Tony Brazier
The Press - Wednesday 23 June 2010
Beware the Catastrophisers
Much has been said and written about the effects of investors losing depreciation claims on their properties since the announcement in the May's budget. Most based on fact but others have other motives.
Working mainly with investors gives a good feel for what they're thinking and true to form they didn't want to know us in the uncertainty building up to the budget, much like when an election is looming. However the general consensus among investors we deal with is that we all got off much more lightly than we anticipated might have been the case in the lead up. It was less negative than most expected.
After the budget we immediately circulated our staff and clients asking, "In light of the budget announcement what did they intend doing with their portfolios". The resounding answer was, "Nothing". For most, it seems there is no need to panic. A lot never claimed depreciation in the first place due to having to pay it back on selling and with any change not occurring for several months anyway an attitude of 'steady as she does' was prevalent.
The landlords.co.nz website did a similar survey where only 1.7 percent of the 636 investors surveyed said they were definitely leaving the property investment market as a result of the budget.
Therefore recent news articles claiming "Property Investors Bailing Out" (Press 12/6/10) and "Landlords Quit Rental Properties" is not what we are actually seeing at the coal-face. Of course there are those who will feel the pinch but this is from a combination of reasons and not just because they have lost the ability to claim depreciation as claimed.
Recent market innovations seem to be blaming a 'flood' of Investment properties into the market based solely on the budget announcement, yet on closer inspection one of the 'headline' properties has been on the market since April 2009. One can hardly claim the budget is responsible for that. But it does make for good media.
The problem of oversupply is simply the buyer's reluctance to commit, not the vendor's rush to bail. It is common knowledge sales numbers are down on the peaks of 2007. It takes longer to sell a property having moved out from 40 days in April to 43 days in May and whilst the catastrophising of what might have happened in the budget is behind us, buyers have been naturally cautious until it was all clarified.
Quite simply when turnover is down properties sit on the market far longer, frustrating the vendors and agents alike, hence tried and true innovations re-emerge at these times to help move them along. Alistair Helm, of realestate.co.nz stated that in May there was 51,980 properties on the market through that website and that at current rates it would take 46.9 weeks to sell them. So, yes, it is what they call a buyer's market created by the fact that there have been less buying decisions being made in 2010 whilst the natural flow of vendors to the market has remained. However the budget has not caused this. In fact Helm goes on to say that, "There is no evidence so far that the government's Budget on May 20, making property investment less attractive, had affected asking price". So what is it that buyers are waiting for that makes them presently so cautious? I would suggest it is more to do with financing new purchases than anything to do with the budget. Having been burned by their exuberant lending practices of the last few years banks are being over cautious not to go the way of the finance companies.
Banks, and therefore buyers, are now much more yield conscious. However, buyers should be starting to now see the positivity on the horizon. Apart from extra choice of properties being available in the market, there is little downward price pressure because of the construction of new dwellings running well below replacement levels. According to Greg Innes of Sunday Star Times (June 6, 2010) the main driver of demand for property is population growth and migration, both of which have risen over recent years since 2007 to give a total population gain of 55,001 in 2010 at a time when new dwelling consents (to April) have dropped from 25,964 to 15,772. Less houses yet more people equals greater demand for property, whether it be rented or owner occupied.
While demand is building for property so to is confidence in the economy. In fact, according to Westpac McDermott (Press 17/6/10) the current consumer confidence index would typically mean "very rapid spending growth of more than 5%" but retailers aren't seeing the buyers out yet either.
It would seem that Mr Bollard has succeeded in making us change our buying behavior with more people presently saving and reducing debt. But one can't help feel that with extra money in tenant's pockets from tax breaks, greater demand for building housing and our primary industry/manufacturing creating greater confidence throughout our whole economy, that buyers may be wise to stop sitting on the side-lines and get into the game, for very quickly a combination of these elements could create the positive yields they so sorely desire.
Footnote:
Tony Brazier has worked in the property industry for 23 years and owns a real estate company selling and managing residential and investment properties.
This columns information is of a general nature only. Readers should seek professional advice before acting upon it.
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