"When Fools Rush In"

Olly Newland's Column, August 2008

We are now about six months into the real property downturn. Until last December there was still a positive note -- despite the collapse of several finance companies and with other hints of worse to come.

Now there are those who say 'the worst is over' and that we can look forward to a more stable market and the resuming of the property bubble.

I do not believe that at all. Some optimists and their advisors are merely seeing a false dawn, in my view, and there is much more pain to come.

Since the beginning of the year, many more local finance companies have collapsed or shut their doors, and overseas the financial markets are still deep in trouble.

Sooner or later there will be a real crisis, with emergency measures to be taken -- and that will be the end of the beginning.
It often takes a crisis to solve a crisis.

Judging from previous experience, I'd say we are probably about one-third of the way through the problem, with much more unpleasantness to come, but (and this is an important distinction) only for a relatively FEW.

Learning from the past
During the 1987-1991 meltdown down both locally and internationally I was continually amazed to see that the restaurants were full, properties were still sold for good prices, people continued to go on expensive overseas trips and buy the finest wines.

This taught me that a recession (for that is officially what we are in) really only affects a small number of people. For many, it is business as usual.

While 10% of the population may be suffering in the recession, 90% ARE NOT.

Now all this is good news indeed for many property owners and I, for one, am more optimistic than ever. Here's why.

If we are one-third of the way through with two-thirds to go:
It means that the real upturn (or least a stable market) will likely arrive towards the end of next year, 2009. Hence, most of us can while away the the rest of recession in relative comfort until then.

It means that investors can now drive bargains that were unthinkable to many 12 months ago. Take advantage of this while you can.

It means that fuel prices should steadily fall (not all the way back, but enough to take the hurt away), interest rates should drop (cheers!) and the banks will relax their po-faced attitude of today and be more realistic tomorrow.

All we have to do is survive for the next 18 months or so, gather up real bargains in the meantime, and get ready for the better times ahead.

Can we get this over with?
You may well may ask if the difficulties we are seeing now could be put right more quickly?
In my view, no, that will not be possible for the following reasons:

(1) Something like $4 billion or $5 billion of people's spending power has been locked up in failed or frozen finance companies. For an economy the size of New Zealand this is way too much. It matters very little if the frozen money is lost or is eventually returned in part -- the effect is the same.

(2) Remember that the statistics quoted -- that 'only' around 16,000 investors are affected -- are patently untrue. Each investor will have have dependants and family, all of whom will be affected to one degree or another. More likely 300,000 people have been affected with stalled deals, properties not settled, projects frustrated, purchasing power crimped. This takes a long while to work through the system, and hence the time delay.

(3) In addition to the finance company debacle, we have more and more lay-offs, and companies reducing profits. All this tends to make people think twice about spending on any major items. (Just ask the car dealers.)

(4) For every mortgagee sale you may see advertised, I estimate there are at least another 50 others who are under real pressure and are selling before the bank does it for them. This backlog has to be cleared away as well.

(5) Even if interest rates were slashed by the Reserve Bank, I doubt it would help. This approach has been tried in the USA and Japan with negligible results. Ask yourself: If interest rates were suddenly reduced to 6% would you rush out and buy everything in sight? I doubt it.

(6) Then we have the problem of inflation. Having lived though hyper-inflation in the 70s and 80s I know it can be both a curse and a blessing. Inflation erodes savings and makes money dearer to buy. On the other hand, it drives up prices -- and property is the first to benefit. Inflation is the potential curve ball in the whole equation. All predictions can be thrown out should inflation become a serious issue once again.

The way forward
It is with these points in mind that I caution property owners and investors NOT to rush in right now just because prices may have a slipped a little.

But this is important: don't stay in hibernation either.

What I DO encourage is that buyers start to learn and get a feel for the market. Go out and look at everything for sale -- don't necessarily buy anything. The current painful volatility is a relatively rare opportunity for you to observe a market in turmoil and to study the ugly side of capitalism.

Of course should a real bargain turn up (at say 20-25% below current market) then maybe a buyer should chance their arm... but how will someone 'uneducated' in property investment or unfamiliar with the market tell a bargain from a lemon? It's time to get educated.

Advice for those under pressure to sell
(1) Deal with the problem early. Delay is your enemy.

(2) Go to your bank or mortgagee and explain the circumstances. As unpleasant as that may be, the alternative is worse.

(3) Usually the bank will give you up to three months 'relief' with no further payments required (capitalising the interest). Of course if you have left it late and already missed a a payment or two, you may not get this relief. Hence the need for early action.

(4) The bank does NOT want to take your house back and will do anything to prevent that. They would much prefer that you put the property on the market yourself, selling it in the ordinary manner for the best price achievable.

(5) Remember, if you are unfortunate enough to find yourself in a mortgagee sale situation you can actually pay the arrears right up to the fall of the hammer, if you find the funds, and keep your property.

(6) Suggest to the bank that they take an equity stake in your property. i.e. They become part owners in exchange for some of the debt. When times are better the property can be sold and the bank will get their share of any upside as well. This was done to good effect in the UK during the severe downturn in the market in the early 1990s.

Are the media to blame?
Some people are saying that a lot of the present troubles have been caused by the media and their sensational stories of gloom and doom. This is bunkum for at least two reasons.

The media only reports events as they happen -- they do not invent them. The market is bigger and stronger than the media by far. There is no way the media can influence the market to such an extent that it creates a recession.

Besides, no-one was complaining about the influence of the media when property prices were rising at the rate of a "$1000 a week". People seemed happy enough then.

In conclusion
The present market is a nightmare for some and can be a bonanza for others. With a good education on how to survive and prosper in a falling market and the ability to act in conjunction with proper advice from impartial sources, it is quite possible to take advantage of this falling market to steadily build up a portfolio of residential and/or commercial property -- which can be a springboard to secure your future.

In the months and years ahead I am sure there will be many who will look back and say that they should have acted but have missed out again through inaction.
Make sure you are not one of them.

If you want good things to happen you must take action and the sooner the better.
The more action you take the more chance you have of getting ahead.
Become active.
Become educated.
And above all -- never give up!

Olly Newland
25 August 2008
© 2008 Olly Newland. All rights reserved.

Best regards,
Mr Colin Kumar
c.kumar@barfoot.co.nz
WE LOVE SELLING AUCKLAND

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