Rising Building Costs, Tighter lending, Oversupply & Kiwi Exodus – Will It Create The Perfect Storm?

In this Blog, we are going to discuss several factors that could have an alarming impact on New Zealand’s real estate market. Some of these things are happening now and some are developing as we speak, and we can see them all combining on a domestic scale to create a perfect storm for a:

Declining Property Market

 

 

Here is a list of things that are happening in the market right now.

Rising building costs
In the last twelve months, we have heard a lot about the worldwide supply shortages affecting everything that is imported into New Zealand. And this has been a major contributing factor to the rampant inflation which we have already talked about and which won’t be going away anytime soon but could get a lot worse. We are expecting these costs to continue rising.

Building materials are included in this and this supply shortage has created delays in build times and escalating costs.

 

The latest Price Index data for the December quarter revealed constructions costs had jumped by 16 percent in the past 12 months. So, for a build price of $1,000,000 this will add another $160,000 onto the building costs. This can create a list of problems for the builder and the homebuyer.


Fixed Price Contracts

A fixed-price contract is agreed upon at the beginning and is meant to show the costs of the entire build upfront. Because of the simplicity of this fixed price build contracts are very popular for first home buyers. However, due to the rising costs due to supply chain shortages and difficulty finding skilled labour this is pushing up costs during the build. So, who pays?

Here is our client tip to avoid this red flag area if you are thinking of building.

Beware the contract and the fine print. Get your Solicitor to look over the contract BEFORE you sign it and ask him to examine this particular point of the fixed price. Some of these fixed-price contracts have a clause inserted for the benefit of the builder that states “if the build costs rise during the build period the purchaser will pay the difference”

We recommend you get a fixed price contract without this fine print clause and that in the contract you state the builder must estimate any cost increases into the prior agreed price before the build starts. So that any cost increases are the builder’s responsibility.

 

Building Companies and Developers going Bankrupt
This is the period in the property cycle where developers and building companies are at high risk of going broke. This happens due to a combination of factors, but the main ones are rising costs in a slowing market with less or no buyers. Most Developers are on a short string with funding, this means they usually need to sell down a percentage of completed property to carry on with current or impending projects. This is easy in a red-hot market that we had six months ago, but when the market slows down, and their sales dry up their financial situation can vaporize rapidly. And anyone caught in the middle goes down with the sinking ship, this includes the home buyer, tradespeople and any other suppliers owed money can get left high and dry.

For the homebuyer who has paid a deposit or is in the middle of a build, this can be devastating if the company goes bust as this can cause a huge delay and waving goodbye to large sums of cash. As well as having to find another builder to complete the job and more often than not you go to the back of the queue with your new builder.

Here is our client tip to avoid being left high and dry during the build process

Our warning is to be very careful at this stage of the cycle entering into a new build and do your due diligence on the company or developer. Try and have an agreement where you pay on completion of work done NOT BEFORE work has started. This payment on completion can be done in stages. DON’T pay upfront.

Here are just a few examples of builders and developers going bust in the last twelve months and what they owed:

– Liddle builders and construction Ltd (Hawkes Bay) in Liquidation leaving $957,000 shortfall for the husband & wife purchaser
– Maxim Design (Christchurch) Liquidated leaving 3 million in debt to creditors
– Project works construction Ltd (Auckland) Liquidated leaving $1.2 Million shortfall to creditors
– First Design & Build Ltd (Christchurch) liquidated leaving $1.2 million shortfall to creditors

We expect this list to grow significantly with the market conditions deteriorating with rising interest rates and buyers drying up or buyers no longer able to finance their purchases. Just make sure you are not the one caught up in the middle of a liquidation event as it can be a slippery slope, with no way of getting your money back.

Oversupply of New Housing
Hard to believe there could ever be an oversupply of housing considering we are meant to have a housing crisis? But step back and look around you, there are new townhouses everywhere. In Christchurch, there has been a massive number of 2-bedroom townhouses built in the last few years with a large amount still under construction and another 1500 units still waiting for approval at Council. We can see an impending oversupply on the horizon.

It’s not only Christchurch, every province and city in NZ has had record building consents and construction happening. If interest rates keep increasing this will create a discounted market where there is a surplus of property for sale.

Expect to hear more of this in the future and we could see increasing buying opportunities with developers and owners having to sell in a saturated market with low buyer interest.

 

Population Exodus out of NZ
This is the real kicker that no one is talking about yet, Since the pandemic started in early 2020 we have had a flood of Kiwis coming home to the safety of their own country, this helped spur on the property boom but now two years later that the world is starting to open up there is a very high possibility of a Kiwi brain drain out of the country.

