The Absolute Absurdity of Paying any attention to House Prices or what’s in the news (June 2020) by Graeme Fowler

New article by Graeme Fowler below team.

As always, well worth the read.

You’ll recognise many of the alignments in messages in this to what we constantly bombard you with, particularly ‘if it makes sense now, buy it now’, and his love and trust for the media and commentators.😊

Enjoy! 

The Absolute Absurdity of Paying any attention to House Prices or what’s in the news (June 2020).

Here are a few headlines from various news articles, most of them over the past year or two.

1. Rotorua house prices up more than 25%

2. Rotorua - House sellers cash in, making median $200k as capital gains reach record

3. Tight Hamilton housing market pushes property values up

4. Hamilton’s house prices keep rocketing up

5. Fierce competition for Hamilton homes means prices likely to rise

6. Asking prices for Waikato homes increases 74% in five years

7. Waikato’s median house price climbs $60,000 in a year

8. Tauranga out-ranks Auckland as NZ’s most unaffordable city for housing

9. Auckland – House prices shoot ahead again, as majority of Kiwis say ownership unachievable

10. Auckland – Buyers beware: House prices tipped to hit 7% in coming year

11. Auckland house sales up almost a third year-on-year, data shows

12. Hindsight is 2020: A decade of rapidly rising Manawatu house prices

13. Palmerston North house prices set yet another record

14. Housing pressure ramps up as average Palmerston North asking price cracks $500,000

15. Housing demand heats up as investors look to Wellington

16. Amid soaring house prices and rents, plans for a new Wellington suburb take place

17. Heat still on Wellington housing market and more to come

18. House prices continue to rise as listings fall in Nelson

19. No end in sight for house price rises in Nelson

20. Latest data reveals Nelson house sales up by more than 50% in October

21. Hawkes Bay centre of property price growth

22. Hawkes Bay’s property prices continue to soar

23. Median house price in Taranaki hits record in September

24. Taranaki property market leads country in average asking price increase

25. House prices soar in New Plymouth as new listings drop

26. Home values rise fasters in Christchurch’s southeast suburbs

27. Christchurch housing market is back in business

28. Southland property market reaches all-time high

29. The Hutt Valley, Dunedin and Invercargill have shown the strongest price growth in NZ over the last 12 months

30. Southland Property Market booming in 2019

31. Hastings and Whanganui are the hottest property markets in NZ right now

32. Auckland house prices boom

33. Auckland house prices make biggest jump in two years

34. Otago – House prices grew most in city no one’s talking about

35. Whanganui challenges zombie myth as house values rise 45%

36. Former down and out Whanganui suburb shatters house price record

37. Southland continues run as highest performing region for residential investors

38. The rise and rise of Gisborne house prices

39. Gisborne leads national house price growth as Auckland turnover falls

40. Taupo current values see significant 12 month increase

41. Wairarapa – No let-up in property boom

42. Masterton house prices soar out of reach

What do all these headlines mean?

What are they trying to tell you?

Can you make a decision based on any of them?

What is the intention of all these headlines?

Why do people care about house prices so much?

In all my time as an investor which is more than 30 years now, house prices is something I’ve never been interested in or paid much attention to. I’ve never thought ‘should I buy now’ because I just read a headline to say that prices in my area are soaring?

So many people ask me ‘what do you think the market is going to do?’ It's almost as annoying to me as someone scraping their nails down a blackboard.

My answer for the last 30 years has been fairly consistent with replies such as:-

1. I don’t know

2. I don’t care what happens

3. Hopefully prices will drop

4. Why does it concern you?

5. If you did know what was going to happen, what would you do and why?

A guy I know wrote a couple of books about 15 – 20 years ago on predicting what house prices in each area would do. Also various suburbs and all these wide array of formulas, key drivers, indicators and other jargon. He also used a property clock to say where in the ‘cycle’ we are now and what to expect. He sold many books and also had a large data base of people that subscribed to a weekly or monthly update on what he thought would happen. I would often say ‘if you know all this information and what’s going to happen, why aren’t you buying a lot more properties!?’

