Podcast: Special Show with the NZ Everyday Investor Podcast. Part 2: Forces for Good in the Property Market | Ep. 227

Posted by Ed McKnight on 27/04/20
Forces for Good 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 2 of the 2 part series, we talk about the forces for good, the things that could typically push property prices up on average. This includes LVR changes, interest rates, changes in the money supply and internationals moving to NZ.

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

Transcript of the Podcast


Ed McKnight: Hello and 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, Andrew and I on his show, the New Zealand Everyday Investor podcast, where we talked about the things that are going well for the property market and the things that are going not so well, the things that could cause a decline in house prices.

Now, it was such a good episode that we've chopped it into two parts, where yesterday we talked about the things that were erring negative for the property market.

Today we're going to talk about the really positive signs that we're seeing and the reasons that Andrew and I are feeling slightly optimistic about the property market. So, I hope you really enjoy these audio clips.

Darcy Ungaro: So now let's, let's go on the other side and talk about these, these upward forces, surprising to talk about this. And we don't want to sound overly optimistic.

We've got to acknowledge the fact that, yeah, it's pretty scary out there and there's a lot of uncertainty out there. But just because it's uncertain doesn't always mean that it's bad or it's wrong. It just means that we just don't know.

So, let's talk about some of the good things, and we've already touched on the fact that the Reserve Bank just today have announced that they're reconsidering the LVR regulations, and that hasn't yet gone through, they're proposing that. But let's talk about the, the lower interest rates.

So, this has already been happening and with the surprise, while sort of surprise-ish cut of the OCR down to 0.25 now and the subsequent drop in a lot of the fixed rate loans, I have 3.05 for a one-year rate. It's phenomenal if you can get it, it's cheap. And it kind of touches on this theme that I'm aware of called the Cantillon effect. I'm not quite sure if it goes aware of that term, the Cantillon effect.

Okay, well, for what I know, and I've only just read a little bit about this, is that the, the theory goes, it was, I can't remember the guy's first, I don't know if it was Richard or something like that, but in the late 18 hundreds or something like that, could be completely wrong with all this, by the way. But he put this, this theory out there that when there's an increase in the money supply. It should have an inflationary impact. But because of the people that are first in line to benefit from that money creation, it actually creates asset bubbles.

So, before it gets to those who really need, like the everyday consumer, it usually starts with those higher up in that pyramid structure, those who are already wealthy, and it has the effect of increasing asset prices. So, the theory is that the more money that you generate, the higher asset prices go.

And you know, if you watch what's happened in equity markets, sharp sell-off, sharp recovery as at today, and, that's a clear example of how when you create more money, when you inject more money into a system and it inflates asset prices, this happens in the property market as interest rates have gone down over time, we've seen prices just continue to go up and up and up.

So as a floor support or even a force actually increased property prices, what do you think of that? Do you think that as interest rates drop, is it reasonable to speculate that we could actually see house prices increase after we're out of lockdown. What do you think of that?

Andrew Nicol: So, I definitely think there is going to be some demand for areas that people couldn't get into because it was unaffordable previously. So, for example, Auckland is a great property market, which all of a sudden in the last, you know, few months, you are able to buy a property there, even with 100% borrowing, even using your usable equity as your deposit. So not putting any cash in and your top upper week, allowing for all expenses is modest.

And when I say modest, I mean like under $50. So, you know, a couple of years ago I would've told someone they need to budget for sort of $300 a week top up to buy a property in Auckland 100% borrower. Today, it's like $38. So, I think that that is going to absolutely mean that more investors look there.

So, I've got probably three clients at the moment, and Wellington who never would have looked at Auckland because it was too expensive all of a sudden, it's cheap. It's not just affordable. It's cheap. And so, people are actually going to go in there and start investing, and then you look at somewhere that's cheap, like Christchurch for example, or Hamilton, and you can buy a property and a pays for itself.

And so, all of a sudden, you're creating a lot of demand for more rental properties because people know that this is a short-term blip. And then if it took three years to recover, if you not having to top up your investment for three years. It doesn't really matter how it performs, so long as you get into that market and you actually secure a good price now, I think it will recover a lot faster and you'll actually see some upward pressure, particularly in the affordable markets.

And in the Auckland market because people can now afford to get into a market where they previously couldn't.

Ed McKnight: I'm going to jump in there as well to talk about the money supply. This is really interesting because the other side of interest rates the Reserve Bank's come out and announced the large scale asset program, now what is this, this is where the Reserve bank comes and says, we're going to buy up all the government bonds and we are going to push down the interest rate that investors can get on government bonds.

So, they come in. Buy it all up. And that means that any investors who we're going to go and buy government bonds now can't buy government bonds. So, what do they do? This is how the money supply actually works, is that now investors have got money that they've got to go and do something with. And so, what are they going to do?

