We originally wrote the following blog post in the first week of October 2019, after writing it we decided not to publish it at that point, we have since updated it a couple of times, and only just decided it’s time to publish it.
Buckle up Ladies & Gentlemen, the ride is likely going to get a little bumpy from now on in. 2019 proved to be the year the NZ property Market “Peaked Out”, with mainly the provinces squeezing out the very last capital gains they could find. 2020 could well be a lot different and a very interesting year with not only a NZ election but a US one as well.
With the majority of world economies having high debt and record low-interest rates, they are realising that printing money and trying to use that as a temporary short term ‘Methadone’ shot in the arm of their economy is not working, and eventually the house of cards held together with blue tac is going to come crumbling down!
The low-interest rates are a desperate attempt to try and rescue an economy that is in very bad shape. The problem with these worldwide low rates is that there is no ‘wriggle room’ left, nowhere to hide if the economy worsens. The last gasp resort a Government will use is called “Quantitative Easing”
(Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to increase the money supply and encourage lending and investment.)
For example, the US Federal bank has printed and pumped over half a Trillion dollars into their inter-bank lending market since the middle of September 2019, in an attempt to prevent one or more of the main US banks and other huge financial institutions becoming insolvent and collapsing. This was due to a lack of liquidity and trust in the interbank lending market causing a sudden spike of the Repo inter-bank lending interest rate rising from 2.4% to 10% on September 17 2019, something that has never been seen before in the history of the market.
This is effectively the Government meddling with its own financial markets in a last gasp attempt to steady the ship! When this happens it is a sure sign the economy is in severe trouble and will only speed up the trajectory towards a recession!
With The Great Depression which started in October 1929 and lasted a whole decade until 1939 conditions were eerily similar to now with the US Federal interest rates at 0%, then quantitative easing began and the rest is history!
We wrote a blog in October 2018 with the heading “The Boom has ended”, we may have been several months early with that call and currently a handful of provinces are taking their last gasp breaths of any price increases. Auckland peaked in 2016 and has decreased by approximately 5%- 7%, Sydney and Melbourne are down 15% & 12% respectively, the biggest price decline in three decades. They are currently having a price resurgence, but this possibly could be a market dead cat bounce!
We can assure you the provincial regions in New Zealand have had their day in the sun and will follow suit with their big brother Auckland in due course.
As we said in the 2018 Blog the Property Cycle keeps on rolling and like night following day a boom will be followed by a slump. Storm clouds are gathering over the world economy and its just starting to rain! Time to run for shelter as 2020 could get rather messy!
Inverted Yield Curves
An inverted yield curve is when the yields on US Treasury bonds with a shorter duration are higher than the yields on bonds that have a longer duration. It’s an abnormal situation that often signals an impending recession. In a normal yield curve, the short-term bills yield less than the long-term bonds.
Campbell Harvey a Duke University Finance Professor (USA) wrote a paper in 1986 showing the yield curves ability to predict recessions. At that time his model had already predicted the four previous US recessions. It has predicted all three since too.
Currently, many countries around the world have negative yield curves including US, Canada, Germany, Switzerland, Hong Kong, Argentina, Venezuela with a long list following this with ‘minimal yield curves’ including Australia, UK, Belgium, France, Malaysia, and Singapore to name a few.
“Any indicator that has a record of predicting seven of the last seven recessions should matter to you,” Harvey said.
Official cash rate reduction (interest rates)
The rate is set by the Reserve Bank and is used as a tool to help the bank maintain price stability. Around the world cash rates set by central banks are falling, the reason they are doing this is to try and stimulate their economies. But if it will succeed is another story. Japan tried this exact same policy in the 1990s as it was headed for recession and it had no effect, Japans economy has been in a state of stagnation ever since.
Two of the early countries to adopt this strategy of lowering interest rates were the US & Ireland after the GFC in 2008/2009. What followed was a severe Recession with a dramatic drop in property prices and a rise in unemployment. With low official cash rates there are minimal options left if the economy continues to deteriorate.
New Zealand had an amazing Dairy boom which started in 2007 through till 2012 which helped pull NZ through the Global Financial Crisis. This is well and truly over now with many farmers backs to the wall with massive debt and low/breakeven milk pay-outs over the last several years. To add to the misery NZs dairy giant company Fonterra registered a more than 650 million dollar loss for the end of the 2019 year, with no forthcoming pay-out this year to desperate cash-poor farmers.
