NZ 1st homebuyers are ScReWeD...

[Dr_Who]

I dont agree, but then the only way to prove it is to wait and see. I have been putting my money where my mouth is and still hunting for and buying bargains.

The experts got the timing wrong last time during the boom and they will get it wrong this time.

Good investing everyone.

[upside_umop]

There is definitely bargains if you find distressed sellers.

Dr Who, you have the luxury of buying more than 1 house and this gives you the ability to average out your entry price. Its like buying parcels of shares over a period of time - takes some risk away - but your upside is limited to your average price. Your doing the right thing in your situation.

For people like me and shrewdy who have yet to get the foot in the door, timing is everything. I simply cant afford to jump into a house with a 20% mortgage and be told by the bank 3 years later I'm down to 0% equity on their valuation. This would severely affect the ability to go out and buy another place using the original as equity.

Still not time for me yet....should be able to go out end of 2009 and buy a place cashflow positive though. With a few modifications maybe reaping 10%. That would surely get me on my way!

[small fish]

It will be interesting to see how long it takes for the decrease in farm receipts to flow through the economy and what effect it has on the job market.

[lakedaemonian]

Bank Direct: 5.90% for five years

[minimoke]

There is definitely bargains if you find distressed sellers.

For people like me and shrewdy who have yet to get the foot in the door, timing is everything. I simply cant afford to jump into a house with a 20% mortgage and be told by the bank 3 years later I'm down to 0% equity on their valuation. This would severely affect the ability to go out and buy another place using the original as equity.

And there you have another problem. Your 20% deposit is now being eroded by tax and inflation. You’ll be loosing around .8 to 1% of your deposit each year. 4% interest isn’t flash for those holding cash.

Trying to “time the market” is such a tricky thing. In my post at 1354 reviewing Shrewdys 2 year anniversary we have already seen mortgage rates drop and wage growth anticipation shrink. I’m not sure there is anyone out there who can honestly say what economic conditions we will be facing in 2 – 3 years time.

As for buying bargains from distressed sellers – they may be selling properties you ought not be buying. And had they thought more rationally they wouldn’t have bought either in the first place.

[upside_umop]

And there you have another problem. Your 20% deposit is now being eroded by tax and inflation. You’ll be loosing around .8 to 1% of your deposit each year. 4% interest isn’t flash for those holding cash.

Inflation is set to stumble down to low single digits...ie 1-2%. Interest rates are forward thinking, based off expected inflation using a 'real' interest rate as a base and the difference between nominal and real being the inflation component. Whats better? Earning 8% last year with 5% inflation, or 5% this year with 2% inflation? When you think about it...actually better this year! Lets have a look:

8% less tax (19.5%) = ~ 6.44% - 5% (inflation) = 1.44% real rate.

now lets see 5% rates and 2% inflation:

5% less tax (19.5%) = ~ 4.03% - 2% (inflation) = 2% real rate.

How can this happen you might ask? Well, the real rates are staying the same...but the government tax take ends up being less - we savers win.

The situation would be even more beneficial on a 39% tax rate, compared to previously. As you see, my competitive advantage is my tax rate...

This is of course not true for people who rely on interest payments for income because now they might only be able to buy half the goods with their payments than they did before. The thing that has changed is the rate of change...ie the derivative. Its only beneficial for savers. Since house prices are still on their downward march of ~10% year, the inflation to the asset in question is actually deflation of 10%.

Trying to “time the market” is such a tricky thing. In my post at 1354 reviewing Shrewdys 2 year anniversary we have already seen mortgage rates drop and wage growth anticipation shrink. I’m not sure there is anyone out there who can honestly say what economic conditions we will be facing in 2 – 3 years time.

I'm not saying I can time the market, but I'm going to wait until:

1) I am earning a consistent income;

2) Prices have stabilized.

In 10 months time, I will have stable, consistent cashflow. In 10 months time, I'm still thinking prices will be falling. Of course I am biased to think this as I cant (havent tried) buy a house yet. For prices to stabilize, fear needs to be taken out of the market. Fear doesnt get taken out when the likes of the IMF says places are in depression. I dont think we're in a depression like state at the moment, but just that word makes people think.

As for buying bargains from distressed sellers – they may be selling properties you ought not be buying. And had they thought more rationally they wouldn’t have bought either in the first place.

How do you mean?

What I mean is any/all of the following, the type of people who have overextended, lost their jobs, personal circumstances etc etc. Not because they have a faulty house...

You could very well buy a faulty house from a normal seller as you could a distressed seller from external circumstances.

Is that what you were getting at? Still not a good time to buy...

