I want to give you a great little tip which will help you understand how the real estate market works.
In previous blogs, I have explained some concepts about adding value to real estate through discounts, renovation, strata and even buying property off the plan. I mentioned that we can’t control the real estate market. We can however make decisions and control the strategies of what we’re using. While this is true we can exert decision control and make some informed choices about which markets we buy in.
New Zealand has five primary markets which we can buy real estate in, do they always all go up at once? The answer is no. These markets are often working against each other or countercyclical. For example, Wellington may be rising while Auckland may be falling in value. So how do we always put our money in the right market and how do we understand the market drivers?
Well, there are six key market drivers for economic growth in real estate. We can’t control them, but we can make informed decisions on where to invest our money. These are:
- Yield variation
- Supply and demand
- Population growth
In this blog I want to talk about one of my favourites, economics.
We can break down the economics of an area by thinking of it as ‘house price’ versus ‘household income’. If you can find an area today with a higher household income and low property values then this would be a great area to start exploring to invest. When real estate markets grow, so they start by becoming bearable. then they become equitable, and if they remain equitable for a long time, they are what we call sustainable markets. If they’re sustainable, they become very viable which we love buying in. So remember – bearable, equitable, sustainable, and viable.
So Sue, what does that mean? Let me explain further and I’ll break it down for you.
Let’s use some simple maths. If we were to find a property in an area, and the average house price in that area was, say, $100,000.00 for easy maths, and the household income in that area was $1,000 per week. Can $1,000 a week afford a loan of $100,000 with the interest rates today? Well, the answer of course is, yes, it can. The interesting thing about the New Zealand property market is 76% of it is made up of owner-occupiers, only 24% of it is geared towards investors. Conversely, when you look to the stock market, it is 100% investor driven. This is why you see so many highs and lows in shares. The bearable market situation is a very stable property marketplace, but how are we going to make some money when it’s stable?
Here is the Tip: Go and find an equitable market. So if $1,000 a week can afford $100,000 loan, what usually happens is a little thing called capital growth. When the capital growth comes along, that is what changes a market to become an equitable market. Let’s use some easy maths again and call it 10% capital gain, 10% CG on a $100,000 property this means the new value of the property is $110,000 and we’ve just gained called equity. We’ve just made $10,000, and our market, or economics of the market, is now equitable. To access the created equity, you need to be able to service it. Can $1,000 a week afford a $110,000 mortgage? Yes it can. Which means you may now borrow that equity. And, of course, if that market went up another 10%, and another 10%, and so forth, eventually, we could see the rise of value in this property.
Property markets tend to go up in two or three-year increments. In fact, some markets have doubled in a very fast period of time, over two or three years. And usually, it’s to do with the income and the house price. Imagine, if this property grew to the medium average property in the area, around $200,000 and we still had an income of around $1,000 per week, we could still afford that property. It’s now become a very sustainable marketplace, because the income is high and the house prices are low. Sustainable markets are viable markets. Right now in New Zealand, there’s marketplaces where the economics of the area are providing great opportunities because of high wages and low house prices.
Take action today and start securing your future though property investment! Join us at our free Property Investor Night near you! We can help you get these three elements of property working for you to secure a brighter financial future.
Positive Real Estate