Rent vs Buy - a new financial calculator

The decision of whether to rent or to buy is often not purely a financial consideration, it may well be about flexibility and lifestyle or as seems more common at the moment the access to that deposit is limiting the opportunity to purchase.

If the financial consideration is a big driver of the decision then you will be pleased to know there is an excellent online tool published by The New York Times that helps to answer the question "when is it financially better to rent than to buy". To be clear the online tool is primarily built for renters to help better to see the point at which it becomes better to buy than to rent.

The beauty of the app is that there are a wide variety of inputs that dynamically allow the calculation to be personalised and whilst it is a US app it can be just as relevant to the NZ market.

The app requires some inputs to begin with which you are key to the calculation such as real estate fees, mortgage rates. inflation, investment rates, local and personal taxes as well as current inflation in property prices and rents. With all of these inputted then the key factors to examine are how long you plan to stay in the house and what is the price of the type of house you are looking to buy. It is also valuable to then go back and see the impact of property price inflation and rent increases as to how they impact the decision threshold. 

Before you have a go with the app I would recommend you have a watch of this screencast I have published which walks you through the app together with advice around the input levels.

KiwiBank ups the ante with Home Hunter mobile app

The mobile property searching environment has become a little more heated with the launch of a significant campaign promoting KiwiBank's Home Hunter app for iPhone and Android. The app was originally launched late last year but seemed at the time to suffer from data integration issues which have now been fixed and with that has come this recent promotion.

It is by no means the only foray into this space by the main retail banks eager to establish closer relationships with home buyers. ASB launched an app back in 2012 which was based on the data from QV which was a rather weak experience and appeared to 'wither on the vine' - I still have it on my iPhone but its lack of data integration leads to it crashing - it is also not in the app store. It is interesting as an example of how to manage the retirement of an app as of course the actual app lives on even when you delete it from the store and your brand therefore is tarred with the implied experience of it not working!

Westpac have been active in this space but rather than build an app chose to partner with both Realestate.co.nz and Trade Me Property to sponsor those apps. They also in my mind built an excellent service called Home Club which with a data integration with Trade Me Property enables the user to scrapbook properties and receive property insight data from QV.

The Home Hunter app from KiwiBank works well as far as data integration which it receives through a data feed from Realestate.co.nz which provides the most comprehensive portfolio of agent listings. However I struggle to see the value in the app for the general property "hunter", except for one very sweet aspect.

I believe that the team at KiwiBank (I use the term specifically as there is a Facebook page for the team!) have rushed off in their excitement to develop the app, grabbed some "shiny objects" along the way but have not stopped to think about the user and what the user might find useful. Here is my take on the app - the pros and cons.

1. Shiny object #1 - the name 'home hunter' goes along with the functionality of the augmented reality capability that allows you to see property around you overlayed with details of property for sale. There is a small circular 'radar' image that tells you if you are near to property for sale. However the whole experience is a classic case of a technology seeking a solution - you have to ask yourself do you want to walk around holding your phone up in front of you? The better solution is the map based presentation of Realestate.co.nz - better to have people look down at a map of where they are and see what is around them for sale.

(As a friendly note to KiwiBank, there is a terrible unexpected consequence of this feature; if as I did, you give up using this feature from the drop down menu and close the app, when you next start the app again you immediately think something is wrong or broken because all you get is the phone's camera with no context of the app).

2. Shiny object #2 - the sun finder feature is one of those functionalities that you go "interesting to know but not something I need everyday!" - it shows the trajectory of the sun relative to the time of year wherever you are standing. Now maybe I am wrong, but not really that compelling; after all what you need to know is where is north and any Sky satellite dish will tell you that.

3. Sweet Honey - the app will provide you with an estimated price range for every property on the market - now that is compelling and appealing!