New Zealanders are the most traveled nation in the world per capita, and if there is a sudden migration surge out of the country this will really hurt New Zealand’s economy and in particular the housing market. Kiwis are spread far and wide with a big contingent in Britain and Europe, it is a lot of these people that came back home in 2020, there will be many that want their old life back again who will go back to their past employers or find a new one.

The Kiwi OE
This includes the younger generation who want to travel and get on with their OE, this number will be higher than usual as they have been caged up for two years and we could see a big number leave all at once.

Migration to Australia
Also, we could see the usual large exodus in numbers travel over the ditch to Australia chasing higher wages and, in some states, lower rents so a lot more attractive and financially easier lifestyle to what NZ is offering. There are reports of a shortage of 250,000 workers needed across Aussie and with the enticement of high paying jobs in the mining and agriculture sectors with 3 – 4 times what you can earn in NZ, with these incentives it is hard to argue why we won’t see an influx of Kiwis into Australia.

Tradies & skilled workforce
The scary thing about all of this is that these people that want to leave are generally all highly skilled. Doctors, Lawyers, Pilots, Nurses, Teachers and tradesmen, the list goes on, so let us ask ourselves if we do have a big outpouring of our skilled workforce out of NZ in the coming one-two years where does that leave NZ?

Just in November 2021, New Zealand had a net loss of 4,000 people who left the country, what happens if this grows to 40,000 or 100,000 or more? That is a lot of houses on the market for sale and vacant rental properties.

Summary
So, let’s just think about all of this for a minute and put all the pieces together, so far in 2022, we have rising inflation creating increasing prices across the board including building and supply costs.

What happens if we do have an exodus of Kiwis leaving overseas added into the equation of higher interest rates, tighter lending market plus a growing oversupply of housing and suddenly we could have a perfect storm for a very fragile looking property market.

Remember we always look ahead at what’s coming and the possibilities of what this could bring to the market moving forward, this is a powerful position to take as you will then have a generally good overview of what is on the horizon so you can start putting plans in place now to either soften the blow or make some great gains depending on the position you are in.

A downturn in the property market doesn’t phase us, in fact, quite the opposite.  We’ve been in the property market long enough to see a few cycles of the ups and the downs and historically we have found the best opportunities to buy well and put together some great deals is when the property market is depressed, times when there are lots of properties sitting around not selling with very few buyers in the market.  Times exactly like we are starting to enter into now.

Over the years we have put together strategies for dealing with most situations the market could throw at you, so whether you are looking to batten down the hatches and make best of your existing property situation, or are looking to capitalise on the rapid change in the property market, we have the experience, knowledge and strategies to help.

We run two different Property training and coaching programmes, the first being our ‘e-Coaching plus’ which is hinged around long term wealth creation via Property Investment in a sustainable manner by balancing cash flow with capital growth, either buying or building property to hold long term (which should always be the primary goal).  The content we teach in this programme is fully updated to work with and around all of the new rules that have come in recently and includes some great new hybrid development/Investment strategies we have created.  If you are interested in seeing how we could help you via working with us schedule an online video call with one of us here.

The 2nd Training/Coaching programme we run focuses solely on our unique fast turnaround Property Trading Strategy that we have been using for the last 18 years now. We only launched this programme towards the end of last year with limited numbers in the initial intake.  This Trading strategy is a total game-changer for many, as it gives you the ability to buy and sell property making a lump sum cash profit,  without most of the normal risks associated with the more traditional method of trading property. And better yet this strategy doesn’t require any capital input from you whatsoever or any need to borrow any money either!

So this trading strategy doesn’t tie up capital or borrowing ability set aside for your normal investing. Yet can produce lump sum profits that can be channeled back into ‘Turbocharge’ your investing, or simply taken as income.  As you can imagine in the current environment with the LVR restrictions and very tight borrowing criteria this strategy can be extremely beneficial.  Up till now, we have kept this strategy tightly under our belt, however, due to the current conditions we saw a growing need for people to know how to implement a strategy such as this, so the time was right to start to teach others how to do this too. If you are interested in learning more about our  ‘Boost – Property Trading programme’ schedule a video call to meet and discuss it here.

If you would like to talk with Shane or Clint to discuss how we may be able to help you with your property investing or trading or how you can get started, feel free to schedule a call (via the links above) so we can meet properly and see if we are a good fit to help you move forward, or simply drop us an email to introduce yourself and get the conversation started.

 

Regards,

Shane Allen & Clint Taylor
PropertyInvestorCentre

 

 

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