Podcast: 5 Reasons Why The Property Market Might Not Fall In Value As Much As You Think | Ep. 234

Posted by Ed McKnight on 05/05/20
5 Reasons Why The Property Market Might Not Fall In Value As Much As You Think 001
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Listen to the Show

Show Notes

What's Covered in the Show?

In this episode, we discuss 5 reasons why the property market in New Zealand may not drop in value by as much as you would otherwise think. These reasons are:

The drop in interest rates make it cheaper for homebuyers and investors to purchase property. Lower interest rates also decrease the return from term deposit, which encourage investors to seek yield in the property market First home buyers are able to save money throughout the lockdown and are likely to form new savings habits Investors are likely to move their focus from New Zealand's regions and instead pull back to the major cities, which have more diversified economies and have greater prospects for employment Similarly, investors are likely to move their focus from commercial property to residential property The Reserve Bank's increase in the money supply through the Large Scale Asset Purchasing Programme is likely to create a Cantillon effect, where investors seek higher yielding assets, which will likely push up the price of shares and property Bonus: the loan to value ratio restriction are being removed, which allow investors to invest with more freedom.

We also mention our upcoming property investment webinar, which is being held this Tuesday at 7pm. You can sign up using the previous link.


Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host, Ed McKnight, and I'm Andrew Nicol, and today on the show we're talking about six reasons the property market may not fall as much as you'd otherwise think.

Now this comes from a really interesting article we've read by my favourite economist, Tony Alexander, friend of the show who's been on, and it was really interesting. He pulled apart about six different reasons why the property market may not fall as much as everybody seems to be making it out to be.

And the really interesting thing, Andrew, just before we dig into this, is that the media or the articles that I'm reading, are so hot and cold, I would say I was on the Radio New Zealand website just a couple of days ago and one day I saw all these articles about why the property market is going to fall in value, while why property price is going to decrease.

And the next day I went back to the same website with articles about why the property market is going to do well. And so, there's so much conflicting information and that's why I really like reading from people like Tony who have had about 25-30 years' worth of writing about the New Zealand property market and the New Zealand economy.

And you know, seeing what they say and look, it's quite pleasing as well. I should just say before we dig into these six reasons to see that a number of them are ones we've talked about on the show. So let's dig into these again. Now, the first one that we want to talk about is this idea of low interest rates. Interest rates have never been this low in New Zealand. I read an article just the other day about why the official cash rate may actually go into negative territory and what that would mean.

Of course, that wouldn't mean that mortgage rates would go negative, but they would likely fall a bit more and low interest rates, of course, allow first home buyers and anybody purchasing property for themselves to take on more debt or be more willing to do, to take on more debt, even if they're tested at the high rate, but they're more willing to take on larger mortgages because the cost of servicing that mortgage stays the same.

They can take on more debt, but still make the same repayments because interest rates are lower and look the flip side as well that we keep saying with interest rates is that of course lending becomes cheaper, but also keeping your money in the bank becomes less profitable. And so those investors start looking for higher yields.

And of course, as mortgage rates come down, investing in property becomes more profitable, it becomes more cheaper. And that means that you can now actually get a higher cash return out of an investment property than you can with term deposits. That wasn't the case before. So that's really important, and we're expecting to see both this to have a stimulatory impact on the demand, both from property buyers for themselves, personal property buyers, and also for investors.

That's number one. Andrew, what's number two?

Andrew Nicol: Number two is one that Tony talked about quite a lot, which is money being saved and so Ed and I off air, were both just commenting on how much we're able to save during lockdown because you don't have those same expenses.

And this is not just personally, but actually in my business, in an obviously, we're not traveling right now. And, the massive amount of savings for the company is actually quite drastic. And so it makes you consider, making more permanent changes. So us, for example, we might consider not traveling as much and doing more virtual meetings because it's become the norm for the young people who are at home, who are not spending money on going out at the weekends and coffees and, and eating out for lunch all the time.

And again, overseas travel. All the things that we do in just normal course of life. All of a sudden you've got more money to put into your savings account. And seeing that grow is quite rewarding. And it's interesting because it takes two months to form a habit, and by the time we're out of this, essentially, there will have been two months of a reduced amount of spending.

And it will be interesting to see how that flows onto more permanent, habits being formed in terms of people's spending.

Ed McKnight: Fantastic. Let's go on to number three then, which is investors pulling back to the cities. Now investors have been much more active in the regions over the last three to four years, and we've correspondingly seen a boom in house prices in a lot of regions around New Zealand from Gisborne and Manawatu Whanganui has done very well. Hawke's Bay, many of the regions house prices have skyrocketed over the last three to four years.

Correspondingly Auckland has done very poorly. So over the last four years, since 2016 Auckland's probably seen about a 7% rise in house prices versus 30% across the rest of New Zealand. Now that is what we'd expect because Auckland is now relatively under-priced compared to where it was four years ago, because everyone else has caught up.

We're expecting those investors to pull away from the regions and come back to the main centres, which tend to be a bit more secure because there are more jobs, there's greater employment here, there's a more diversified economy, and so we would be expecting to see investors come back into Christchurch and Canterbury. We already started to see prices go up there, but also in Auckland as well.

So that's number three. Andrew, what's number four?

Andrew Nicol: Commercial property worries. And, this is a really interesting one because it reminds me of the GFC, and I think I've mentioned this a few times.

I remember after the GFC, walking down Cuba Street in Wellington and seeing the number of vacant shops and retail stores available. And I remember thinking, I'm glad I'm not a commercial landlord. Whereas all of my residential properties were being rented.

