Sun, sand...and stress

Photo / APN

Summer's here and coastal property is back in focus. So how is it going out there at the beach? For the most part, it's looking rather dire, writes Bruce Morris.

For the clearest of pictures of the boom-and-bust coastal property cycle over the past three years, take a drive up to Cable Bay in the Far North.

There, in Dudley Cres, high on a point with terrific views over Doubtless Bay, is a monument to the folly of the conviction that coastal property is safe as houses: a stand of three-storey villas telling a story of destroyed faith and wealth.

Everyone has lost here - developers, lenders and investors - and it is a tale which has its parallels throughout the country where the smell of salt is in the air.

It's easy to look back now and decide the outcome in Dudley Cres was almost predictable for an ambitious scheme hatched towards the end of a property boom when the economy was bubbling and finance was easy.

You could have bought one of the 25 elegant, modern villas off the plans in 2006 - each spread over 172sq m, with three bedrooms, all of them with stylish bathrooms, finest European appliances, granite benchtops and all the trimmings - for $750,000 to $820,000 (and annual rate bills of $4000-plus, along with body corporate fees of $5000 a year).

The view was great in a lovely part of the country - but what demand would those prices draw, four hours' drive north of Auckland and two hours from Whangarei?

Not a lot, as it happened. By the time the first villas were completed in 2007 - just as the market was slowing - only10 of the properties had sold. The new owners would soon realise they had made a mistake, no doubt some months after the developers and finance company lenders had come to the same conclusion.

Last month, more than half the villas remained unsold - a full three years after completion. Two months earlier, two sold by mortgagee tender - one for $381,000, the other for $330,000. Both were fully furnished and neither sales cheque would have covered replacement cost, let alone land value.

In the Far North, this is not an isolated story of boom and bust. A collapse in section prices fuelled by a vast over-supply and skimpy demand continues to seep into the housing market.

At Coopers Beach, a hillside subdivision of around 89 sections drew 39 contracts as the land was being developed through the latter part of the boom. Most people paid just $5000 deposit on sections priced between $170,000 and $320,000 - a standard way at the time for developers to show finance companies and banks the project was on a sound footing.

But when the market soured, nearly half the buyers walked away, writing off the tiny deposits and leaving the developers with the headaches. Those who honoured their contracts and held on to the sections must look with some distress as neighbouring properties sell for as little as half original value.

If the news is glum now, it will be years before it gets any brighter - and not just in the Far North, although the vast overhang of sections there poses a particular problem.

The price of that fancy section overlooking the ocean will, spurred by inflation, get back to $280,000 (present price: $140,000), but it will take years and years to hit the mark. Perhaps a decade ... or two. In real terms - what that $280,000 will buy in 2020 or 2022 - that's washing away lots of dollars. The "ordinary" section a kilometre or two from the sand doesn't even bear thinking about.

Back in the boom years, when coastal property was charging ahead of the extraordinary enough gains on standard urban and rural homes, land agents put a seaside spin on the century-old words of Mark Twain: "Buy land, they're not making it any more."

Too many people fell for it. They would have been better advised to have listened to another Twain line: "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

Over two generations on from the last big residential property boom in the 70s, New Zealanders today are better understanding that residential property - whether sitting on the seashore, lake edge, smart suburb or rural town - does not automatically rise in price. Some of the "new generation" caught up in the 2002-2007 boom when many average houses doubled in value somehow thought it would go on forever, perhaps as an earlier generation imagined it would be so in the roaring 70s.

Instead, they discovered the economists were right and, while residential property has done very well over long periods, guaranteed capital gain is a fairy story.

Buying at the wrong time (ignoring economic indicators and going instead with Kiwi gut feeling) can be destructive for those forced to sell and erode personal wealth for those who hang on. The coastal market will tend to have more exaggerated surges and falls than standard residential because, while many areas have permanent residents, the discretionary dollar is a key driver.

When the economy's doing well and job security is high, the dream of a bach comes into focus; when the economy sours, the dream also turns bad. Not for everyone, of course. The long-time family bach will stay to welcome another generation and the well capitalised will suffer the paper fall and still enjoy what the seaside offers.

But elsewhere, over-supply runs head-first into meagre demand controlled by bargain-hunters and that means tumbling prices, especially in a country where general residential values are still high when they are set against household incomes.

The holiday home market is unlike normal residential (where value can be assessed according to rental yield and, even if prices drop, owners enjoy the economic benefit of a roof over their heads). At the beach, the bach sits vacant most of the year, giving nothing back except for spasmodic pleasure and a feast of memories. The bare section doesn't even do that.

It's an irony that some of the speculative bubble that has led to a collapse of prices in some segments can be attributed to the risk adverse stance of financiers from 2002 to 2007.

For example, finance companies and banks cutting their risk and getting burnt because of it, scorching small people along the way - how could that happen?