However. yes there always has to be a however; you need to get a pre-approval from KiwiBank. Now I would think if I was thinking of buying what harm could there be in being pre-approved? After all the estimated price range for every property you look at that is on the market is compelling and considering the cost of a one-by-one request of QV for this data would be $49.95, the trade off of 10 mins of your time and providing your details to KiwiBank as compared to hundreds of dollars of cost for multiple property e-valuer estimates, is a no brainer - where do I apply? Added to this KiwiBank highlight with a little green tick properties that in principle they would lend against.

4. Dead end - the app despite having all this rich set of listings of property on the market and estimated price range, fails at the core benefit of a tool to find property for sale and to contact the agent. Instead of having the agent details on each listing, the app has to open up the whole listing as a app browser-window from Realestate.co.nz for you to have to scroll down to find the agent contact details within that listing.

5. Disorientation - I have in the past bemoaned the Trade Me Property app as it does not put the map based search front and centre on its app, burying it as a secondary functionality. Almost 100% of real estate mobile apps the world over (inc Realestate.co.nz) launch into a map. It's logical. It's a mobile device with built in GPS. Sadly KiwiBank goes one huge leap backwards and has no map on their app!

So in summary, this Home Hunter app has one killer piece of functionality that in my view outweighs a stack of poor user delivered functionality. So if you are serious about buying, get a pre-approval and use the app from your desk at the office or at home, and then when you are out an about to view property use the Realestate.co.nz app.

As an extra piece of insight I thought I would have a look at the level of downloads for this app as compared to the main portal apps. The chart below tracks (via App Annie) the ranking of downloads of the 3 apps over the past 30 days. Clearly the advertising campaign is working for KiwiBank, they are the most downloaded app for property at this time. For Realestate.co.nz it's a steady rate of downloads on top of the more than 200,000 to date, whereas Trade Me Property whilst benefiting from a spike in downloads after the relaunch in April, is struggling a bit in 3rd place.

Housing Crisis / Property Bubble - what does the data tell us?

The term "Housing Crisis" has been the standard text of many news articles in the past week - a quick Google search reveals the extent of the coverage and the political mud-slinging. Now, whether or not there really is a crisis regarding the availability of houses or if we are seeing a bubble in property prices is always a matter best explained and rationalised after the event, never during it. This leads me to ponder the old adage of "What can we learn from examining history?" and equally the wise comment "Past history is not a certain predictor of future trends".

However despite these cautionary words it is useful to examine the history of property data, in the context of which,  history covers in relative terms a fairly short period; for accurate factual data of property selling prices goes only back to 1992. Since that time we have had a monthly median sales price reported by the Real Estate Institute; that's 22 years of data which does at least cover a couple of key cycles, most significant of which in price terms was the period from 2000 to 2009. During this period of 9 years we saw the national median price (measured on the Stratified House Price Index) to more than double from $174,850 to $344,566.

The key questions is whether the current bull market witnessed since 2009 is in anyway a repeat of history? Certainly that slope looks very similar and can be seen to some extent to be accelerating over the past year.

To attempt to answer this question, I have compared on an index basis these two periods and overlaid them on the same chart. For the national picture the chart below tracks these two periods with the 2000 - 2009 period represented by the grey line and the recent 2009 to date represented by the red line.

Into the 5th year of this bull run the national median sales price is up 21%, this compares with a rise of 52% over the earlier property bull run at the start of the last decade. A case of the circumstances looking similar but actually the extent of the rise being nothing like as significant.

However when I thought more about this analysis a question struck me, which is as to whether indexing is appropriate a measure after all a 10% increase on $200,000 is $20,000 whereas a 10% increase on $400,000 is $40,000 and I know which capital appreciation I would prefer to have. So to answer the question, the capital appreciation over the early part of the last decade representing that 52% increase was $91,250 and the most recent rise of 21% represents an appreciation of $77,821. The chart below more ably demonstrates this.

So there appears to be a lot of similarity in capital gain between the current bull run and the last bull run - half way through the cycle if history were to be repeated, it would seem.

