Private property issue #38 - opportunities and drawbacks of the current market

Private Property – our weekly newsletter that gives you insights into what's happening in the NZ property market. Written by managing director Andrew Nicol. Sign up to receive this in your inbox every Thursday.

After last week’s newsletter, a reader contacted me:

“It sounds like you're actively encouraging buying property with up to $20k negative cashflow … with a very subtle assumption rates don't go higher than 6.5%.”

“I'm no expert, but that sounds pretty sketchy … Sure, some people will have the resources to take that risk with the assumption prices increase, but I'm assuming most don't.”

– Darren

I get it. Today's cash flow (for a property bought with 100% lending) is terrible.

But the purpose of this newsletter isn’t to convince you that now is the right time for you to buy.

That’s up to you and your financial adviser. Instead, this newsletter aims to show you both the opportunities and drawbacks of the current market.

Let me respectfully address some of Darren’s genuine points.

#1 – “...some people will have the resources to take that risk…but I'm assuming most don't.”

True.

If you can’t afford to top-up the negative cash flow of $300 – $500 a week in today’s market … you shouldn’t invest.

(This assumes that you’re borrowing all the money and you’ve already gone through our 7 strategies to manage higher top-ups).

But some people can afford the top-ups. And they’re still investing with full knowledge of today’s cash flow.

Last week 11 investors we’re working with at Opes went unconditional on an investment property.

For these investors, they see that: “Yes, my weekly top-up will be higher in the short term. But I’m buying a property for up to 14% less than I would have last year.”

In other words, they might put in an extra $10k - $20k of cashflow during the short term … and for that, they’ll pay $90K less for the property.

If you want to dig into what a cash flow looks like in today’s market, check out last week’s Private Property.

#2 – “... subtle assumption rates don't go higher than 6.5%.”

My current assumption is that the 1-year interest rate will peak mid-next year at 6.5%.

However, rates could go higher than this. They could also end up lower too.

Whenever you model out your property's cash flow, you need to put a stake in the ground. You need to enter an assumption into your spreadsheet.

Whatever assumption you use, you must be comfortable with the numbers used.

Here at Opes Partners, we’re comfortable with 6.5%. (Head here for the reasons why).

But if investors want to be more conservative, they can also model this in the return-on-investment spreadsheet.

#3 – “... the assumption prices increase.”

Property prices will likely increase over the next 10 - 15 years – the standard length a property investor tends to hold for.

For starters, here is the Reserve Bank’s modelling:

After prices bottom out, the Reserve Bank forecast that house prices will increase by 11% over the following 2 years.

At the most recent NZ Property Investors Conference, economist Tony Alexander said that the market “has the capacity” to increase by 5% in 2023.

And after 7 months of consecutive house price fall, the latest REINZ data (released 2 days ago) showed that house prices increased by 0.2% in October.

The last point on cash flow…

I was keen to put cash flow examples in front of you last week because many people don’t know what the numbers look like in today’s market.

So, instead of hiding from them, I want to talk about them transparently.

Because you need to know: the risks, the negatives, and the positives to make an informed decision. And there are pros and cons in every market.

Right now, cashflow is the con.

But the positives are:

• The capacity for near-term capital growth

• Deals – properties are selling at lower prices than 12 months ago

And I appreciate that Darren got in touch. Because it’s important to be challenged on these assumptions too.

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