Olly Newland: Beware of false dawns

Like a hungry man falling on a morsel of food, some commentators and interest groups are in full cry over the improvement in the property market.

Driven by lower interest rates, houses are selling again, albeit for less, and the mood is more up-beat than a few months ago.

Any market improvement is good, but this may be a false dawn. Buyers might rush in too early and, in their enthusiasm to re-live the "good old days", they may fall into a bigger trap than before. Buyers should be wary for two reasons:

Lower interest rates bring out buyers as well as sellers. Sellers, who have been hanging on by their fingertips, realise the market has picked up and are listing their properties at a fast clip.

This could swamp the relatively few buyers out there and cause another dip in house prices. Statistics show most sellers are taking a loss if they bought within the past two to three years.

People have short memories. Only a year ago interest rates were on the rise and picked to go higher. Home owners and investors were crumbling under the weight of double-digit rates. Then along came the recession, and now interest rates are down.

But this won't last. In a year or two interest rates will very likely rise again and we could have the beginnings of yet another crisis.

Today's home buyers should ask themselves whether they will be able to afford the mortgage they're borrowing today if interest rates go back to more than 10 per cent in the next few years. If the answer is no, think again.

House prices are still falling. Interest rates could well reach historical lows, but buyers will resist borrowing if they think the capital they invest in will be eroded by prices continuing to fall.

A few more months of this could bring the slowly stirring market back to a grinding halt.

Much criticism has been directed at the banking industry for the part it has played in the market slump.

Last week some clients told me about their failing business and the role their bank was playing.

The blunder they had made was to use their home as security for a business loan, borrowing 90 per cent of the home's value to fund it.

The bank treated the loan as a business loan and charged them business rates of 22 per cent, plus fees, bringing the total to 24 per cent a year. They have to sell their home to relieve the pressure.

My task is to go to their bank and see if a better deal can be organised, allowing them to keep their home but giving some flexibility.

While banks trumpet cheap home loans, they're hammering home usurious interest rates on business loans, overdrafts and other facilities.

There will be little hope for recovery until Dr Alan Bollard and the politicians come to grips with the fact that a low interest regime must benefit everyone - businesses as well as home owners.

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My home and income properties are stand-alone and have been easy to rent. What do you think of home and income properties which are upstairs-downstairs? Flora

A home and income property can be good, giving two incomes instead of one. But make sure they are legal. Many are not and if they cannot be made so, don't touch them. Any mortgagee who finds out there has been illegal conversion can ask for all or part of their money back. And if there's an insurance claim, it may be declined for that reason.

I would like to buy two Auckland properties this year with maximum prices of $250,000 and $350,000. I'd like to go for areas with good capital gain potential. Which suburbs should I go for and what kind of properties do you suggest? Fleur

Look at any suburb that was built up before 1970, has good schools and bus and rail connections, isn't dominated by state houses, has mature trees and where there's a minimum of graffiti - Te Atatu, Avondale, New Lynn, Henderson, Glendene, Glen Eden, Mt Wellington, Ellerslie, Meadowbank, Kohimarama, Waterview, Waiheke, Orewa and Whangaparaoa. Look for solid three-bedroom family homes on good-sized sections.

The worst house in the best street is the motto. Go for brick or weatherboard with tile or tin roofs. Also worth looking at are two-bedroom units on the ground built 1960-1986. No mono-clads, under any circumstances.

I know nothing much about property investment but wish to buy, renovate, (I'm able to do most of this myself) and on-sell profitably. I have sufficient capital to do this without borrowing and the time to spend for a quick turnaround. Is now the time or should I be looking at other areas of investment in the property market? I am debt free and 60 years old, but very fit. Mike

You are in an excellent position to take advantage of the current market, as you're fit, cashed up and ready to learn. Many clients launched themselves into the property market without any forethought and are now burdened with debt. A few months' learning and some professional advice is all it takes to avoid getting trapped in a downward spiral of falling prices and increasing debt.

We have a mortgage of $145,000 on a floating rate of 6.45 per cent. Should we switch to a fixed-term mortgage? Edwin

Stay floating until the next official cash rate announcement. The word is that interest rates will drop again. If they do, that may be the time to lock in the rate for a fixed term. I would fix $100,000 of the mortgage and leave the balance floating, allowing you to pay down a portion without penalty if you wish.

We are looking at a freehold block of shops in Hastings. It's a two-level concrete building built in the 1920s, with three shops and five car parks, leased to a variety of small retailers. The total net rental
is $110,100 plus GST, with a right of renewal. The owner wants any offer around $1,110,000 and won't look at any low offers. Roger

This could be a great investment because of the spread of tenancies. With multiple income streams it will be safer than a single tenancy property.

It's unlikely all the tenants will go broke at the same time. A 10 per cent return is very good, especially when you can only get 4 per cent in the bank. You need to check out the Lim report, get a registered valuation, and ensure that the rents are fair and at market rates.

My realtor says lower-priced houses are starting to sell well again in Auckland and there has been a lot of activity in Waterview. I bought my house on a good-sized section there for $379,000 six years ago. I couldn't give it away last year in March for $479,000. If I'd sold it a few months earlier, apparently it would have fetched more than $500,000. Do you think this is a good time to put it on the market or would you recommend waiting longer? Debbie

You may not get the highest price you mention as prices are still sliding downwards but you should get more than you paid for it. Get local agents to give you an opinion of its current market value first, or you can get a registered valuer to give you a "market assessment". This is not a full valuation, but a suggested price guide in the current market. If you aren't in a big hurry, it might be better to wait.

* Olly Newland is a property investor, consultant and best-selling author of six books. You can email your burning property questions to omn@ollynewland.co.nz or andrea.milner@heraldonsunday.co.nz

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