However this is where the rich data available can provide a very different view as to forecasting the coming years as to whether future capital appreciation will match the past decade. For although the national picture shows a striking similarity in capital appreciation thus far the components of the key regional markets highlights a very mixed story.

The REINZ Stratified House Price Index only covers the main 3 metro areas and then provides a figure for the North Island (minus Auckland and Wellington) as well as the South Island (minus Christchurch). Here below are these respective analyses of capital appreciation for the period of 2000 to 2009 and 2009 to date across these metro and provincial areas.

Auckland

Auckland we all know is cited as the driver of the current NZ property bull market, but would you have imagined for a moment that it is outstripping the performance of the last bull run? In just over 4 years the capital appreciation of the median sales price is $198,355; after the same period at the start of the last decade it was $132,810. There was certainly a hesitant start but that capital appreciation has been rolling along at a fair clip for the past 2 years - those two lines are certainly diverging more and more.

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Wellington

It probably come as no surprise to hear that the capital appreciation for the Wellington market is less than Auckland, however the extent to how much lower may surprise. After just over 4 years the capital appreciation of the median sales price in Wellington is $28,582; after the same period at the start of the last decade it was $84,035. You could, looking at the chart even question the security of that accumulated capital appreciation - just 4 months ago to amounted to $65!

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Christchurch

The Christchurch market, very much as a result of its own set of unique circumstances has been cited as the partner to the Auckland market in driving the bull run of house sale prices nationally. Well the data certainly bears that out, not quite as extreme as the Auckland market but keeping very much inline with the last bull run. After just over 4 years the capital appreciation of the median sales price in Christchurch is $107,982; after the same period at the start of the last decade it was $92,185.

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Other North Island

This set of data comprises what remains of the North Island excluding Wellington and Auckland which is a large part of the North Island property market. It does cover the Waikato region including Hamilton as well as Tauranga, the Hawkes Bay, Taranaki, Northland and Manawatu / Wanganui, a very diverse range of property markets. It will though come as no great surprise to see that these collective markets being more of provincial New Zealand, have not experienced a bull market for the past four and a half years. Over this period the capital appreciation of the median sales price across these provincial North Island centers is $16,820; after the same period at the start of the last decade it was $67,225. There is certainly a lot of similarity between the Wellington market and the rest of the North Island excluding Auckland, further reinforcing the fact that this bull run is very centric to the two major cities.

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Other South Island

Excluding Christchurch from the South Island still leaves a reasonable property market with Otago as well as the Nelson / Marlbourgh region, the balance of the vast Canterbury region and of course Central Otago comprising that unique market of Queenstown. This aggregation of provincial South Island has benefited somewhat better in the past four and a half years than their North Island counterparts recording a capital appreciation of the median sales price of $37,426; after the same period at the start of the last decade it was $92,550. Clearly this region enjoyed a strong bull market in the past bull run, this time however the markets seem more subdued.

We still know so little about overseas buyers of NZ property

This week we have seen two supposedly insightful pieces of data helping to provide insight to the extent of international buyering of NZ property - one from Labour and the other from National. Irrespective of the validity of the data (I'll come to that in a minute) it clearly shows the fear and/or uncertainty surrounding the extent of international buyers' activity in the NZ property market. Certainly from a political perspective at least.

The first set of data released was from Treasury analysis of IRD data into tax returns filed by rental property owners. The data showed that from amongst 200,000 such tax returns around 12% (24,000) were from non-residents.

This data is certainly robust as there's somewhere around 400,000 privately held rental properties in NZ - allowing for multiple ownership this would cover most of the tax records. However the question has to be asked - what relevance has this data?

Included in this total of 24,000 would certainly be ex-pat kiwis with homes or investment properties here in NZ, and with the overseas ex-pat community somewhere close to a million people by all accounts, this group could account for all of it. Also the data provides no insight into the changes in the make up of this group of the years and thereby any inference of proportion of sales. The only trend analysis (Figure 1) shows that this segment had not actually grown significantly over the past 15 years during which time the NZ resident ownership base grew from 110,000 to 180,000 whilst the non-resident (as well as "unknown" whom the analysts suspect are likely to be non-resident) actually fell from around 28,000 to 24,000. 

