Residential Views

We are assailed on a daily basis by commentary from excited and breathless media types all singing to the same tune, a tune of woe and impending doom. Tirades range from the standard statement that we’re experiencing yet another absurd high in a real estate market out of control, to more dramatic sentiments referring to the market as a bubble in search of a pin leading to a violent explosion, sending us all to the poorhouse in the process.  What a lot of rot!!

There is little reasoning behind the claims beyond the observation that prices are high and hard for locals to pay, or that America created a meltdown when their finance people went bananas and cheated the wealth of the middle class right out from under them; the inference being that fate is to be ours when the bubble goes ‘Pop”.

I do not believe we are experiencing a ‘Bubble’ or that disaster is on its way, in fact this is simply a market with a demand supply imbalance acting as such markets do, our prices are all about supply /demand, cost of money, cost of construction and the desire of people to be ‘wealthy’.

Using the English Doomsday Book it has been established that, in the United Kingdom property has risen by 9% compounding for the last 1200 years or so – a long time by any standard.

Everything that could possibly happen to a country took place during that period – including the ‘Hundred Years’ War, pestilent plagues, the two largest world wars the planet has ever seen, to blood soaked invasions by murdering hordes (think Vikings, Normans and others), turbulent times indeed.

The destructive effect of a limited nuclear war today is probably equivalent to the destruction wrought by the  Black Death in the Middle Ages and yet through all the changes and upheavals ………click, click, click, good old real estate quietly averaged a solid 9% compounding! Astonishing isn’t it? Little wonder we love the stuff.

If we’re looking for a reliable expectation of the way property might perform in the medium to long term future  then I’d say 1200 years at 9% would provide the basis of a pretty reliable expectation wouldn’t you think? Interestingly, residential real estate values in both New Zealand and Australia have compounded at around 10% for the last hundred or so years according to NZ and Australian Government records. Again, this provides a good market sampling that an investor should be able to rely on to make a prudent decision or two.

Spurred to action by the agents of whispering death (Media), a little research delivered some information that does just rip the breath from the lungs – in the midst of all the comment focussed on the reckless unsustainability of the Auckland market it becomes apparent that the market is, in fact, behaving in an utterly predictable and rational fashion; everything is exactly as it should be, and there is no long term catastrophe laying in wait.

Mad, I hear you say; but wait and consider recent history of real estate sales/values in our wee piece of the world………

AUCKLAND, Eastern Beaches, residential real estate performance.

Year   Med sale price  Med sale Apr 15 Compound growth pa
1992 $165,000 $878,000 7.54%
1995 $225,000 $878,000 7.04%
2000 $269,000 $878,000 8.21%

If anything the 20 year performance of our market thus far verges on the conservative, ironic isn’t it?

Median rentals over the period haven’t yet maintained the same rates and do lag a little but they may well start to rise too, let’s just wait and see.

1998    $320 pw. 2000  $340 pw. 2015  $570 pw.

There’s no sign of madness in these numbers. I remember selling many 3 bedroom, 2 bathroom townhouses in year 2000, that would have been typical of a median priced home of the times, as a rental investment for a price of around $260,000. We projected 15 year values of $796,000 (How they laughed and yet it was only the result a 7.5% compounding growth rate would achieve.) and voila those properties are achieving sales today in the mid $800k thousand range. In most cases it was necessary to cite 5% growth rates for the sake of credibility – even then, that showed an approximate sale value of $560,000 which stretched credulity. Bear in mind these figures represent an increase in value of between $600-$800 for every week that passed, more in some cases than the owners did earn and pay tax on.

Mad and unsustainable as the market may seem today; in fact it has only behaved as predicted and expected. Anyone who did enter the market as an investor in those times has certainly reaped a benefit.

It’s important to note that there was no 15 year period I could identify where the above did not hold to be true, however there are many periods of 3-7 years where market variations could have been very expensive to people forced to sell. Real estate is a long term game ideally suited to long term planners. It’s a marathon, not a sprint.

Tony de Leeuw

New Landlords Special