Banks are taking a hard-line on Farmers with high debt, and there are a lot of Dairy Farmers in this situation. Currently the bigger banks have shut their books on any on-farm lending, even if the farmers including Sheep & Beef are in a good position with high equity and low debt levels. The banks are saying no.
Out of the blue in November 2019 we learned China is saturated with logs from Russia (5 million tons) and they currently don’t want any more from NZ. Now with the Coronavirus rampant in China the NZ Forestry industry is taking a huge hit. Overnight a third of forestry logging operations have had to shut down, there are impending job losses for truck drivers right through to stevedores and marshalling floor jobs. This could be many hundreds of jobs gone in the forestry industry alone. Hopefully this is short-lived but its wait and see.
Most world share markets have had an incredible run, the US Dow Jones has had a Bull market run (upwards) over the last 10 years, along with NZ, Canada & Australia they have achieved close to 300% increase in the past decade. This is incredible, keep in mind recessions and share market crashes go hand in hand! Remember 1987 and 2007?
Update – This week on fears of the Corornavirus continuing its global spread and the pace picking up in a few more countries the US Stock Market has now had two days of large losses, with the Dow Jones ending 1000 points down on Monday (US) and continuing its fall on Tuesday (US) with the Dow plummeting another 900 points on fears of a global economic slowdown due to the Coronavirus. This is the Dow’s worst 2-day point slide in history! More than US$ 1.7 Trillion has been wiped off the S&P500 in the last 2 days.
Whether the virus ends up being very bad and killing large numbers of people or not, it has now created uncertainty, fear and panic in world investment markets.
Mortgage / Household Debt
We haven’t learnt a lot since before the GFC in 2007, back then NZs mortgage debt was a huge $160 Billion, currently we are now a staggering $265 billion and climbing!
Currently Americans have more credit card, student loans and automobile debt than 2007/2008 The US Government guarantees most of these.
Australia has the world’s 2nd largest household debt at around 120% of GDP.
This statistic is similar reading for many countries currently, Switzerland, Denmark, South Korea and Canada, to name a few have massively high mortgage and household debt which is a very high-risk position to be in.
This could go two ways depending on who you believe:
1. It could be contained and just fizzle out and disappear like other previous recent-time world virus scares.
2. Or this could be a severe and serious problem for China crippling one of the biggest economies in the world with a massive ripple effect outwards to the rest of the world and ultimately being the trigger for the beginning of a worldwide recession. This may sound like scaremongering but currently the world financial markets have so many massive bubbles, where graphs for every financial market have gone off the scale which has never been seen before, we are calling it the “Everything Bubble”.
When these bubbles become so big it doesn’t take much to trigger the deflation process, and the Coronavirus could do just that.
Update – As you will likely already know, as of the last couple of days the coronavirus has spread quickly into more countries, with big outbreaks in both South Korea and Italy. The news of this has spooked world stock markets with the US Market leading the fall, with the Dow Jones seeing two days back to back of very large falls, 1000 points on Monday and 900 points on Tuesday, on fears of a global economic slowdown. This is the Dow’s worst 2-day point slide in history!
NZ (as well as many other countries) are already seeing the financial effects of travel bans and the major reduction in tourism, Airlines are feeling it with large reductions in the number of international flights, no exports to Chinese markets (logs, meat, seafood to name just a few), due to China basically shutting down with their workers having to stay at home. If this continues for an extended period it will have far-reaching dire effects on world economies.
Other things happening
There are other unstable things happening in the world economy which create further unrest and uncertainty and are compounding the increased risk of a world recession. Some of these are:
US/Iran & Iraq Tensions
China/US trade tensions
Hong Kong protests/riots
Australian & Canadian, Saudi Arabia, Finland, Sweden to name a few economies struggling with over-inflated property markets now in decline.
European countries struggling, Italy in recession & Germany on verge of recession, Greece has over 18% unemployment.
Brexit, moving forward Brexit is going to cause a lot of mayhem, not only internally but worldwide.
Inequality Protests, we are seeing many people protesting against their Governments due to feeling shut out of the wealth of their country, this is happening in Lebanon, Chile, Venezuela, Spain, Bolivia to name a few.
