Podcast: Special Show with the NZ Everyday Investor Podcast. Part 1: Forces for Bad in the Property Market | Ep. 226

Posted by Ed McKnight on 27/04/20
Forces for Bad in the Property Market 001
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Show Notes

What's Covered in the Show?

In this episode, Andrew and Ed feature on the NZ Everyday Investor Podcast, which is hosted by Darcy Ungaro. Darcy recently asked us to come on the show to talk about forces for good and bad in the property market.

In part 1 of the 2 part series, we talk about the forces for bad, the things that could typically pull property prices down on average. During tomorrow's show we'll talk about the forces for good that good work well for property prices.

We also mention our property investment webinar, where we are going to talk through how you can grow your property portfolio from 2 to 5 properties and get more money from the bank.


Transcript of the Podcast

Ed McKnight: Hello would welcome along to the Property Academy podcast. I'm your host Ed McKnight and today on the show, we're doing something a little bit different. One of my friends Darcy Ungaro recently had us on his podcast the New Zealand Everyday Investor podcast where Andrew and I talked about the things that could go well for the property market in the future and the things that are erring negative.

It was split in kind of two segments. So, we're going to share both over two episodes. Today you're going to hear about the bad, the things that are a little bit scary, the things that are not working so well for the property market. I hope you enjoy.

Darcy Ungaro: So today we're just going to cover off this question or this thesis, has the property market crash or will the property market go through a correction or a crash of some sort? Let me just ask you guys this question. Has or will the property market crash in New Zealand?

Ed McKnight: There are two parts to it really, in terms of a crash one's in terms of prices, one's in terms of volumes. Now it's really interesting, some data just came out, released 7 days ago from the Real Estate Institute of New Zealand, which releases data about property prices.

Now this is for properties that settled in the month of March, before lockdown, and these are properties that would have been signed and gone unconditional before the lockdown started. And what's interesting is just as a starting point, before the whole lockdown, was that the median New Zealand house price rocketed up to $650,000.

Now it only hit the six hundreds about three months ago. I know that the month of February, the median New Zealand house price was 615 K, March 650 K so it increased by $35,000 in that month. So just in terms of prices the latest data we're seeing, is that prices are very buoyant and healthy. Now, of course, the big question is, well, what's happening in the April data?

We don't know what's happening to prices right now, and we won't find out until the data's released about the 10th of May. But what we do know is that volumes will have crashed. The number of properties that are being signed will crash. And that's because properties generally cannot settle during this time, or it's being recommended that they're not going to settle.

And Andrew can talk a little bit more about that in terms of what the Auckland District Law Society has suggested around that.

Andrew Nicol: One of the main points there is around the value of properties or what they're being sold for. So one thing to remember is that there has to be a sale at a lower price for a price valuation to come down. And so, then you require multiple properties to sell at a lower price for the market to kind of come to a screaming halt, or crash, because we have to recognise properties as an average. And there will always be outliers.

You'll always have some people who will, out of desperation coming out of maybe a level 3 or a level 2, they may have a failed business, and so yes, they might sell a property at a lower rate, but they're are going to be few and far between. And because the banks have been so generous with allowing these mortgage holidays, they're giving facilities which allow people to hold onto properties for maybe six or 12 months without making payments or making interest only payments.

I believe that there's going to be a lot of people who maybe defer their mortgage payments in order to get their life back on track or to get their businesses back on track. And so, because those sales aren't coming through at a lower rate than what they might have been, you know, a month before.

That's going to mean that people can hold tight, and so the market might not drop a lot. It might just go stagnant for a while and so people will be able to weather the storm a lot easier than maybe if some of those products weren't available.

Darcy Ungaro: Gotcha. So that the key message there is that due to the fact that there's a lack of transactions that we can actually look at, it's not even really possible to say what's happened to the property market? Because like you said Ed, the volume just doesn't exist.

So, it doesn't matter what the price is because no transactions are occurring. So we're in this weird no man land where void of information, and it's just all speculation at this stage.

Andrew Nicol: What we've seen in past times like the GFC, people tend to hold onto properties if the value goes down. And so again, even if the value goes down a little bit because some other people are selling at lower rates, it doesn't mean that unless you're forced to sell, you're going to recognise or crystallise any of those losses. And so, this is where, this is probably the main reason why the market tends not to drop as much as economists tend to predict.

Darcy Ungaro: So let's talk about some of the negatives, some of the reasons or, and there's a lot of articles out there, and people that were putting out those headlines, saying that the property market will be crashing, are you usually quoting some themes or some, some common things.

So, we'll call these the forces for evil, if you like. Let's start with the Airbnb dynamics. So, do you want to just talk to us about how this would potentially work.

All these people that have these Airbnb units that they're letting out in short term basis, converting them into long-term rentals, what impact that has.

Ed McKnight: Oh, this was one of my favourite topics Darcy because I think that the Airbnb effect is very concentrated in a few key areas.

So, there were 66 council districts all around New Zealand and in 27 of those council districts, if all Airbnbs converted into rental properties, Longterm residential tenancies, it would only add less than 4% stock onto the rental market.

