Looking back on 150 Issues
In this landmark issue for NZ Property Investor, Amy Hamilton Chadwick looks back on a dozen years of massive change, discovers gurus come and gone and uncovers the lessons learned for today’s investor.
19 May 2016
Consider these two numbers: 2004’s REINZ median house price of $240,000, and today’s median house price of $495,000.
Looking at those figures, you might assume property has steadily increased in value and property investors have sat back and calmly watched their equity accumulate.
But those two numbers offer only a tiny glimpse of the full-colour, all-action tapestry of the past 12 years in property.
It’s been a volatile and sometimes nerve-wracking time for investors as property prices have boomed, deflated, stagnated and in some places boomed again. Interest rates have crashed, yields have halved and depreciation has all but disappeared. Gurus have come and gone, strategies have waxed and waned – but through it all, anyone who’s managed to hold onto their properties since 2004 has come out a long way ahead.
The global financial crisis (GFC), the Christchurch earthquakes and the leaky building crisis have played significant roles in the property market over the past decade. All three have caused huge problems, but also created opportunities for investors. The GFC saw a 15% drop in real house prices across New Zealand and the recovery times have caused a tectonic shift in the real estate market. Auckland soared to new highs and continues to outperform most of the nation; other regions remain at below-2007 prices today.
In Christchurch, the earthquake changed the physical and investment environment. The initial post-quake fallout saw “a lot of bad things happen to property investors,” Martin Evans, former NZPIF president and director of A1 Property Managers, says.
“No tenants and damaged properties. But then the rebuild started and there was a shortage of properties, new opportunities, and rents went up remarkably – though they’ve come down again.” A surge in the purchase of ‘as is, where is’ damaged properties between 2013 and 2015 allowed quick-thinking investors to make some fantastic buys.
Old And New Issues
The construction of leaky buildings ended in 2004 with the new Building Code, but the impact of the crisis was felt most acutely in the following decade as apartment buildings, homes and even schools were faced with massive recladding costs. A small number of property investors were able to buy acknowledged leaky homes in Auckland at very low prices and remediate them before selling at an excellent profit. Experts say thousands of leaky buildings in New Zealand remain undiagnosed and this problem is expected to have a long tail.
And one new issue that has had no upside: the rise in the use and production of methamphetamine, or ‘P’. Police data from 2009 found that 75% of the meth labs busted by police were discovered in rented properties.
“This is the single major risk factor that’s turned up for landlords in the last 12 years,” Brian Kerr, Marlborough PIA president and author of The Complete Guide to Landlording, says. “It’s a drug that can destroy a house.”
New Lending Landscape
Low interest rates have been the biggest change for the average Kiwi property investor.
Ushered in as a result of the GFC and its aftermath, interest rates that traditionally hovered between 7% and 12% are now sitting firmly below 6% with the OCR at an all-time low. Further, there’s apparently no immediate danger of these rates suddenly spiking.
“We have ridden a pretty big property wave over the last 12 years but people shouldn’t lose sight of the fact that that has also been driven by interest rates,” John Bolton, founder of Squirrel Mortgages, says.
“It’s kind of natural with the interest rate drop that asset values should effectively double, which they have,” Bolton says. “Cheap mortgages are also driving down yields. We’ve moved into a world awash with debt. Disposable incomes have dropped significantly because so much more of your income is going to the rent or the mortgage. Any asset that has got an income stream has appreciated hugely as interest rates have gone down.”
New Zealand’s supply of lenders has also changed, with most second-tier lenders knocked out by the post-GCF higher cost of funding. Banks are more enthusiastic about lending and the level of bank debt since 2004 has also increased massively – probably doubled, Bolton estimates.
The way we borrow has changed, too. “Back in the 1990s, if you paid lump sums off a mortgage you could never get them back,” Evans says. “Now you can put $5,000 cash on your mortgage and six months later ask for it back. Revolving credit is great for people who can manage that. Having a revolving credit or two made it so much easier.”
Rules, Models No Longer Apply
Remember the old 2006 ‘rules’ for buying rental properties? You wouldn’t settle for anything less than 8% gross yield, but you backed yourself to get 10%. You always bought at 20% below value, even if you had to put in 100 cheeky offers (which was occasionally recommended by property mentors of the time).
Anyone who tried to stick to those rules in recent years, however, soon discovered it was no longer possible to make them work.
“That was the hardest thing for me – changing the concept of wanting 10% yields. I just never got any properties! I had to adjust or miss out,” Evans says. “To stay in the game you had to recalculate.”
Expectations on yields have halved in Auckland, Mark Withers, partner at Withers Tsang, says. “If you can find 5% in Auckland you’re happy.”
In 2008, Hamilton investor Daryl Fisher was paying around $320,000 for brand new cashflow neutral homes. Those same houses are now worth $580,000 to $600,000. “But to buy now as a rental? They don’t really stack up,” Fisher says. “Basically, I’m after anything that shows 2% above the five-year interest rate, about 6.5% at the moment. I’ve been chasing blocks [of units], but I haven’t been getting many!”
The short-term rental market is the only area where yields have increased, though only for those who have embraced the emergent Airbnb model. It’s a lot of work and the risks are higher than a traditional rental, but if you’re prepared to take the good with the bad the yields can be outstanding.
