are currently booming. Regional markets – which are a traditional investor hunting ground - are too. Wanganui investor Daniel Timmins says that means it is hard and time consuming to find bargains in the current market. “To do it effectively, you really need agents on the ground that work with you to let you know when deals and contracts fall over so you can get a new sales and purchase agreement in as soon as possible.
“This happened in a recent deal of mine: two contracts had fallen over on finance and I happened to be talking to the agent just after the second one fell over. We had our cash offer in within 30 minutes and were accepted.”
Another strategy is to look at “private sale” pages, on Facebook. Timmins says he has seen a couple bought in Wanganui from people he knows and he would have considered them a bargain. “Within a couple months, and with no renovation, they are worth $60,000 plus more.”
He also uses the “latest listings” function when he searches and jumps to the last page and then calls agents to see if the properties are still available. “This can take some time and effort but when you find one that is available, it’s often been sitting a while and it’s often an opportunity to get a bargain. Look out for properties that have overgrown lawns and a bad paint job. These can be cleaned up and made to look amazing very easily.”
Timmins recommends getting some advice from experts. To start, find a good mortgage adviser and have a discussion to understand where you are at and what number you need to work from. Also, find someone who has done what you are wanting to do and ask them for advice. “But, when trying to get a deal, make sure you don’t get emotional and overpay. Multi offers and tender sales are more and more common these days. They are designed to make you bid higher for the property. Know your market and know what the house is worth to you. Know what you want to buy and wait for it to come up – and when it does jump as fast as you can.”
Go Against The Grain
The Auckland CBD apartment market is one which has been hard-hit by Covid-19. International students and people on work visas played a big part in the market and a vast amount of them have now gone. That has affected the market noticeably. Apartment Specialists’ Andrew Murray estimates that rents in smaller apartments that are more traditional investor fare are down by about 15%, while prices for those apartments are also down. “In contrast, prices in higher end apartments aimed at owner-occupiers are holding up. But there’s less competition for them as banks still treat apartments as B-grade assets and have kept the LVRs in place for apartments. So owner-occupiers are looking to houses more.”
Less competition across Auckland’s apartment market generally, combined with a decline in prices for investor-type apartments means that there’s nowhere it is easier to find deals than in this market, Murray says. “It’s a good time to buy. With apartments under 40m2, yes - you need 50% lending but prices are down by about 10%. That’s great for cashed up buyers. Smaller apartments above 40sm2 are selling below the average price they were in 2016, but that market will come back up so there’ll be gain going forward.
“Additionally, if you can come in and pick up stock with decent returns now, think about what rents and returns were like pre-Covid. Then remember that rents will come back in a couple of years. So, in those cases, you are likely to see much increased cashflow going forward.”
Murray concedes that the Auckland CBD is not looking very attractive at the moment, thanks to the diminished nature of office work and retail along with the disruptive infrastructure work going on. “But there’s lots of money going into the CBD. Think Commercial Bay, the convention centre, the City Rail Link, even the America’s Cup… It all points to a bright future. Office workers will be back. The CBD – and it’s rental market - will only get better, although not right away.”
That’s why now is a good time to go where other buyers are not and pick up an apartment bargain, he adds. “When things look dire that’s when it’s the best time to buy. People want to live in New Zealand: that’s not going to decrease. And it’s only going to get harder to find a CBD rental property because most of the developers have disappeared and no more stock is coming on to the market.”