ARCHIVE: Originally published February 2002

IS THIS IS THE "BIG ONE"?If readers of my column look back to my September article they will seethat what I predicted was by and large right (with all due modesty) inlight of the events of September 11th.Right now the news media is talking yet again of another Property Boomin the offing, how builders are going crazy with work, how the lowestinterest rates in 40 years are pushing things along and how immigrationand Kiwis returning home is affecting the market in general.Various commentators and promoters are urging everyone to get on theband-wagon and make hay while the sun shines. "Everyone can be rich" isthe cry.Is there any substance to all this hype?Is it just another short-lived fizzer to be dampened out by the ReserveBank the moment we begin to enjoy ourselves?As one who has witnessed many such upsurges and booms (not to mentionbusts) I would predict the following;Yes.  This feels like the "Big One" It has the same smell about it asthe early 70's the mid 80's and again the mid 90"s. Property boomsusually go in seven year cycles. I believe we are at the beginning ofthe next up-cycle right now.Also remember this is election year. If Helen Clark wants to be PM foranother term she had better guarantee that the "feel good factor" isalive and well all year long.Don Brash and the Reserve Bank are supposed to be independent. On theface of it they are. But do you really believe that dear Dr Don wouldkill off a boom in election year?  Hardly. Helen would smack his handfor sure whatever the posturing to the Public might be.One caveat: Another terrible event like September 11th and all bets areoff.So what does this year hold for property? Let me make my predictionssector by sector.BUILDINGThe construction industry especially residential, will be under greaterand greater strain as the year progresses. Already builders arecomplaining that land prices are going up by leaps and bounds. Anecdotalevidence suggests that land prices have risen 15% in the last 12 months.On a $200,000 section (if you can find one) that is another $30,000onto the finished price just for starters.As land is in short supply everywhere and especially in the oldersettled suburbs , I expect land prices to rise at least another 15-20%and perhaps more.The only answer builders have in resisting increasing land prices is toerect cheaper and nastier houses and apartments. Already we are seeingghettos being erected to the ever-lasting shame of the City Councilwhich permits these blots on the landscape.  There will be trouble fromthis quarter sooner or later -- mark my words.I caution all investors:  Do not go near them until at least the secondor third private owner has been through them and is out again. When heor she  has lost all his or her equity, (not to mention GST)  thenperhaps the pickings will be right. These nasty apartments and townhouses should be at least one third or more cheaper than their new pricebefore they are worth touching as investments.The lesson: Buy houses on big pieces of land (preferably sub-divisible).The house can be rented out to "oil the wheels" but it will be the landthat will bring the true rewards.COMMERCIALFor the last ten years or so industrial, retail and office space waslooked on and pitied by the smart-set.  After reaching huge highs in thelate 80's commercial property was squashed flat by the thick-as-a-brickbankers who fire-sold  everything in sight. The decade of the fundmanagers had arrived. "Invest your money in this or that fund", "Don'ttouch property, it's no good", "Give us your money we will look after itfor you". Personally I got heartily sick of the chorus of nay-sayerswho foretold the demise of property other than a means of shelter.Strange how quiet they are now.How times have changed. Agents cannot get enough commercial property tosell. Yields have dropped dramatically. This means that prices haverisen while the rental stream has remained constant. A propertyreturning $50,000 pa one year ago may have sold for an 11% yield($454,000). The same property today could well sell for a 9% yield($555,000). What a difference a small yield change can make. Who wouldwant to invest in the bank at 4.5% (less tax) when a good commercialproperty can return double or more plus tax breaks?Recently a small provincial bank investment sold for a 7.5% yieldsetting a new bench-mark for higher prices. Also recently 50 or so KFCoutlets were sold. The lot were ripped out of the auctioneers hands atvery low yields in an investor bun-fight.One investor made a pre-auction offer for the lot at a pricereflecting a 9% yield. The cunning vendors believed that smallinvestors would pay more and they were right. He was left in the dustby several percentage points.Commercial property is at last lifting out of the flat patch it has beenin for a decade. By any normal standards it should double in price.Traditionally commercial yields are around 2 % higher than prime bankrates. At present they are still double as much. Work it out for yourself.RESIDENTIAL:Houses: By far the best investment taking into account land value andits increase plus rental returns. The two must be added together. Mostresidential properties (viz ordinary 3 bedroom house on standardsection) return (if you're lucky) around 4% nett after all costs.Add the increase in land values and do the sums again.Town houses: As is well known, town houses are like Japanese cars. Theyare dearest when new, dropping around 30% over a 5-10  year period.They make excellent rental investments if bought cheaply second handand at around 25-35% less than when new. Refurbished and recycled canincrease their value dramatically. As with any residential property,position (location) is the key. Town houses are particularly senstive toposition.You can always redecorate the house but you cannot change its position.Apartments: See above. I am still not convinced that they make goodinvestments until they have been recycled at least 2 or 3 times. As wellthe land content is effectively zero and they date rapidly.  Ever heardof people queuing up for out-dated apartments?  Also there is the control problem. You may like to keep your apartment nice and clean butwill your neighbour?. If someone starts to dismantle a motor-bike in thecorridor or hang all of last years washing out on the balcony whateffect do you think it will have on values?TRENDS(1) An increase in residential land prices by around 15% over the next12 months.(2) An increase in house prices by 5-20% depending on which town, city or area.(3) An upsurge in syndication for the purposes of investing intoproperty especially commercial.(4) The re-inventing of tax schemes to entice people into property for"tax purposes" (don't waste your time)(5) More demand from residential tenants through immigration and peoplenot leaving for El Dorado overseas. This puts pressure back on thehousing and rental stock.(6) Likewise with commercial. Pressure from people wanting to set up inbusiness after arriving from overseas will lift rents and valuesespecially in retail and industrial.SUMMARYI have found a large upsurge in the number of people coming to seeme for advice and guidance in my capacity as an independent Mentor orConsultant. Further, there is not a day that goes by without me receiving several phone calls or e-mails from a complete strangers, wanting advice on this or that aspect of property investment.I've seen this phenomenon many times before.It always precedes the Coming Property Boom.Olly NewlandFebruary 2002Copyright. All rights reserved.www.EmpowerEducation.com/newland.bz