Gurus, Forgotten Trends
Several property strategies burned red-hot for a few years then fizzled almost without trace, recalls property journalist and former NZ Property Investor editor Diana Clement.
“In 2006 there was a huge trend on lease options and sandwich lease options. If you weren’t doing lease options you just weren’t an investor,” she laughs. “There were also a lot of mortgagee sales and billboards up in the poorer parts of town with investors wanting to buy houses privately and get them for nothing. There was a trend for a delayed settlement and you’d do the renovation during the settlement period. And you’d hear a lot of people talking about JVs [joint ventures] or sandwich JVs. Everyone was very gung ho.”
The boom of 2000 to 2007 saw a raft of new property-related businesses, particularly the rise of the property mentor. “Every man and his dog who wanted cashflow became a property finder or mentor,” Clement says. “A lot of the people selling mentoring had only been through one cycle, and a lot of them disappeared. Kiwi Property Investment magazine disappeared. At some point Richmastery imploded. Organisations just disappeared off the face of the earth.”
The names Richmastery and Blue Chip are now synonymous with an unsustainably aggressive model of property investment that gained huge traction between 2000 and 2007. The failure of these businesses during the GFC burned many Kiwi investors. Blue Chip’s investment apartments lost enough value to damage the reputation of Auckland apartments for many years to come, keeping them under-priced from 2008 to 2014, when they took off like a rocket and saw massive gains.
“I didn’t like apartments, they made me really nervous,” Lisa Dudson, financial adviser and director of Acumen Consulting Group and co-owner of iFind Property, says. “But four or five years ago I started buying them, all in the Auckland CBD, and now I love them.”
One other name, Dean Letfus, also crops up several times when it comes to memorable events in the property cycle. The investor-turned-mentor had a strong following before the GFC, but declared himself bankrupt in 2011. Letfus was well-known for his seminars and interviews where he talked about all his mistakes; “I thought, if he’s making that many mistakes should he really be giving out advice?” Evans says.
“Dean Letfus and Richmastery really epitomised that rah-rah, go-getter, risk-taking approach,” NZPIF executive officer Andrew King says. “They’ve gone by the wayside; a lot of their teachings were risky.”
Property Gets Political
Over the past decade property has become a political issue: politicians now frequently talk about housing affordability, property investment and property-related legislation, something that happened rarely before 2007.
“We’ve seen the over-politicisation of landlording and the demonisation of landlords – I find that really, really sad,” Brian Kerr says. “There’s a lot of heat and not much light in these discussions.”
Craig Paddon, former NZPIF president and principal of Craig Paddon Lawyer, was at the forefront of NZPIF’s entry into the political sphere. In 2004 the foundation had its own lobbyist for the first time and began to represent property investors’ interests in discussions with policy-makers. Since then it has forwarded submissions on amendments to the Residential Tenancies Act (some of which were Foundation-initiated), changes to Tenancy Services and the Tenancy Tribunal, the Licensed Building Practitioner scheme, the Unit Titles Act and information sharing between WINZ and landlords.
“We also made submissions about capital gains tax across the political spectrum – we were opposed to that,” Paddon says. The political push was part of an NZPIF effort to help landlords run sustainable businesses. “We were trying to get away from the old ‘Ma and Pa’ type industry view and make it more business-like.”
Property finders and property managers also felt the heat from politicians. Finders must now be licensed agents, while the standard of property management has seen a definite increase, according to Daryl Fisher. “A lot of private companies are really stepping up to the mark. Some aren’t, but the good ones are growing very well.”
Political pressure has also been brought to bear on the quality of houses. Tenants are demanding – and getting – warmer, drier homes with heat pumps and insulation. A rental ‘warrant of fitness’ has been hotly debated; smoke alarms and insulation will be compulsory in rentals from July 2016 and 2019 respectively.
“There’s no question the quality of houses provided has improved considerably – inspections, insulation, heating, management – the expectations are higher on both sides,” Brian Kerr says. “Good landlords know it’s competitive out there.”
The Tenancy Tribunal’s systems have also changed considerably since 2004, mostly for the better, but wait times remain the same – too long.
New Era Of Volatility?
In another 10 years we’re going to look back at this as a golden age for property investors, Bolton says. “Over the last 20 years you’d have to have been a complete moron not to make money out of property. Over the next 20 years you’ll have to know what you’re doing. There’s a lot more risk than in the past.”
King doesn’t agree. He believes the traditional property cycle will continue to operate but each cycle will go on for longer and the price rises could be less extreme. But while the economic environment and the optimum strategies change often, the foundations of property investment remain the same: cashflow, value-adding strategies and risk management.
“Buy well, add value, look for a twist, think about the tenant – try to get that yield up,” King says. “That’s just as important now as it was then. How you achieve that is probably based on how much time and experience you have.”
With so many strategies out there and a flood of advice available online, it’s easy to be overwhelmed with information, Dudson says. Remember the fundamentals – especially net, not gross, yields – and consider any new strategies in the context of your own personal circumstances. It’s vital to keep sight of what’s important to you, rather than getting caught up in the latest news story or property chatter.
“I’ve been advising people for the best part of 20 years, and I think they’re fundamentally facing the same issues now as they were then. Step out of the hype and think about the realities of the long-term management from your perspective – financially and personally.”