So, let me just give you a bit of a sense around that. If every single whole home Airbnb, so the whole home that's laid out on Airbnb converted into a residential tenancy that would only add 6.16% supply onto the rental market. 6.16%. I've crunched the numbers myself, there's about 33,000 whole home Airbnbs in New Zealand, which is about 70% of all Airbnbs and there are about 590,000 rental properties.

So that's how you get that 6.16% but there are a small number of districts about ten districts which have a high concentration of whole home Airbnb's the most concentrated district has McKenzie district and South Canterbury.

Now, if in McKenzie district the same thing happened, all those whole home Airbnbs converted over into residential tenancy properties, it would add 73 to 74% supply to the market. Queenstown is about 52, Thames/Coromandel is about 51, Ruapehu Tasman all of those really tourism hotspots, they've got a high proportion of whole home Airbnbs, so that's where it is most risky, those are the areas that have the most risk of having a big, Airbnb shock.

Darcy Ungaro: Not a homogenous thing that we're making a comment on. This is very case by case. Okay, that's good. So tell me...

Andrew Nicol: Sorry, just to add in there a little bit as well, with the stuff that's in say downtown Auckland, you'll probably find that a lot of that might be apartments, so they're not necessarily going to have a major impact on three bedroom or four bedroom houses in Auckland.

So again, there might be some people that shift if they, if they're in a two-bedroom townhouse a bit further out, they might move into town, potentially. They might be some changing around there, but we don't see a major change in a very traditional house, which is probably more likely to be an Airbnb in Queenstown than it will be in Auckland because more likely in the inner city you are getting an apartment.

Darcy Ungaro: So then moving onto another thing that could affect or put downward pressure on the actual prices of property. What about, let's talk about the supply side, because you know, we've been ramping up recently as much as possible.

Developers are producing a lot more stock and you guys are all over this. I know in terms of who's doing what and producing what right now in terms of new stock that's coming to market, what effect is this going to have when these developers are probably dumping what the pre-existing stock is, and then there might be a bit of a quiet time where maybe some developers go to business.

What do you see happening on the supply side of the equation?

Andrew Nicol: So what I'm seeing at the moment with developers is they're a lot more favourable to a discounted price. So right now, we're in that really sweet spot where they've had four weeks of not having any business, and there might be another couple of weeks before they get a whole lot of contracts. And so, we're able to go out and try and negotiate maybe 10, $20,000, off a contract, in some cases up to 50,000 off a property in Auckland.

So, there is the desire from developers to do some more deals in the next month or so. Now that will be short lived, that won't last forever because they have got increased holding costs because they've had to hold and not construct in this period.

But for most developers there's probably not a huge amount of pressure for them because banks require so much pre-sales before they start a development that nowadays that they tend to have most of the development sold before they even break ground, certainly that will be true for most of our developers if it was a single unit, single house development it's typically sold prior to the fact that they even start with the consents and anything like that.

The other thing to remember is of course there has been five weeks, or by the time, by the time level three kicks in, there's been five weeks with no construction. So that's all come to a screaming halt. And so, there's not going to be this massive influx of properties because there aren't very many that are finished that aren't sold.

Darcy Ungaro: Okay. So, let me put it another way, and again, I'm just trying to unpackage this force for evil a little bit more, the supply side bit. So, is it paused or is it lost? Like is there a risk that some of this new supply coming online is just pausing? It'll recommence and it'll go faster just to kind of catch up to where it was or, or is it lost somehow? Do you know what I mean by that?

Andrew Nicol: I think generally speaking, that's paused having said that I know at the moment there's companies who are basically reassessing their developments at the moment. So some of them have stopped, and they're not going to release new projects, so that will have a flow on effect later, but having said that, if they get some momentum in existing projects, then I imagine, I mean, they're developers, they make money from developing.

They will want to get those other projects up and running as soon as they can. Once there is a bit of momentum in the market again.

Ed McKnight: And just to add to that as well, if developers aren't able to make projects where you can pull them from the market bearing in mind that most of these houses aren't built so they can't flood the market. That's actually going to be a force for good in terms of house prices because you don't have as much new supply coming onto the market.

Ed McKnight: Well, that's part one of these two part episodes with Darcy Ungaro from the New Zealand Everyday Investor podcast. Hey, they do a really good podcast weekly show where they talk about all different types of investors and Darcy always has some really good guests on. So, if you are interested in that, then it's well with searching for that in your podcasts listening app. Of course, please don't forget to rate, review and subscribe to the show. I

t really does help us get the message out to more people and hey, if you are interested in learning more about property, Andrew and I are doing a webinar this coming Tuesday all about how to grow your portfolio from two to five properties and how to get the bank to turn the lending tap back on if they've constrained you at the moment. So it's well with coming along to that, I'm going to link it up in the show notes, but also just hit along to the Opes partners website Opespartners.co.nz and you can register there.

Thanks for listening to the Property Academy podcast, I'm your host, Ed McKnight, 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 the New Zealand property market.

Until next time.