Podcast: What Are 'Good Fundamentals' Anyway? | Ep. 243

Posted by Ed McKnight on 12/05/20
What Are Good Fundamentals Anyway 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss what "Good Fundamentals" actually means. It's common to hear that you should buy properties in areas with 'good fundamentals', but often it's not defined what that actually means.

For us it means:

high population growth tight supply high demand high average incomes low unemployment and a diversified economy

We also walk through the data showing which of New Zealand's regions tend to have these good fundamentals. If you'd like to explore the data mentioned in the episode, then check out our analysis of the NZ property market.

Transcript

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 doing a bit of a follow up on our episode where we lifted the skirt on developers, which was very popular episode recorded a couple of weeks ago where we talked about how developers operating in the market and look and wanted to do a follow-up because a phrase that I hear frequently that's used by property investors is invested in an area that's got good fundamentals.

And I hear this a lot, invest where there's good fundamentals, and I thought, hang on, I haven't seen anybody in, while I agree with anybody saying invest in areas that have good fundamentals if you're looking for capital growth, I would also say, let's define what we mean by good fundamentals. And I haven't really seen that defined by a lot of people talking about property investment in New Zealand at the moment.

And so we're going to break down the five things that Andrew and I see as being really good fundamentals, or what you would actually look for. And then we're going to actually break down the data as well and talk about, well, which regions in New Zealand have these good fundamentals. So the first one, number one, is population growth.

Obviously, if you want to see higher house prices, then you need to see more people looking at houses, more people who are going to buy houses. And I've broken down the 15 or 16 regions within New Zealand, with the projected population increases over the next 20 years. So actually between 2018 and 2038 and Auckland, unsurprisingly comes out at number one. So Auckland is expecting to have a 30.75% increase in population over 20 years.

Now, that's about 500,000 people, given that the population of Auckland at about 2018 was about 1.5 million. So we're going to see a city of 2 million. We're going to see for every person you see walking up Queen street, we're going to see another third of them. So every third person you see on Queen street, there's going to be an extra person walking around. Now that's followed by Canterbury. Canterbury is projected to have a 20% increase in population. Waikato, Bay of Plenty, and let's just look at the other side as well.

So West Coast, I always love rolling out this stat because the New Zealand population isn't increasing everywhere. The West Coast over the next 20 years, the population is expected to shrink by 3.69% now it's not a very big region anyway. It's only about 30 to 40,000 people in there. So it's not that there's going to be tens of thousands of people moving out of the West Coast, but it is going backwards, and that's only followed very closely by Southland, where the population is only expected to increase by 0.81% over the next 20 years.

So when people talk to me about wanting to invest in Invercargill, because they've seen a bit of growth during the last property cycle, that's where I try to temper those expectations given that Southland population is only, is going to be relatively stagnant over the next 20 years. And a lot more of that growth is likely to happen in your Waikato, your Canterbury, your Auckland where that population is increasing.

So I think if you're going to be somebody who invests on those fundamentals, also make sure that you go and validate that those fundamentals actually exist in the areas that you're looking to invest in. But number one, and I think this is the most important one, is population growth. Andrew, what have you got for number two?

Andrew Nicol: So, number two Ed is tight supply. So, tight supply of properties. So, there's a few things that we're look at for this. I would actually argue that New Zealand overall has somewhat of a tight supply most of the time because we've got a lot of red tape that it requires to build any new stock. And it happens at a quite a slow pace.

And certainly there's lots of developers out there that will tell you that they just have so much challenges when it comes to council to actually get things approved. We looked at the new dwelling consent issued per person, and the lowest was Gisborne at 0.008. So that means, what does that equate to Ed?

Ed McKnight: That means that there are very few houses being built in Gisborne per person, very, very few.

Andrew Nicol: There's hardly any. And then Southland, 0.012, Hawke's Bay, so interestingly, there Hawke's Bay 0.015 and then you go right out to Canterbury, which is the highest at 0.047. Now, Otago sits just below that 0.039.

I would say that one thing about Canterbury though, is I wonder whether or not that's slightly skewed, this was between 2014 and 2018, because of the fact that there was so much replacement of, existing houses. So there were a lot of houses needed to be built to replace earthquake damage houses.

Would you think that might be the case there Ed?

Ed McKnight: I think that probably will be the case. I always try and remind people that there are about 200,000 houses in Christchurch and half of them a hundred thousand or just over about, I think it was spent 110,000 were damaged in the earthquake, severely damaged.

But I just realised what you were actually asking when you said, what does that equate to? So in terms of Gisborne, we're talking about, one new consent per thousand people in Canterbury we're looking at one new consent for 200 people, every 200 people, and so within that range, you'd still say this is over four year, five year period.

That's still, I wouldn't consider that a lot of houses being built, you know, in the highest, you know, over a five year period saying, well, we're going to build one house per 200 people, you'd probably say, well, that's probably what the replacement is anyway, because there are houses coming out of the market.

But what I also think this is really telling is, you know, if I look at the five regions that have the lowest number of dwelling consents per person, those being Gisborne, Southland, Hawke's Bay, Manawatu, Whanganui and West Coast, they're the regions where house prices are low relative to the rest of the country.

Now, why is that important? It's important because you've got to think about what the replacement value of a house is and say it costs, I don't know $400,000 to build a new house, and then plus whatever the land is, or it might be 300,000, Andrew, you'd be, you'll actually have those figures to hand whereas I'm kind of poking numbers in the air.