And so this is where it's really interesting, the difference between commercial and residential, if businesses fail, there's no longer a need for those premises. And so they can sit empty for years. And in a lot of cases they did in Wellington, especially in central Wellington, and again, going back to some business decisions that companies might make, all of a sudden owners of businesses might be a lot more flexible with allowing people to work from home.

So you maybe don't need as much office space as you once did. And so there might be some major changes in that market. Now, if then people are going to enter the commercial property as an investment, the market as an investment, they're probably going to change that and are highly likely to switch back to residential, which is a lot more stable in a recession.

Ed McKnight: Yes, exactly. And it's interesting, I'm doing a lot more running at the moment, out and about around the streets and do a lot down around Newmarket and going down Broadway. Now Broadway and Newmarket has typically, or previously been a real highlight of Auckland's retail scene, and has previously been, you know, one of the best places where you'd go to shop.

Now, we've recently had a big Westfield mall be built there. And so many of the stores which used to be on prime real estate on Broadway have all moved into the Westfield and are now vacant. And so it just occurs to me that it's really interesting that you can have quite large shifts in commercial when a mall comes in you know, or something else gets built, or foot traffic changes and consumer trends change, that you don't have that same kind of swing that you have in the residential property market, which tends to be more stable simply because you've got more people who are active in the residential property market compared to the commercial, and because there just aren't these same big swings, that can automatically happen because somebody comes in and builds a mall.

Now let's move on to number five, which is this idea of money printing, which has come from the government. So the reserve bank has announced that they're doing a large scale asset purchasing program. We've talked about this on the show. It's currently valued somewhere between 30 to 50 billion, the target is moving kind of quite frequently but we do know that there are going to be billions of dollars going into purchase government bonds.

Now what does this mean. First of all, it decreases the interest rate on government bonds because the reserve banks willing to give them money, but it also crowds out that investment. So if there were investors out there who are looking to put, say, a hundred thousand dollars into government bonds, they're no longer able to do that because the reserve bank came along and bought them before they are able to get that.

Now that creates money because people have a hundred K or whatever they were going to invest within those government bonds now available in their bank account. Now they've got to figure out what they're going to do with it. And this is what is known as the Cantillon effect.

Now, we actually talked about this on the NZ Everyday Investor podcast just a little while ago that you would have heard, which is where, if I think I have an actually, where the Cantillon effect says that when there's an increase in the money supply like this, that money tends to go into assets.

So things like shares or property, because those people who had the money, now I've got to go figure out what they're going to invest in. And remember, they're not going to put that money into term deposits because the yield on that is so low. So, we're expecting that additional money that was going to go towards government bonds is now more likely to go into shares and property, and that will have an inflationary and similarly impact on those markets.

So we've actually, I think I said they were going to be five topics we're going to talk about. We've actually got a bonus one, Andrew, what's number six?

Andrew Nicol: Well actually we're going to bonus two because as I was reading through these, I kind of put two more in there and I'm just going to group it together and say bank stuff. so that I can make it count as one.

So, while we're recording this the reserve bank is reviewing LVR restrictions and there is a high probability that those will be eased and that's going to allow people to borrow more money. And this is great because all of a sudden, if people can buy properties with the lower deposit that allows them to go out and purchase at a high rate and that stimulates the house prices and along with the that and my second bonus round is mortgage deferrals, so the banks are willing to give people time to catch up on mortgage payments at the moment.

And if they can't do so because of average income or anything like that. And so what that means is that, if someone is in a desperate situation now where they might've been forced to sell their property in the previous GFC, if they came under this financial pressure, they don't need to now because you get six months on deferred payments or 12 months on interest only.

And so that's almost by default it's pretty easy process and so this allows people a lot more time to find other income sources or just sort their life out. And so those two things together are going to mean that the market is going to be more robust than what we saw in the GFC.

Ed McKnight: Fantastic. Well, let's wrap it up there, but please don't forget to rate, review and subscribe to the podcast. We really do appreciate it.

And hey, I'm just going to read out another review from somebody that has left one on Apple podcasts. Now this is a four star review. It comes from a loose iPad, I think it is. And the headline is excellent, and the comment is, you guys provide truckloads of very useful info for NZ property investors, one episode a day as well. Well done and keep it up. Well we're definitely planning to. So we really do appreciate it when you leave a review, it really helps other people like yourself find us.

Andrew Nicol: Oh, sorry to cut it in there. Ed's actually looking at the moment to find, to source some of the mugs that I had made for him with him and my face on for the podcast review people, so Ed's going to look at sending some of those out in the future as well.

Ed McKnight: Yes, well we're going to have to find a way actually to get people's addresses so that we can send these out so that what Andrew is just referring to there is the podcast artwork.

He very kindly surprised me one day, oh gosh, listen to this, it sounds like we're in a relationship, Andrew, with our faces on these mugs. And I think I've actually got it in Christchurch at the moment. I don't have it with me in Auckland, but we thought, look for people who are really into the podcast, we will start sending these out so that you can drink your daily coffee with our faces on it while you're listening to the show, maybe we'll start doing it.

We'll have some reward for people who get their mug and then post it on social media or something like that. That could be quite fun. And of course, please don't forget to sign up for our webinar, which is coming this Tuesday. It is about the strategies to live off your property portfolio and how to build passive income, we're going to go really deep and share some strategies with you. You can sign up for there at the Opes website or I'm just going to link it in the show notes. So tap or swipe over that cover art.

Thanks for listening to the Property Academy podcast. I'm your host to Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of New Zealand property market.

Until next time.