The Boom is Over!

More than a few people could be surprised or alarmed at this statement, but it’s true. The New Zealand Property Boom is now over, in fact it finished months ago!

What you are seeing now is the final death rolls of the boom market. This includes very confusing market reports of prices going up, prices going down and lots in between. What most people don’t realise is that official statistics of price movements are typically 3-4 months behind the current market. So when you hear “Napier property up 4%” or “Auckland average prices down 3%” that was actually 3-4 months ago. And a lot can happen in 0 – 6 months especially in a peak market which we have been in for the last twelve months, things can and will turn quickly.

What the property industry does at this stage of the market is keep any whisper of a downturn under wraps. They want to keep any indication of a property downturn from the public at all costs. So you’re not going to get anyone involved in Real Estate or selling property telling you the market has softened and prices are now dropping!

What has been kept incredibly quiet in NZ is that Australian property prices are currently in a solid and steady decline. Sydney and Melbourne are leading the charge with annual drops so far of 6 – 4%, with some suburbs in Sydney down over 10% and still falling. I guarantee if you ask your average Kiwi on the street if they know anything about this, they wouldn’t have a clue. Sydney and Melbourne especially had a frenzied Boom similar to Auckland’s with dizzying rises creating some astronomical selling prices for property. A correction was imminent.

As sure as day follows night NZ will follow our cousins over the ditch with a property price drop. We will be behind them but it will happen. It’s already started in Auckland and will gather momentum going into 2019. Areas that had the biggest capital gain rises like Auckland, Queenstown, Wanaka, and Hamilton & Tauranga will have the bigger corrections.

Why is this happening you ask, surely prices will just keep on climbing with the low interest rates and big shortage of housing? The answer to this is very simple. Real estate prices never keep on going up, they always have a breather and a correction especially after a solid period of upward movement. If you are stupid enough to think the price of houses will keep rising indefinitely you will get burnt. Some will get their fingers burnt, and others will get charred to a cinder! Depending on your circumstances and how leveraged you are.

Strangely enough a long list of property corrections have taken place in years with an 8 in them. 1978, 1988 (Massive 1987 share crash), 1998, 2008 (Global financial crash) I remember all of these       from 1987 onwards where I got stung in the share crash. Companies I had tens of thousands of dollars of shares with disappeared over night!  I started investing in property, and never looked back.

There are also some global economics in play currently which could have a major impact on our property market. The US and China trade tensions and the US strong economy is creating a strong US dollar. The NZ dollar is in a steady decline currently which is great for exporters (Agriculture) but not good for importers hence the high petrol prices. Usually when our dollar drops, interest rates rise. Watch this space!

If NZ interest rates start to climb this will fuel a property correction. If interest rates went up 1%, what would that do to our market? I know a lot of home owners have no wriggle room as it is. For a $600k property it’s an extra $6,000 per year on an interest only loan. This equates to $500 a month extra to finance your home loan. For owners or investors who are highly leveraged this becomes dangerous territory. What’s even worse and is happening in Australia currently with their real estate decline is that banks are asking clients with mortgages on “interest only” loans, to change to “Principle & Interest” loans. When a bank requests this it happens overnight. This is pushing some highly leveraged negatively geared investors over the edge.

So what now?

Don’t panic, we are not saying the sky is falling! What we are talking about here is your typical property cycle. We are experts at calling the market, if you need proof read all our Blogs from 2014 where we called the beginning of the boom. We give an accurate handle of what’s happening BEFORE it happens. Remember any “expert” can give a commentary AFTER an event has happened. This is why you are not hearing anything about this right now.

So now we are entering a period of correction. The majority of home owners will be fine and life doesn’t change. But there will be a small percentage of property owners who over extended, over leveraged or for no fault of their own their circumstances have changed. This could include a marriage breakup or losing employment to name a few. These will be the unfortunate ones who are forced to sell on a declining market where all your Mum & Dad investors have long disappeared into the woodwork.

Opportunity

This creates massive opportunity to the educated investor who has been sitting quietly through the Boom phase of the cycle. This is where there will be fantastic opportunities to purchase great deals where buyers are scarce and the outlook is grim. (The media will be portraying a bad property market) Cash will be king. The strongest position will be organised cash buyers, as most desperate sellers need to exit quickly.

So this is the time to get organised and educated. Be prepared as we are entering a phase of the cycle where there will be some change which will present some exciting opportunities. This is the period where only 7% of investors operate in as they have the knowledge and knowhow of what’s going on. The other 93% stay out of the market. You won’t see them again for a few years when the word Boom re appears.

Happy Investing

Shane Allen & Clint Taylor

 

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