There has never been a better time to be a real estate agent

If you start seeing more late model European cars parked outside open homes in the coming weeks – don’t be surprised. Simply put; in the past 20 years there has never been a better time to be a real estate agent.

It is the perfect alignment of the key drivers of the real estate industry. Sales volume are growing fast, prices are up and up, there’s little competition in the commission fees and its harder to break into the industry.

Since the peak of the property bubble in late 2007, sales volumes fell by 40% and then rose by 40%, prices fell 8% and the rebounded 23% whilst the number of agents literally halved but have barely grown since 2010.

The industry structure was significantly altered in 2008 with the implementation of the Real Estate Agents Act. The new Act required a higher threshold for admission plus annual license renewal by individuals whereas prior to the new Act licenses for salespeople were held by offices on behalf of offices, allowing for a more flexible arrangements for people to move into and out of the industry. As the property market collapsed in the 2008 / 2009 agents left the industry as selling opportunities lessened. When the market started to recover in 2011 the traditional surge of new entrants to the industry did not eventuate as the barrier to entry had been raised by higher entrance requirements, an effective apprenticeship period and less educational establishments providing courses.

The current market

In the 12 months to September of this year the industry comprising just over 9,000 active residential agents, (as tracked by Realestate.co.nz) closed 80,539 sales with a combined value of $39.35 billion.

The value of the commission charged by the industry to their clients for their services in the past 12 months to the end of September totalled an eye popping $1,586,450,000 (inc GST). That total is within 5% of the all time record set in 2007, yet back then the industry had over 17,000 agents vying for the opportunity to sell property.

Viewing this data on the chart below ably demonstrates just how happy those in the real estate industry must be at this time.

In the past 12 months the average agent has sold 9 properties and has generated an average commission total of $153,280 (exc GST) charged to their clients for their services. Of course the agent themselves will see a proportion of this commission dependent up on the arrangements with their office. However the fact is that this scale of sales commission has grown by more than 50% in just 2 years driven by the rise in volume of sales and rising prices.

The majority of this growth though as is so often commented is unique to Auckland and Christchurch so maybe the real winners will be European car dealerships in these key cities!

Property is all about supply and demand

Property as we all know is at its core, a fundamental of Maslow's Hierarchy of Needs, the primary need for shelter. Far more important than even safety and self-esteem and self-actualisation.

For this reason property exhibits the same fundaments of economics of supply and demand. When the supply of a good (in this case property) is limited, price go up as we have seen in Auckland as supply of property for sale has been constrained whilst demand has grown faster than supply and the access to finance has been relatively easy and cheap. These latter two components also impact the economics of property as does the substitution of property options between renting and buying.

If the cost of buying becomes affordable and the access to finance is available then people will buy, equally if it is cheaper to rent and finance becomes less accessible rental demand will grow and consequentially rents will increase. 

This is all logical. Let's now examine these principles when applied to the constant media story of 2013 - the dire housing shortage in Auckland. We hear weekly how Auckland needs 20,000 or maybe 30,000 new homes to be built almost immediately as well as 350,000 homes over the next 25 years to solve the housing crisis.

If the housing crisis is so dire and is the reason why property prices of houses for sale are growing at double digit levels, then why is it that rental prices of property in Auckland are not growing.   

This is very clearly seen in the chart below which tracks Auckland's stratified median house price over the past 4 years on an index basis with the red line; as compared to the index of mean rents based on bonds submitted to the Dept of Housing & Building with the grey line - the index is Jan 2009 = 100

The chart clearly shows that whilst property prices have increased by over 45% since the start of 2009 rents are up just 15% and the past 18 months have barely seen any change. 

If Auckland really had a housing crisis then rents would be increasing - it's the same economics of supply and demand. To look for proof, look at the same chart for Christchurch below. The fact is that Christchurch has a real housing crisis. There are too few available properties to meet demand as a consequence of the earthquake and the subsequent rebuild programme. In that market both rents and prices are rising, almost in alignment. 

Now look at Wellington, a market that is not suffering a shortage of property and we see an alignment of rental price appreciation to property sale price appreciation. 

This analysis would seem to support a view that the recent appreciation in property prices in Auckland have been fuelled by speculation.

With easy access to low cost finance over the past 2 years people have returned to property assets, this has been especially true of rental investment and property re-development. Investor growth has actually increased the supply of rental properties, which has as a consequence has maintained fairly stable rental prices at and contributed to a further tightening in the property-for-sale market through effectively taking home-owner stock out of the market. To this has been added inbound migration demand into the region from both domestic and international sources which has often been accompanied by higher equity capacity which has only further stoked the property price inflation.

The silver lining of the new LVR Restrictions

The first day of October has dawned and with it the introduction of the LVR restrictions imposed by The Reserve Bank on the main trading banks forcing them to reign in their lending to borrowers with low deposits (less than 20%).

Certainly this is going to have an impact on the property market. It will impact those who either do not have the necessary 20%+ deposit and also importantly those who do not want to tie up that much capital in a property, especially an investment property. Investors tend to like to highly gear their investment properties so as to maximize their interest cost recovery against tax. Therefore there will likely be an impact not only among first-time buyers but also investors.

However as with all matters economic, there is always a contrary position and in fact there will be winners or potential winners from the LVR restrictions.

The fact is the main trading banks whilst strictly adhering to the new policy (especially as their operating license is at stake, not something they are likely to risk for one second) will not for a moment relinquish their desire to continue to build their business by lending against property as a secure asset. These banks are hardly going to be able to settle back and report to their shareholders that they have seen their profits fall because of this policy. Their shareholders will rightly expect them to seek to find alternative lending options to make up for any potential loss of clients in the high LVR market.

This is where that contrary position comes in. If you are not a first-time buyer or an investor. If you have a healthy equity ownership in your property and you are possibly looking to buy a house or refinance. You may well now find out that your local bank is even more happy to see you, greet you warmly and encourage you to discuss options with you.

The fact is that for every large value low-LVR mortgage that a bank can write, will effectively allow them to offer a lifeline to first-time buyers and investors.

Here is a somewhat simplistic example to illustrate this situation.

Lets say a bank as of last week has 25 prospective mortgage customers. 10 of those customers are after a 90% mortgage to buy a property and they all want to borrow $300,000 to fund that purchase of a $333,000 property. The other 15 customers happen to be customers with a larger portion of equity. They are looking to borrow $750,000 each to buy a $1.25m home – 60% LVR mortgage.

This package of mortgages totals $14.25 million and results in the bank having 21% of its mortgage book in loans over 80%. A situation that the Reserve Bank says has to stop from the 1st October.

So from the 1st October the bank in the same scenario of those 25 new customers would have to turn away 6 of the 10 customer who wanted 90% mortgages to ensure that their total mortgage book has no more than 10% in high LVR mortgages. This decision would cost the bank a 13% fall in overall lending, down to $12.45 million and likely a consequential fall in profits.

However if the bank reached out to some more of these higher value customers who are well below the 80% LVR threshold and offered them an enticement in the form of lower interest rate or other inducement then by attracting just 2 more of these higher value customers they could also satisfy one more first home buyer and in so doing end up with 22 customers rather than 19. They would have a total mortgage book up 5% at $15 million and a potential competitive advantage.

So my advice is be alert to some very friendly and generous bank representative courting you if you are after large mortgages and if you have a good strong equity position in your home!