Property Cycles, Ninjas and Imposters
It was a warm summer's night, sausages were sizzling on the barbeque, cool beverages were being sipped, and the conversation turned to property. “Prices are so astronomical they are completely unaffordable,” lamented one person.
“How can our children ever hope to get on the property ladder?” said another. “Saving for a deposit is almost impossible.” “Cash yields are so low that only a crazy person would want to own a rental property.” “The property market is going to crash – property is a terrible investment.” So was the sentiment in 2007, when the median house price in Auckland was $420k.
Asset values were peaking out, cash flow yields were tight, and yet another cyclical peak of property values had occurred in Auckland. Optimism reigned in the regions, which were cycling behind Auckland, while Auckland had peaked first. Panic was ensuing in the property education industry because the writing was on the wall, high capital growth days were coming to an end as the market began to enter a downturn, and lucrative property mentoring and education workshops were getting harder to sell.
Here we are in 2018 and the property lights are dimming again. We have low cash yields in Auckland, values are peaking out at the top of the cycle, sentiment is turning against property at barbecue conversations with people complaining that property values are astronomically high, and there has been a slow but noted withdrawal of Mum and Dad investors and speculators. Auckland has peaked, but optimism still reigns in the regions, which are cycling two to three years behind Auckland. We have had a disruptive change of government, planning amongst other things to ban foreign buyers (for the most part), reduce immigration, and threatening with the green-eyed monster to tax the perceived lucrative property investor market more aggressively.
All of this is quite unsurprising really, and well predicted by many, including the writer. Each cycle has a clear pattern that seems to peak in Auckland in a seven year (1987, 1997, 2007, 2017), and if you have seen it before it's very familiar.
There is better value in the regions at present, and my pick of the crop is Wellington because there is a well-observed link between a Labour government and a flourishing Wellington property economy. Labour creates a big government, which needs more offices and more people. More people need more houses, and this creates more demand. Restricted supply, combined with Wellington having the highest average incomes in the country per household, is a recipe for growth in my book.
People are always jumping on and off the property investment bandwagon, with more jumping off at the end of the cycle, and this leads to the inevitable conclusion of a downturn. But you don't need be alarmed about the lack of affordability and cash flow. What happens is incomes and rents increase while asset values remain flat. Eventually what was unaffordable becomes affordable, and so ensues the next upturn in the cycle.
In my view, we should expect Auckland to continue cooling and the exuberance to carry on for a year or two longer in the regions, as they are cycling behind Auckland. But what we should also expect is the various stakeholders in the various real estate industries to continue to promote the market that they work in as an impenetrable fortress that never corrects and always goes up. Any other prediction would result in a reduction in income, including commissions, fees and mentoring revenue. While all of this is normal, what you should be careful of is the more predatory instincts in some property circles. I'd characterise these into three personalities.
1. Number Ninjas
These guys bedazzle you with numbers, showing you the massive profits they assure you are achievable in property if you follow their strategies. Problem is, they neglect to include the costs you will incur, such as interest costs, realistic renovations costs, holding costs, agents' and legal fees, and tax and GST if you are selling. Once these very real costs are taken into account, their fabulous gains start to look very ordinary – and that's a hard sell. So they lure you into their education programmes with false promises, and their students are more often than not left disappointed, or worse, in financial trouble.
Watch for these Number Ninjas if you are getting into mentoring – they can let you down or harm you financially. We have unfortunately had people come to see us at GRA, distraught because following several such Number Ninja deals, they were facing having to sell the family home after suffering financial losses on each deal.
2. Wolves (dressed as sheep)
These are experts who understand property and provide education on how to make money. At the end of the education process, they encourage you to purchase property from their favourite developers (and in the process, get paid significant commissions). Such advice must be questioned due to the obvious conflict of interest. If they are being paid commissions upwards of $25k on sale, how can they be impartial? When a 'mentor' is telling you to buy a property but getting commission of such magnitude, are they a mentor or a predator laced with self-interest? Is this advice client-focused, or tainted by the need to make next month's mortgage payment? Call me a cynic, but an adviser telling you how to invest, who is getting a commission on what you are buying, is not an adviser – they are a salesperson (wolf) dressed as something else (a sheep).
Imposters will tell you have they have all the property investment knowledge and have been in the education game a long time, so they have the experience to lead you to property investment success. However, in reality they own few (if any) investment properties themselves, so they are all theory with no practical backup. They make all their money out of teaching, not out of investing in property. They promote the same strategy at all stages of the property cycle, which can be dangerous in a moving market.
Imposters haven't actually done what they are teaching you – there is no proof in that particular pudding, which makes them a gamble at best. For example, property development mentoring from someone who has not developed property is dangerous. They can seriously underestimate the costs involved, which could leave you a very long way up the creek with no sign of a paddle.
Be wary of Number Ninjas, Wolves and Imposters – they can harm you if you are not careful. That's not to say all property mentors and coaches fall into these three categories – there are some genuinely good educators out there. But before you choose one, do your due diligence, and if you choose to work with a Number Ninja, Wolf or Imposter keep your eyes open and don't be persuaded to invest in anything that is not in your best interests.
Who am I to be talking?
I have been investing in property for more than 20 years and currently have over 30 properties in the Auckland market. At Gilligan Rowe and Associates we work on property fundamentals – we measure supply and demand, look at factors that underpin growth, and choose the areas we invest in accordingly. We avoid areas with loose supply and low demand, declining populations and low employment. Being chartered accountants, we understand the numbers and will never forget to include costs or tax when calculating the outcome of an investment. We take a long view and have a deep understanding of the property cycle and each of the phases it passes through. We understand that you need to adjust your strategy to the market, and we know what works in each phase – and more importantly, what doesn't. We also understand how to protect the wealth you are working so hard to build.
GRA have helped thousands of clients build wealth through property over the years, and we get a genuine kick out of seeing them succeed. That's why we run our educational programmes, like our 7-week Property School
. We invite you to talk to us about what we can do to help you. Come to one of our free education evenings
(held in our offices in Newmarket), or contact us on (09) 522 7955 or [email protected]
to find out more. Or check out some of my predictions and observations at www.gra.co.nz/Seminar-Downloads