They've got to go invest somewhere else. Now, this was one of the reasons, and you just brought up the article before that I think property could do really well, is because the interest rates are so low, the share markets in flux, there are a lack of other opportunities to invest and a lack of other stable asset classes that investors can go and use that money on, especially now that the Reserve bank has announced they're going to go out and buy bonds from the councils and local governments.

So, there's a lack of alternative investments. And now the interesting thing about the decrease in interest rates is that, number one, it makes term deposits. less profitable, but it makes property more profitable as a cash asset, as an income generator. And that's because the biggest expense in an investment property is the cost of the mortgage.

Now, if that goes down by 20% or 15% because the interest rate's decreased from 3.5% to 3% that has a significant impact to the cash you can pull out of a property. And I think the blog you pulled up, the article I wrote, showed how it increased the cash out of it by something like 2%, and it showed how property as a cash generator now, can get a better return than term deposits, which wasn't the case previously before the interest rate cut that wasn't the case.

Darcy Ungaro: Yeah, that's a good point. And it's this whole theme, you know, as interest rates go down, there's this hunt for yield. The conservative investors forced to go up. A little bit, aren't they? They're forced to get away from cash, forced to get away from fixed interests, and now they're entering more into property and those that are in property are getting more into, say, commercial property, and then they're getting more into equities.

Those that are in equities seem to be going more into alternatives. So, it's this hunt for yield, and it has this interesting ripple effect as interest rates get lowered. It's, it's just phenomenal because it just effects everything. So, let's talk briefly now about New Zealand as a safe haven, because I've often said this, that New Zealand, honestly, and this is coming from, you know, I wasn't born in New Zealand, but I am a Kiwi.

New Zealand is absolutely the best place in the world to live. If you've travelled, you understand this and or if you've come from somewhere else, you really understand this. The rest of the world is absolutely waking up to this.

What do you think you know, and think about the, the response that our government has had, you know, being proactive in handling this pandemic. What impact do you think that will have to New Zealand, you know, in terms of its attractiveness to people who might want to own a slice of the action.

Andrew Nicol: Yeah. So, we've actually been dealing with a lot of expats, and so part of this, because potentially New Zealand is familiar to them and now they're thinking, actually maybe we'll just come back to New Zealand a little bit sooner than we originally thought. Some of those people are looking at investing in New Zealand now.

Our government has done an excellent job at dealing with coronavirus in such a swift and confident manner and so that does give a lot of confidence to investors and, but here and overseas, and of course whilst we might not have a lot of people coming into the country in the next wee while if the borders remains shut, you also don't have people leaving either. And so people might want to sit it out here, you know, actually get their roots into New Zealand.

They might not be planning on moving to Australia. And like I was talking to one of my investors today who were planning to move overseas at the end of the year, she's deferred that decision for another year. And so she's probably going to look at buying a house for herself here as well as an investment.

And so all of a sudden, people's plans are changing and they're thinking, ok well, you know, maybe we just keep investments and my cash here. She was an investor actually with quite a lot of shares as well, so she's taken a hit there, decided that property might be a much more stable investment for her, and so rather than buying one property, she's looking at buying two. So that chain mentality is going to create a bit of demand as well.

Ed McKnight: It might be a point as well around specifically wealthier individuals coming to New Zealand. Because although I don't expect you know, hordes of them to be coming to New Zealand, it doesn't take that many wealthy individuals to have a substantial impact on the property market. Because if you own a two bedroom apartment, a reasonably nice bought one in Shanghai that's worth a couple of million, you sell that move over to New Zealand.

Well, hey, you can get a really nice place and you know, and you're not as price sensitive, you can buy all of Christchurch, you know, but you can get a lot for your money's worth when people move from a really hot property market over here.

Now, if they come in, throw their cash around a bit and overspend quote unquote overspend on a property, that means that the New Zealander that just owned that property now they're feeling really good, they're going to go buy something good. And so it has this ripple effect of people feeling really confident. This is why Bay of Plenty or Tauranga in particular has got really hot. Tauranga is in terms of where it sets versus the long term over the last 27 years, it's sitting really, really high. Prices there are higher than they typically have been over the longer term.

Why? Because Aucklanders feeling really good about their purchase price or sale price they've been able to get for their property, move down there and are able to spend up a little bit, able buy nicer properties, able to spend a little bit more or out-compete the next person. And so property prices go up there. And so you have a similar effect if people from overseas come over here, spend up a little bit overpay a little bit.

Now everybody's feeling good and that kind of trickles down to other homeowners as they sell their property. So it doesn't take a lot of very wealthy internationals to come here and have a substantial impact on the property market.

Well, that's part two 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 podcast listening app.

Of course please don't forget to rate, review and subscribe to the show. It 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 worth 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.