The second set of data released by Labour's Housing Spokesman Phil Twyford presented the statement that based on data from a Chinese real estate website New Zealand is the 5th most popular place Chinese buyers look to purchase residential property behind the US, Australia, Canada and the UK.

The website to which the statement refers is SouFun - the biggest property website in the world, whilst not publishing traffic figures to its site, it is a listed company on the NYSE generating EBIDTA of US$360m on revenues of US$640m - this is a significant company operating in a massive real estate market. A market with annual transactions in the multi-millions of properties.

However whilst the audience and presence of the website is enormous in domestic Chinese terms, the capacity of it to attract an audience to NZ listings is tiny - no correct that microscopic.

In total they host probably somewhere over 4 million properties for sale across China together with a tiny add-on of around 35,000 listings from outside China. Within that 35,000 international listings there are 23 NZ listings - yes 23, check them out.

Many real estate websites around the world host international listings. The most significant of which is probably the UK site Rightmove which hosts over 125,000 international listings from more than 65 countries. Rightmove hosts 3,476 NZ listings which would equate to over 8% of all NZ property.

The fact is that the SouFun international section of the site is not representative of the true listing stock of any country it showcases. The closest it comes is actually Australia where it hosts over 6,000 listings - yet that represents less than 3% of the more than 230,000 listings of Australian property on the market today. For NZ there are 42,751 properties for sale at this time across the country and SouFun showcases 23 of them - less than one tenth of one percent.

It is therefore at best misleading and more likely totally irrelevant to showcase this data as any form of indication of true Chinese interest in acquiring NZ properties. 

Having said that there is no doubt we still need to find away to collect and analyse the data of property transactions - something I seem to be constantly championing - is anyone listening?

The facts behind the headline when it comes to property do-up's

I can't blame newspapers / media sites / sub-editors or journalists for eye-catching headlines - they need to attract an audience and sell advertising to that audience, and there is no better headline than the combination of property and greed, or is it simply kiwi can-do attitude!

"Owners make $220,000 in a year"

However this article in today's NZ Herald is at best light on fact and rather heavy on drama.

• "A plain weatherboard house on Auckland's North Shore sold last week for 94 per cent more than its current valuation" - the fact is it the property sold for $876,000; its 2011 Auckland assessment capital value was $455,000. It's current valuation is either the sale price of $876,000 or the valuation assessment made by a registered valuer. So it did not sell for close to double its current valuation.
   
• "Owners make $220,000 in a year" - the difference between the sale price in March 2013 and the sale price in May 2014 is $226,000, no allowance seem be allowed for in any costs associated with owning or selling the property. As I will show below the owners made around $70,000.
   
• "A real estate source said the sale showed there was "no sign of the market slowing up" in Auckland" - a single property sale can never be extrapolated to reflect the property market dynamics of the whole of Auckland.

I could so easily have stopped the article there, but  could not help myself when I saw this article to do some research and see what I can assess is the real story here.

The property concerned is at 13 Benders Avenue, Hillcrest - with the services of Google Maps StreeetView it takes no time these days to verify a property from a street image. The property was sold at Auction just over a year ago on the 7 March 2013 for the price of $650,000 it was marketed by Bayleys. The marketing copy described the property as "An original immaculate example of what was a modern 60's bungalow set on a near-level, full road frontage section of 954sqm"... with the ability to create and add value"

It was very clear from viewing these images  of the property just over a year ago that it was indeed an "original" and in need of renovation - a full portfolio of images is available to view via Open2view here.

Over the course of the past year the owners have carried out a classic do-up to improve the appeal of the property as the 'Before & After' images below demonstrate.

The property has been recently marketed by Barfoot & Thompson and went to auction on the 8th May and sold for $876,000.

