The Wellington Property market – The perfect storm

As the Greater Wellington property market heats up, more and more buyers are frustrated by the escalating costs of submitting offers and the purchasing procedure most real estate agencies are using for buying and selling.  I don’t profess to have intimate knowledge as to where we might start to untangle this complexity.  What I do know is that if it progresses unabated people will start cutting corners (due diligence will go by the wayside) assumptions and dishonesty will occur around finance (banks will be fed BS) and purchasers will ‘take the punt’ in signing a Sale and Purchase Agreement hoping the Real Estate Agency actually accept a moral obligation to both buyer and seller.  Expecting their lawyer will correct any possible anomalies – after the fact!

Most people do seek advice when first looking to purchase – the problems start to arise after multiple disappointments and the rising costs.  Not the rising costs of the property (that’s a subset of forward planning and patience) but the rising costs in making submissions.

• Lim Report (Land Information Memorandum)
• Builder’s Report
• Valuation
• Sale & Purchase Agreement
• Engineer’s Report
• Title Search

When you sign a Sale and Purchase Agreement with conditions, you have a legal obligation to meet the conditions within the timeframe specified.  In other words, if you have ‘taken the punt’ on any important aspects of the offer, ie. Valuation, Finance, Builder’s or Engineer’s Report – you better be ready to complete your information gathering on time or risk buying: a ‘wet pup’, a ‘P pup’, an ‘under value pup’, a ‘pup with earthworks issues’, an ‘easement pup with restrictions and covenants, an ‘uninsurable pup’ – the underlying principle of all investment – whether property, business or securities of some sort is – risk.  Determine what the risks are and how to mitigate them.

Theory and practice now deviate.  When people are sufficiently frustrated by roadblocks, either perceived or real – one of two things occur, in the majority of cases.  They throw their hands up in total despair and walk away, or they look for ways to get the outcome – fair or foul.  That’s our market at this point in time.  I can only imagine what’s occurring in Auckland and the likely ramifications – both legal and social.  The fallout from inappropriate due diligence (risk assessment) inevitably leads to dissatisfaction and ultimately – cost.  Whether time or money.

So how have we reached this situation – Auckland/Wellington?  Economics 101 says that when demand exceeds supply, prices will rise.

The flip side also means that standards may also suffer as euphoria over-rides emotional intelligence.  In other words, when markets go up, human nature kicks in and common sense may not prevail.  We may want to take advantage of what we perceive as a money making opportunity – we don’t wish to miss out.

The mere fact that the opportunity existed for 5 years previously – as is the case in Wellington, especially, has not dawned on the impulsive investor.  The buying decision may not be planned and the urgency decision is not intellectually or analytically disseminated.  People caught up in the frenzy of market surges are grist to the mill of sales sprikers and their toadies.

Lack of supply can occur through various reasons, but fundamentally new developments are required on an ongoing basis within urban development.  Wellington has handled that reasonably well in my opinion, through inner city expansion and development pockets (Newlands, Aotea, Whitby-Paraparaumu, and Upper Hutt).  Unfortunately the combined effect of job losses (Government), KiwiSaver (cash flow) and the GFC meant our region was somewhat stunted for some time – 2008-2013.  We haven’t experienced the immigration influx as has Auckland, however our time is now.  Meantime the combined effect of previous poor regulation and compliance has meant that building standards are greatly in question.  We are certainly not inclined to make an unconditional offer on a property that is likely to cost us a handful to put right immediately upon occupancy.

The Real Estate industry, reacting to their own regulatory ‘qualifications and standards’ now proffer through ‘tender’ and may the buyer beware.  When Governments attempt to manipulate fundamental free market economics the outcome is most always – a series of unintended consequences.

• Do we trust that builders have erected safe and non-leaky homes or apartments? – No
• Do we trust that local councils have overseen these buildings during time of construction or re-construction? – No
• Do we trust that Real Estate agents feel a moral obligation to sell us even a ‘relatively risk free’ home? – No
• Do we trust the insurance company to fully protect our potential losses through earthquake or other risks? – No
• Do we trust that previous owners or tenants have occupied the building without creating a chemical threat? – No
• Do we trust the neighbours to be obliging and law abiding? – No
• Do we trust the lenders or the service providers (banks and local authorities) to maintain costs at inflationary rates? – No

Who do we trust?  Now there’s a question really worth considering.  The disappointing aspect of today’s market is that KiwiSaver is now providing sizeable deposits for first home buyers, just at a time when prices are soaring and more and more due diligence is necessary.  The libertarian in me says – “just another example of supply side economics”.  You increase the demand through some government action and an opposite reaction will inevitably/likely occur.  It has.  Low interest rates aligned with available deposits (KiwiSaver) a flat market for the previous 5 years with crab like prices – and demand exceeds supply.  The Real Estate agents are not focused to house sales – they are all chasing listings – the agencies (the license owners) are driving the tender (sale process).  I’m still not sure how all this regulation has helped the customer?