Wed, 23 Sep 2009 1:45p.m.
Opinion: By Brian Dalley
Dinning with a group of property investors a few days ago I made that statement which froze their knives and forks in mid air.
It was if the building had started to violently shake and the ground below was about to open up and swallow them whole.
An airy silence followed which I capitalised on by saying nothing for a few seconds... then the tsunami; “If you continue to build paper houses it is going to be disastrous.”
One poor guy, Jason, almost chocked on a mouthful of food.
Why such a reaction? Well I had just concluded a meeting by stating there has never been a better time to start investing and now I drop this bomb shell.
Many here in NZ have already started rebuilding after the carnage the world recession caused but sadly it has become apparent [to cut costs] paper houses [properties funded by interest only loans] are being replaced with more paper houses.
And just like an origami boat will eventually get saturated and sink, so will house prices when the Shockwaves [increased interest rates] place added pressure on balance sheets.
New Zealanders have been brain washed by idealistic theories over the years that real estate will always increase in value and to date we have weathered the storms reasonably well thanks largely to the intervention from those we often point the stick at [lenders and the Reserved Bank].
However, even they will not save us from an inevitable Shockwave unless we prepare for it and yes, it is coming.
Unfortunately like others, I cannot to the day predict when it will hit our shores but it is expected to be in the next two to five years and will come in the form of increased interest rates.
As Real Estate is only worth what someone will pay for it, irrespective of what a valuer / real estate agent or anyone for that matter puts on paper, I wouldn’t be opposed to lenders tightening up on speculative investing [interest only loans] that rely on capital gain and instead encourage borrowers to look at some form of debt reduction, even if it was simply to increase payments on a personal mortgage as a trade off.
Just what would be the implications if you were forced to sell a property in two years time should the Shockwave hit then and you realise NO capital gain? Example;
$450,000 interest only @ 6% = $520 per week | less rent $450 = $70 x 104 (2 years) = [ - $7280 ] less selling costs $19,000 [ - $26,280 ]
Imagine what the figures would be like if the sale is made when the Shockwave hits and the property is sold for less than its paper value.
Don’t let this put you off investing as I stand by what I said, [the timing has never been better] simply spend more time laying stronger foundations from which to build on.
Predictably I was confronted with; “But Brian you haven’t factored in the tax benefits.”
A thought flashed through my mind, you can lead a horse to water but you can’t make it drink, but I didn’t say that out loud, instead I replied with;
“Jason, it should be about the cake, not the icing.”
Brian Dalley is a leading Property Consultant | former NZMBA Mortgage Broker, and Real Estate Agent.
You can read more of his views and opinions on his website www.propertyprofit.co.nz