Hey Lakes, thats a good rate. Almost a full 1% less than kiwibank....might have to check it out.

[fungus pudding]

Inflation is set to stumble down to low single digits...ie 1-2%. Interest rates are forward thinking, based off expected inflation using a 'real' interest rate as a base and the difference between nominal and real being the inflation component. Whats better? Earning 8% last year with 5% inflation, or 5% this year with 2% inflation? When you think about it...actually better this year! Lets have a look:

8% less tax (19.5%) = ~ 6.44% - 5% (inflation) = 1.44% real rate.

now lets see 5% rates and 2% inflation:

5% less tax (19.5%) = ~ 4.03% - 2% (inflation) = 2% real rate.

How can this happen you might ask? Well, the real rates are staying the same...but the government tax take ends up being less - we savers win.

The situation would be even more beneficial on a 39% tax rate, compared to previously. As you see, my competitive advantage is my tax rate...

This is of course not true for people who rely on interest payments for income because now they might only be able to buy half the goods with their payments than they did before.

But it still remains true. Even though they may spend interest and capital to survive, they would have had to spend the interest and even more of the capital previously. It is the real rate of return that matters. A 20% return when inflation is 21% is disastorous, particularly with taxation .

[kazza]

upside_umop you make some great points, a 10% drop in house prices means a 50% loss in equity, leverage is great when prices are going up but a total disaster when going down. When the housing market finally does bottom there will be no mistaking it, you will know all about it, just like when house prices started going down there were news articles every day for about 3 months before prices started falling. You would have to of been totally blind or illiterate not to see it coming, it will be the same when they have bottomed. just keep an eye on market sentiment, one thing is for sure market sentiment at the moment shows prices are still falling.

Sounds like you will be in an ideal position to take advantage of low interest rates to get a good quality house in a decent suburb, but I tend to think property will never again be as good as shares or fixed interest as an investment.

[minimoke]

Thanks upsidedownmop – a useful analysis. Just a couple of things though. I’d be plugging in a tax rate of 33% rather than 19.5 for general analysis. Lets face it the tax rate of 12.5% on $12k then 21% to $40k income isn’t really real world for house savers. Somebody wanting a house is really going to need an income of more than $40k to either save enough for the deposit or afford the repayments. Your inflation rates are a bit optimistic – expected to drop to 2.7% but currently at 3.4%. And as for deposit rates today you can get, say 3.75 from Kiwibank (may as well use them since posters like to use their deposit mortgage rates) but either way you’d be doing well to get 4% on call.

So if you plug in 3.75% interest rate, 33% tax and 3.4 inflation you are getting -.89% in a real world analysis. For those looking for your first home your deposit money is going backwards.

You are right not to be buying now and 10 months will be better. Regardless of everything else you do need consistent cash flow to service your debt. Trouble is, as we have seen banks are getting more nervous on what debt they want on their books. Who knows what their loan criteria will be in 10 months time – but good luck all the same.

What I mean by distressed sellers is those people who have leapt blindly into the property market over the past few years thinking that property values only ever go up. Well they don’t – they are like anything else where there is supply and demand: the values will go up but they will also come down – but over time they always head up.

The distressed people will be those that bought land at say Pegasus town hoping to build a spec home and flog it off, Jacks Point might be the same as is coastal holiday homes.

Distressed people will have bought a rental for capital gain only to find that the rent really doesn’t cover outgoings. They will also have discovered that they are in a “service” industry – and if they as landlords aren’t providing the service tenants want they end up with higher vacancy rates. The distressed sellers will have mortgaged to the hilt, thinking negative equity was some magical potion only to find its not a great place to be when property values for non-essential property starts to fall, buyers dry up, their income gets squeezed (or they feel more risk adverse) and people don’t pay the huge dollars for a week by the sea.

Run of the mill brick and mortar family homes are unlikely to hit the “Distressed Seller” market. But your rental properties bought in haste will – which is possibly why Dr Who is buying. But this might mean buying in rental areas – which may not be an area you actually want to live.

[fungus pudding]

Thanks upsidedownmop – a useful analysis. Just a couple of things though. I’d be plugging in a tax rate of 33% rather than 19.5 for general analysis. Lets face it the tax rate of 12.5% on $12k then 21% to $40k income isn’t really real world for house savers. Somebody wanting a house is really going to need an income of more than $40k to either save enough for the deposit or afford the repayments.

Your calculations are questionable. To pay 33% you need to be earning over 150,000. Apporoximately 90% of tax payers earn less than 60,000 per annum; the tax on 60,000 is around 22%. Most tax payers pay around 20% or less.