You would think for example if you absolutely knew for a fact that XRO (Xero) shares that were $30 today were going to be $60 in 18 months time, you would buy as much as you could! You would ‘back the truck up’ and borrow like crazy!! You’d have nothing to lose if you knew for a fact what was going to happen.

So what happened to him? He ended up losing most if not all his money a few years later. How can that be you may ask? It’s not really a mystery to me as I’ve seen so many others do the same thing. They make assumptions based on nothing - and then have plans or strategies based on those assumptions being accurate. I prefer to make no assumptions and have no opinions about the market, so that whatever happens to market prices is okay with me. My strategy needs to work in all markets, not just in a rising market or a static market.

For 8 years, market prices in Hawkes Bay dropped around 30% from their previous high in 2007/2008. I thought it was great! There were so many more opportunities. All those investors that thought prices would never go down and therefore used interest only loans (I/O), thought the sky was falling. They watched their equity reduce rapidly over that time, but hoping and praying prices were going to go back up again.

By the time 2014 came around, I was able to buy a lot of properties for bargain prices as investors thought they would lose even more. That was the year I bought 20 rentals with no money down, using equity from other properties I already owned. The rent had to cover the mortgage on a 20 yr P & I loan, also the rates, the insurance and property management. It was a great year and a huge success, buying all those properties and not using any equity/cash to do so. In fact at the end of the year, I had $20,000 more than the $0.00 I started with.

The equity in just those 20 properties today is about $4.25 million starting from nothing 6 years ago. The cashflow after expenses is over $4,000 positive a month and each year over $110,000 principle gets paid down on the loans.

Many of you will have read the book I wrote a while later detailing each property purchase and the cash-flow/yields etc associated with them.

The book has now become a best seller, selling well over 5,000 copies.

Property Myths.

Myth Number 1.

Generally, investors think that the big cities such as Auckland, Wellington, Hamilton and Christchurch will be better to invest in because they falsely believe that prices rise faster there.

Having talked at most of the property investor associations around NZ over the last 20 years or so, often I would show a graph of average prices in all the main cities in NZ from 1981 onwards. The graph shows how much on average each area increased in value per year. These included all of the above locations in the headlines plus several others.

Over time, they all had a very similar increase in value. From 1981 – 2007 each of these 18 locations increased by an average of 7.1% (Rotorua) and 9.0% (Hamilton) over that 16 years. Auckland had an 8.2% average increase per year, which was somewhere in the middle.

When redoing all the numbers last year (2019) for a weekend property seminar I spoke at, it was all fairly similar.

This time, Christchurch had the lowest increase over the last 38 years and Wellington the highest. Auckland was 6th on the list for the highest increase over the full 38 years.

While prices went up somewhere between 7 – 9% p.a. from 1981 to 2007; in the last 12 years, all locations went up a lot less and were between 4.5%p.a. and 6.5% p.a.

The figures confirm to me that each of the locations above in all the News headlines will fairly closely follow what any other location is doing over time. Sometimes, one area will increase more for a few years, then stagnate and even drop. But eventually any reasonable size city (I’ve often said - invest in any location with at least 100,000 population) will be very closely in-line with any other city.

Even back as far as I have a few figures from 1968, over 50 years ago, the relation to prices in Wellington, Hawkes Bay and Auckland are almost identical now to what they were then.

Myth Number 2.

Number two myth is to only buy property in the best location in each city, not the cheaper areas and suburbs, because you won’t get the same capital gain! Again, simply not true.

If you look at Wellington, the more expensive suburbs compared to Wainuiomata for example, the ratio between the cheaper areas and the expensive areas is the same as it’s always been.

One seminar I spoke at in Wellington in 2015, someone in the audience disagreed and said to me ‘that’s not true!’ So I said, ‘okay, where are your properties located, and what are the prices there?’ He said the location and about $500,000. I said ‘okay, what would it have been approx 20 years ago?’ He said ‘around $200,000’. I said ‘how much was the average price in Wainui at that time 20 years ago?’ He said it would have been about $80,000. I said ‘and what is it now?’ He said – ‘they’re only about $200,000 so they haven’t gone up as much as mine! Mine has increased by $300,000 and the Wainui one only a bit over $100,000.’