You know, developers aren't going to build houses if they're not able to sell them. So even though land might be cheap in Gisborne if you plonk a $400,000 house on it, and it's still above what the market rate is, then you're not going to be able to sell it within that region. And so that's why you might see lower numbers of dwelling consents within those regions, even if they'd be good houses, but it might be uneconomic for a developer to go and build them.

And so the people who are doing that are owner occupiers doing it for themselves in that case. It's interesting as well to note that Wellington has a relatively known low number of new dwelling consents, per person over this period that we've looked at, which was the period we were able to get data for, and I think that probably is because Wellington has so land constrained. I've been looking at Wellington today, and it's, it's just so hilly and mountainous.

You can't get the land to build on, and that's why actually if you come to our webinar tonight, actually you'll see the differences in how our cities are just constructed in terms of the land that is available for building. Wellington has a really interesting shape. The city has an interesting shape simply because of the terrain that it's built on.

But hey, let's go to fundamental number three that we always look at, which is demand. The demand for properties. Now this is a bit of a harder one to look at. We can use population growth as a bit of a proxy for this, but is there some pent-up demand? Is there a lack of supply there for the demand that's already there?

Population growth is going to tell us what future demand might be. But is there tight demand already for properties? Are we seeing that it's a bit of a seller’s market? Are you able to see that?

And I know Tony Alexander, one of my favourite economists releases some data showing around the country do real estate agents think it's a buyer's or a seller's market? And where is it more of a seller's market? And this was a little bit more intuitive with say in Auckland, that there probably is more pent up demand for properties than there is down in Southland because of this.

So that's fundamental number three, Andrew, what have you got for a fundamental number four.

Andrew Nicol: Fundamental number four is high incomes. So looking at the incomes people earn within a certain region. And so we looked at the regional GDP per capita, for March, 2018 and the highest in the entire country is Wellington.

There was some data page on that worked out to be $71, 622 and compare that to the lowest, which is Gisborne, which is a significant dropdown of $41,409. So, the top five are Wellington, then Taranaki, then Marlborough, Auckland, and then Southland, and then the lowest you've got working upwards, Gisborne, Northland, Manawatu, Hawke's Bay and the West Coast.

West Coast actually not as low as I thought it was going to be.

Ed McKnight: Yeah, well within the West Coast you've still, and this is of March, 2018 little, a little bit older, but this was the data available, when we were trying to make it consistent across all of the regions.

Because this was the data actually used for the Nicol property report, which is where we were making a single measure and we took all of this data and tried to put it into one measure to figure out where was the best place to invest them, and I would expect that the West Coast and probably Otago will take a bit of a hit because of tourism at the moment, but certainly within this West Coast still does have agriculture production, which, you know, in high country farming, which brings in some income for that area.

I'm always very proud that Taranaki is right up the top, and actually Taranaki until recently was the region that had the highest GDP per capita because of the agriculture and oil industries. Now, I'd expect, again, that to be a little bit lower at the moment because the oil price has been so low and also because we're likely to see less investment, within the oil industry with some of the policies that have come out under the current Labour/Greens/New Zealand First government, very unfortunate policies there for the Taranaki oil industry.

And look, number five, the last fundamental we look at is unemployment and not only unemployment, but also we're looking at whether the economy is diversified. So that if a major pandemic happened, you know, just in case one of those happened, that the economy would be diversified enough so that if some industries were impacted, that the rest would continue relatively unabated. And the areas that have the highest unemployment top three are Northland, Manawatu, Whanganui then Taranaki.

The lowest unemployment are Nelson, Tasman, Marlborough, and Otago. So, I'd expect an Otago, Marlborough, Nelson, Tasman you actually do have quite a bit of industry up in Nelson, Tasman and around in Marlborough Manawatu, Whanganui, Taranaki, Northland we kind of know that there is less employment up there, less of a diversified economy around there.

Now the big question is how do you rate all of these and put them together. Cause this is the big question. And if you've been listening, obviously Taranaki, GDP really high, but then look, they've got higher unemployment, they've got kind of lower consents per person. So that's good from a supply side. How do you actually put it all together and look, this is where it gets very, very simple.

You kind of look through the data. And you have your pros column and your cons column. And once you've got it down, you've got to make a judgment call about whether you're going to invest or not. You know, well we did attempt to do it and actually it got published in stuff.co.nz our measure, what we call the NPR regional rich list about, when you weigh all of these and put them together where should you invest?

And the top three we had were Auckland, Canterbury, Wellington, followed by Otago, sorry, Auckland, Canterbury, Wellington then Waikato were the top four, which were the main cities, which is our typical advice because you have a more rounded economy, a tight supply, high demand, higher incomes on balance. When you look at these, even though on some of these measures, you're never going to find somewhere that has high population growth like in terms of first place, population growth, first place, supply, first place, demand, first place, income, some first place, unemployment.

You've got to put it all together. Now you can either do that by putting a measure in place like we've done, and I'll link to this article actually in the show notes. So tap or swipe over that cover art it'll take you right there. Or you make a bit of a judgment call and sometimes that's what you've got to do, but hey, let's wrap it up there. Please don't forget to rate, review and subscribe, and if you want to read that article with some of this data that we've talked about, just tap or swipe over that cover art, I'm going to drop a link in the show notes.

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

Until next time.