Summary of what we are likely to see
– Rising inflation
– US Dollar Collapse
– Rising unemployment due to world market slowdown
– Small businesses struggling or closing down
– Declining/inactive property market (low-interest rates have no effect)
– Declining/inactive Share market (Share crash)
– Rising Interest rates
– Huge Increase in Gold Price
We are not fortune tellers or clairvoyants and don’t claim to predict the future but we have both been in the property game for over 28 years and have seen many property cycles come and go, each cycle is different with different triggers, but generally speaking overall they are very similar. We are also not saying this will happen tomorrow or next week, but we are saying look at all of these factors and indicators, look at what’s happened in our property market over the last few years. We listen to several trusted associates and they are saying the same backed by the same evidence.
We are saying that based on all of these facts, and where we are currently placed in the Property cycle …. a downturn in our property market is extremely likely.
Part Two – The Opportunity
We expect to see in the next few years a property market full of fantastic opportunities for educated investors to take action. These will be the investors who will use their calculated knowledge to pick out the many great deals which will present themselves and it will be these investors who will be the next round of Real Estate Millionaires in the coming decade.
Yes you heard it right Real Estate Millionaires. It’s a case of being educated, picking the right market and taking action!
We have been an extreme minority in the last 2 years telling our e-coaching clients to be patient, get educated, get organised and get ready to pounce as even though the time isn’t right just now, it will come and there will be a lot of great deals from motivated vendors to pick and choose from.
Some of our clients have been frustrated hearing this news to hold back, as all they are hearing from agents is buy, buy, and buy! With phrases like,
“You need to get on the ladder or you will miss out!
“If you don’t buy now, you will never be able to afford it!”
This is called FOMO, “FEAR OF MISSING OUT”
I was shocked recently to hear advice from one Property Finding company that they had a great deal in Tokoroa, which they were trying to sell to one of our mentoring clients. I said to our client, do you know Tokoroa is a forestry town heavily reliant on that one industry and that currently there is a sharp forestry downturn due to China being overstocked and the Corona Virus effect? She had no idea.
It’s easy to get caught up into the hype of a booming market, but if the figures don’t stack up, don’t go there, simple. We last saw very similar conditions in 2007 (The peak of the last boom).
In the past couple of years we have seen uneducated investors buying up property for themselves at very high prices and in some cases massively over inflated prices. Some of these sales I have witnessed and I have been shocked at how people can be drawn into a multi-offer situation only to end up paying a ridiculous price for a sometimes average property. The only winner in these situations is the vendor!
It is these very people who may well have overextended themselves in the boom time, that we will be negotiating with in the future.
You see what happens is the market cools, then starts to decline and suddenly being an investor with a negative cash flow property is not much fun. Even worse when its value is dropping away from what it was purchased for. So these people decide to get out of this (stupid) property investing game and decide to sell, in some cases they are forced to sell due to bank pressure, marriage breakup, failed business etc.
These are now very motivated vendors. But unfortunately the market has changed dramatically since when they purchased and there is a lack of buyers around. Most mum and dad or un-sophisticated investors and most speculators are what we’d call ‘good news’ investors, they are only interested in investing when there are positive news stories in the media all the time, about booming markets and ever-increasing property prices, and they jump on the bandwagon – often far too late in the cycle.
This is when we enter the market, there are way less buyers and the “Mum & Dad” investors and the speculators have long departed. We can look for motivated vendors and offer them a price that will work for us, If they say no, we say thank you and move onto the next deal. If they agree to sell to us, our offer must have been the best they had in front of them at the time and gives them a solution to their problem. We end up purchasing a positive cashflow property at a price that works for us.
Buying when the majority of people are not is called counter-cyclic investing, and it’s far easier to get great deals when you are not competing with many other buyers all pushing the price up.
As the great Investor Warren Buffett said “It is wise to be fearful when others are greedy and greedy when others are fearful.”
Believe it or not, these market conditions are just around the corner, so this is the big opportunity we have been talking about, it’s right in front of us staring us all in the eye.
Big question is…. will you be ready?
If you’d like to prepare yourself, build your knowledge and get yourself in a position to make the most of the biggest opportunity we will have seen for more than a decade, then the time to act is now. Build your knowledge, learn to understand the market and how to best position yourself so that you are ready for when the opportunities do present – Its a matter of when not if.
You can contact us on email at email@example.com, feel free to register for one of our free training sessions to understand how we invest in the property market, or schedule a time to have a one on one video consult with Shane or Clint to discuss property investment in more detail and see if we are a good fit to help you.
Shane Allen & Clint Taylor
Property Investor Centre