In my judgement the owners carried out an appropriate make-over to the property to present it in excellent condition which naturally creates appeal and demand and that was demonstrated by the fact that the auction was brought forward.

However that headline keep nagging at me - did the owners really make $220,000 in a year. So here is my assessment of the facts based on my estimation. 

Not $220,000 but overall a healthy return in a year of over $120,000 representing a 94% return on the original investment of the deposit of $130,000.

However I think what we have presented here is what the IRD would judge to be a property purchased with the intention of sale and thereby deemed to be a business. The mitigating factors being the property was only owned for a year, it was significantly renovated over the year and it was clearly staged for sale and therefore unoccupied. 

Assessing this project as a business and with the help of tax advisor and accountant I have developed this more accurate financial assessment:

So legitimately the owners have seen a net profit of just around $70,000 giving a 54% return on the original investment of the $130,000 deposit for just a years worth of work, and the government collected $34,000 of tax on earned income.

The property is now a far more attractive home for its new owner. The local community has benefited from the trades people employed to do the work, local real estate agents have earned their income for their work and the owners are rewarded for their risk in this business decision. 

So who loses? - the new owners were not forced to buy; based on their evaluation of the property market they felt that the property was worth $876,000. Potentially it could be argued that the new owners will have a mortgage that is sourced from overseas funds and this costs the country, otherwise the domestic economy benefited as well as the government.

What can we glean from the April property market data?

The most noticeable component of the monthly summary from the Real Estate Institute for April was how conspicuously it lacked any great hyperbole. The facts were clear - sales volumes continue to fall and the fall was significant in the month, down 22% from March and down 20% year-on-year.

The fact is that sales volumes have been trending down since they peaked in October last year, reaching 80,677 on a moving annual basis. Since then they have fallen 4% to a moving annual total of 77,151 including April.

The April total of 5,670 sales was as the Institute stated the 7th lowest April since the data commenced over 23 years ago. I would go as far as to say that there were extenuating circumstances that partly accounted for the fall in sales. The Institute did reference the coinciding of school holidays and Easter and its effect on working days. I would judge that the key coincidence was the fact that the Easter week ended with Anzac day thereby creating two sequential long weekends and a very short 3 day business week which was a chance for people to escape in the last rays of summer as they did.

The last time this occurred was in 2003 when the impact on sales was equally significant - April 2003 saw a 1% fall year-on-year coming off a sequence of strong months in January / February / March of that year respectively +21% / +11% / +11%. By comparison 2014 saw January year-on-year sales down 4%, February down 8% and March down 10% before the April fall of 20%. Out of interest May 2003 saw a rebound with sales up 25% year-on-year. It could be that we may well see a rebound in May this year.

The fact is real estate agents are in many ways more influential in the marketing of property these days than a decade ago. Action was noticeably focused to getting listings onto the market in early March coupled with the avoidance of auctions and other time-bound campaigns ending around the Easter period. This did in some way help to deliver what was actually quite a strong March. 

In terms of price data the median price fell in April from a record high set in March of $440,000 to $432,250. The more reliable Stratified price edged a small increment higher from it's peak in March of $447,003 to $447,646.

As has been discussed recently there have been questions asked as to the true indication of property prices as represented by these two measures given the artificial inflation of median price as a consequence of the significant decline in sales of low value property. On a year-on-year basis the sub $400,000 price bracket saw sales decline by 32% - far in excess of the 20% decline in total sales in the month.

This factor is clearly impacting the true measure of property prices for just as the composition of sales is changing away from sub $400,000 properties, so it is skewing towards the $1m+ properties which grew by 14% year-on-year thereby exerting a larger influence on the median.

Gradually the impact of the this slow sales of lower price property will be reduced and the median price measure (either in raw form or stratified) will begin to reflect the true selling price of a representative selection of property sales. At that time and I believe the April figures are for the first time beginning to reflect this, we will likely see some easing in property prices, clearly showing that the market peaked in price and sales volumes back at the end of 2013.