My Thoughts On NZ

Hi,

Here is an interview that I did with a journalist on the topic of New Zealand real estate (circa Jan 2005). It is interesting to see the comments as I still feel they are valid, albeit that interest rates are higher again.

Is Steve positive about the NZ market at the moment? (If not, why? If so, why?)

Since January 2004, the NZ Reserve Bank has upped its official cash rate seven times meaning its benchmark rate is now 1.75% higher. After a several month lag, it seems the destabilising effect of these rate hikes has finally eroded investor sentiment, most evident in the Auckland where the property market isn’t as buoyant as it was even three months ago.

Generally, I feel the NZ property market has well and truly peaked, so I wouldn’t be recommending investors partake in speculative deals with a view of earning quick profits based on broad-based capital appreciation. Nor would I be encouraging investors to buy long-term buy and hold deals either, as property prices are more likely to fall rather than rise in the short term.

What I do like though are the 10%+ yielding properties in outlying regional areas that exhibit strong industry and infrastructure. In my opinion it is these properties that will outperform in the coming 12 to 24 months whereas off the plan concrete coffins in the sky (i.e. inner city apartments), which are already in oversupply, are likely to be a much riskier investment.

Finally, while there are buyers willing to pay a reasonable price, it may be a good time for investors sitting on significant unrealised profits to consider selling in order to cash in their gains. The same is also true for investors minimising losses on underperforming real estate too.

Has NZ been thoroughly picked over by investors? Are there positive cash flow opportunities still?

As in Australia, the vast majority of NZ investors have focussed on capital gains rather than cashflow returns, and as such, have tended to by-pass higher yielding regional areas in favour of larger population centers such as Auckland and Hamilton.

With values rising and yields dropping in these major business centers, investors are now seeing the sense of buying cheaper rental properties (say up to $70,000) that are already delivering gross returns of 10%+.

For example, a recent purchase we made was a block of 10 units that we bought in a North Island regional center for $230,000 on a gross yield of 10.28% per annum. You’d be hard pressed to find that sort of return in Auckland – or Australia.

It’s true then that investors have certainly given the kiwi property market very thorough once over, but there is plenty of opportunity remaining for investors who think differently to those who focus solely on acquiring long-term buy and hold metropolitan property.

Is NZ property overpriced?

Property is only overpriced if it doesn’t sell, and at the moment it seems that NZ property is still ticking over, albeit not as fast as it has in the past 12 months. This is more evidence that the market may have now passed its peak.

For those buying, it really doesn’t matter what a property was worth yesterday… all that matters is what it is currently worth in today’s market. For example, if you’ve identified a realistic profit making opportunity buying on the advertised price, does it matter that the property has just doubled in value in the past 12 months? This said, you must have a strategy for profiting rather than just a hope that prices will rise.

Personally though, I don’t think the current general property market – in Australia or New Zealand – is sustainable in the medium term. Property values will need to fall and/or rents will need to rise in order to improve the profitability for investors. Otherwise, the money will flow back into the stockmarket or other investments offering better returns.

Does he think the NZ market has changed in the past few years and if so why? What’s the outlook for the near-term?

The New Zealand property market has certainly boomed in the past 18 months, but nowhere near the extent of Australian real estate prices. This is because NZ interest rates have been higher, and because kiwi property seems to have much stronger decline phases that has subdued demand compared with the Aussie experience.

While prices may have risen though, the fundamentals are the same. That is, demand and greed drive prices up, while lack of affordability and fear will drive prices down.

Unless the NZ Reserve Bank dramatically increases its benchmark cash rate, the general kiwi property market is likely to be flat or mildly negative in the near term.

For Australians then, New Zealand house prices will, at first glance, seem cheap in comparison to Sydney, Melbourne or Brisbane values. Yet this belief is a false economy, as incomes are lower in New Zealand while interest rates are higher, meaning that it is not accurate to compare on price alone.

It would be much better to base your comparison on returns and factor in an appropriate risk premium for buying overseas property. For example, why would anyone invest in NZ and earn a 7% yield, when they can do the same in Australia? That’s why I always demand at least a 10% gross return on all my New Zealand property.

Regards,

Steve McKnight

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Remember that success comes from doing things differently.
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