I’m on holiday with my family, staying at a villa on a golf course. The TV is on in the evening. My son wants to watch The Block NZ: Firehouse. He knows someone in the audience.
For me, the dynamics of an auction are always interesting. And this is the auction episode! But I wonder how it’s going to go in a tough Auckland property market. Especially when the units are priced north of $1.3m.
Yes, you read that correctly. Apartment units in a former fire station. Selling for seven figures.
Now, we have some of the lowest interest rates on record in New Zealand. ASB Bank recently launched a bond at 1.83% to bolster mortgage financing. On their website today, they’re offering a 2-year fixed rate of 3.59%, with minimum equity of 20%.
This should be bolstering the property market. And helping The Block contestants’ profit at auction.
But there are a couple of things to note.
Bank margins are still high here. In the UK, the BOE base rate is 0.75% — only 25 basis points below our OCR of 1%. On an 80% maximum LTV (Loan to Value), HSBC UK is offering 2-year fixed rates from 1.49%.
So, yes, our banks enjoy generous margins. On my share portfolio, it is possible to obtain margin lending on the global money markets from 1.49% on NZD for amounts of $150k to $1.5m.
But banking is just one side of the story.
The reason the property market is still soft is that the fundamentals have changed. Supply is catching up with demand. Kiwi homes are no longer available on a global market. And rental yield is being affected by regulatory and tax factors.
For first-home buyers in Auckland, this is no bad thing. But it’s not good for contestants on The Block, trying to make a profit from their renovation efforts.
In this case, the build just seemed too expensive for the market. And even though the well-publicised auction looked to have plenty of bidding, only two of the four apartments sold under the hammer. And three of the four teams went home with no profit after 12 weeks’ hard slog.
Auctions and liquidity
Property, by its nature, lacks liquidity. ‘Days to sell’ a home in Auckland have been creeping up, and in July 2019, it took on average 44 days.
Of course, many homes take much longer to sell, especially at higher price points. I’m seeing people getting stuck. They buy a new home, then they’re unable to sell the one they’re living in.
In the UK, the property market works very differently. There are often chains — lines of buyers and sellers linked together — because they’re selling and buying a property from one of the others.
In the UK, only 10% of property transactions are chain-free.
And buyers seem to have more power. They can walk away from the transaction, even after a sale has been ‘agreed’.
I see New Zealand property heading more in this direction as liquidity slows. And auctions, except for ‘hot’ properties, losing their steam.
Shares get sold on stock exchanges in what amounts to live electronic auctions.
What I like about shares, particularly for larger companies, is the stronger liquidity. The market instantly prices the share, and you choose where to put your order in.
Providing you’re happy with the market price, you can pretty much buy and sell your shares at any time during trading hours.
When dividends are payable, prices may also adjust to reflect ‘ex-dividend’ periods. Although in some cases, we’re seeing such strong demand for yield, prices are continuing to increase even when the next dividend payment is no longer available to new purchasers.
In the property market, you attempt to achieve value by negotiating with the seller. And by stumbling across an opportunity where you may see value others haven’t.
In the stock market, you attempt to see upside that is not currently showing in the share price. Often, this is due to timing. The bulk of market traders operate on a shorter cycle. With a longer-term investment horizon, it may be easier to capture upside.
Savvy traders within both markets can capture a margin of safety when they buy. And then enjoy income yield (via dividends or rent) and capital appreciation with the wider market. Or, ideally, eventual gains due to the upside of the company or location your research and intuition has led you to.
So what’s the best strategy to use in buying shares?
The liquidity of shares appeals to me over property. As does good dividend yield that doesn’t require you to replace the roof.
Of course, liquidity depends on the company and the market — and there is opportunity in that dynamic too.
And there are risks inherent in businesses well beyond your control which you need to try and assess.
- How do you identify a business with the desired yield and upside?
- How can you estimate a margin of safety in the current price and assess risk?
- Should you buy at market price or use a limit order?
- How can you best judge a suitable limit-order price?
- What about the use of stop or stop-loss orders?
- How do you buy shares in New Zealand and beyond economically?
- What role does forex play in share purchases?
This is such a large topic!
So we’ve decided to offer our first-ever Investor Training Event to help investors get to the bottom of things.
It will feature examples and live trades in our paper account. And lots of useful tips and suggestions.
As a Wealth Morning subscriber, you’re invited!
It’ll be a chance to ask questions. Get some answers.
Unfortunately, we only have limited spaces.