I said ‘well yours has gone up 2 ½ times and the Wainui one has also gone up 2 ½ times. If you had two of your ones in 1995, they would have been worth $400,000. Now the two of them would be worth $1 million, correct? But if you had five properties in Wainui, that would have also been $400,000 (5 x $80,000) and now they would also be worth $1 million.’ Yes, you would have more rates to pay and maintenance, but the yield or rent compared to the purchase price balances that out.

Auckland is the same; the outer suburbs will stay in-line with the inner city prices over time.

I was at one of our local HB Property Investors’ associations a few years ago, and the guy speaking up front said ‘buy in Hastings or Havelock North. You won’t get the same capital gains if you buy out in Flaxmere!’ I nearly walked out, and in fact haven’t been to another one since then. I thought, you complete [email protected]!!&%$!!!, how could you think such nonsense, let alone tell 100 people such complete crap.

In 1981, the average price in Hastings was $40,500 and the average in Flaxmere was $24,000. Last year in 2019, the average Hastings price was $505,000 and the average for Flaxmere $300,000. An increase for both of around 12.5 times or 1,250%. Flaxmere has always had the better yields and in most cases is a lot easier to rent properties to tenants than is Hastings or Havelock North.

If you look at any big city in NZ, you will have the better more expensive areas and also the cheaper areas where more people rent than own. The ratio if you look at any of them will work out almost identical over time with any market price changes, up or down.

Myth Number 3.

The third myth held by a large number of investors is that you need capital gains to become financially free or rich. They think that you need gains to increase your equity in order to borrow more. While that obviously does help, it is not necessary at all.

The purpose (to me) of investing is to put up a deposit and then have the tenants pay off the mortgage for you, over time. That’s it. How many you buy is determined by how quickly you can get the next deposit together.

For me in early 2000, I bought and sold (traded) many properties which created deposits for long term buy and holds.

You may also save money from a high paying job, a business you own, working extra hours, a secondary job etc, all sorts of things.

Depending on how many rental properties you want to own, this may take a few years, or it may take a lot longer.

Having prices increase does help for sure, but it should never be relied on, or planned on. If you do get it, take it as an unexpected bonus which may enable you to buy an extra property here and there. But also make sure that the more debt you have, the lower your loan to value ratio (LVR) should be.

How you get wealthy over time is by first of all leveraging using the banks money, then waiting until the loans are paid off in full.

The tenants pay the mortgage(s) off for you over time. Depending on how many properties you own and the value of the mortgages being paid down, will determine a lot of your net worth. However what the prices of the properties may or may not be at the end when the loans are all paid off should be irrelevant. The cash-flow is what's important, not so much the overall value.

Also, you have no control of what the values will be, so there is no point in being concerned about it.

Myth Number 4.

Just because your city had a big increase in prices over the last 12 months, 2 years, 5 years or however long – does not mean that it will continue!!

This is what a lot of those headlines are about. In many people’s minds - what has already happened in the past equals what will also happen next year, the year after and the year after that!

Up until mid March 2020, in my over 50 years of living in New Zealand, there had never been a pandemic or a lockdown which prevented people leaving their homes for anything but the bare essentials. So, based on that it would be okay to assume that it will never happen! However, it did happen and sometimes unexpected things do happen to all of us.

So following along with all the headlines about events or occurrences that have already happened, has no bearing at all on what happens tomorrow!

People would have to be very naïve indeed to base their investing decisions based on Newspaper headlines - although I’m sure it does happen.

In Summary.

Property is not about timing the market, it’s about time in the market.

It’s not about trying to work out what you or anyone else thinks will happen to market prices in your area.

It’s also not about trying to work out which suburbs in your area will go in value more than any other suburb.

And it’s not about trying to pick various locations in NZ that you think will go up more than any other area.

There are still people today that haven’t bought anything, waiting for a big crash that may or may never happen. All they focus on is the doom and gloom articles posting many of them to their own Facebook page, or Property investor groups on Facebook, trying to convince others (but moreso themselves) that they should sell everything now or if they don’t own anything, wait.

It is so simple; buy a property that makes sense based on where things are at today! Does it make sense now or doesn’t it?

Nothing else matters 

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