Economist Dr Rodney Dickens, a former ASB Bank head of research and now managing director of Strategic Risk Analysis, explains that developers without track records couldn't gain project finance without pre-sales.

The bankers would say, "Fine, we'll lend you the money but we want 20 per cent in pre-sales, and that created the whole environment," says Dickens.

The lure of $5000 deposits with the rest payable on title a year or two down the track satisfied the lenders and "sucked in" hundreds of people before they would normally have considered buying a holiday home or section.

Some caught the boom early enough to wheel and deal their sections as panic buying set in, and there are reports of land selling two or three times before title was issued.

"It became like a pyramid game, and that's fine so long as more people are coming along," says Dickens. "But of course that's not how it works."

People paid "cloud cuckoo land" prices and were exposed when the market turned. If they didn't walk away, sacrificing deposits and risking legal action, they were left holding property that may now be half original "value". Many were "in denial", hoping things will turn.

The problem is at its most pronounced in the Far North where latest three-yearly rating capital values on the coast are down around 16-20 per cent, although Kerikeri is holding up better with a decline of 11 per cent. Land values have dropped 25 per cent in places such as Paihia
and Russell and nearly 29 per cent on Karikari Peninsula and in Mangonui. The across-the-board cuts are the first since the Far North District Council was formed in 1989.

At present levels of sales, it will take years for sections to be absorbed, putting huge continuing pressure on prices, which filters through to residential properties because land price is the key component.

"How long will it take for enough people to want to have holiday homes there?" asks Dickens. "Ten years? Twenty years? Because, until that supply gets in balance with demand, there will be no price appreciation."

But the decline is not restricted to the Far North. It is across all the popular holiday patches, where prices continue to slip as too few buyers pore over a growing stock. In many of these places even more owners would love to get out but don't want to suffer a big hit.

As time passes, some of those owners will capitulate and move on, further undermining prices.

Absolute waterfront property on Coromandel Peninsula, Waiheke and in Rodney district hasn't been doing so bad, according to research by Bayleys which suggests prices this year have steadied or improved after post-2006 slips. But sales levels are so low that the statistics probably mask a much greater malaise, although such prime property has shown enormous growth over the years.

Away from actual beachfront, and especially in areas with a rash of sub-divisions, one senior agent reports: "Generally speaking, coastal values are now back to where we were in 2003, just as the boom was getting into its stride, and perhaps half the value of the peaks of 2006
and 2007.

"This is a discretionary market and the banks are either not lending or being very tough. Added to that is a massive over-supply of land which is having a crushing effect on values, and that is not going to change any time soon."

Areas well away from the cities are doing worst and property owners at outposts such as Great Barrier Island - which spurted through the boom because they were relatively cheap - face depressing futures if they bought at the wrong time. A superior property on the island sold for $1.5 million this year - $1.2 million down on its 2006 sale price.

As one agent noted: "If you owned land on Great Barrier, you wouldn't be selling it now unless you were dead. It'd be too depressing."

Even in the prime spots, the market is funereal. Mt Maunganui's apartments may have seemed blue chip in 2003 or 2004, but today many are down 30 per cent on their peaks and drifting further.

Now that most people have seen through the false promise of capital gain, one valuer reckons you could knock on most apartment doors in the Mount and find an eager seller.

At Whangamata, another traditional holiday favourite, activity is equally deathly, with enough existing houses for sale to satisfy five years or more of demand.

Whangamata Real Estate principal Sue Hunt says values are probably down around 20 per cent on average from their 2006 peaks, with no interest at all in higher-priced properties. She feels further declines are inevitable as people decide they won't wait any longer and accept lower prices pitched by a small pool of buyers who are "sitting and waiting, biding their time".

"What we really need is for vendors to be realistic about what their places are worth in this market," she says.

"Then we might get a bit more activity."

So the future for coastal across the upper North Island - and it is no different in the discretionary market elsewhere in the country - continues to look dire, compounded by people who took advantage of low deposits and easy finance to step into the holiday market much earlier than they had anticipated.

As Rodney Dickens notes, they were tomorrow's prospective coastal buyers who got in ahead of time, further reducing the number of "natural buyers" in the years ahead.

"Who's going to be the next generation of buyers?" he asks. "This generation has a larger mortgage than the previous generation and has more debt so it will take longer to work through and, even with the decline, property is still dearer than it was 10 years ago."

Add in the impact of cautious banks, tight money, an uneasy economy, looming interest rate rises and that almost endless supply of sections and houses and it surely means a continuing slide. Real term capital gain, the "business case" for people buying coastal property, is becoming a fading memory now. In a decade, history books may need to remind us exactly what it was.

* From the New Zealand Herald's quarterly 'Property Report' - a guide to house prices and great places to live.