“Natural growth” / “external growth” what are they, and how do they relate to the rise and fall of property?
It is now very apparent that many investors have no idea what the words mean as the large number of fire sales confirm.
Look what happened in the Auckland CBD, and will happen in other areas if the path of “natural” growth is not factored in. Back in the day when students flocked to the CBD from around the world to study, the apartment industry started to flourish, then a dash of greed was added to the mix, as supply and demand exceed growth, a little more greed was added. The apartments became smaller and smaller and next thing investors were paying top dollar for a shoe box, they were blinded by the returns and flocked from around the country and from shores far away to feast on the returns forgetting they were now on a different path running like hell towards a cliff that would see their net worth plunge by thousands if not hundreds of thousands of dollars.
Was it greed that was their undoing? Yes in part (building too many smaller low cost apartments for students to maximise returns) relying on external growth alone rather than factoring in an element of natural growth (build a good mix of apartments) that is what caused the first cracks to appear and from then on the fires started to burn and many are still smouldering.
The students stopped coming (external growth) the purpose built apartments had become too small to market to the general population (natural growth) couples wanting to set up home in the CBD simply couldn’t do so in a shoe box.
So property values plummeted as did the returns on investment, fire sale after fire sale had become the norm, the CBD apartment market was burning.
The same happened in general housing. When Auckland and other Major centres became to expensive for investors they started heading south as properties were more affordable and offered a better return which in turn drove prices up and returns stayed down. Things are OK in this market at the moment as interest rates are low so they can afford to reduce the rent, but when interest rates go up, and they will, and house prices come down, and they will, things may look a little different. For some areas there are still a few fingers that will be burnt.
Remember, although we are only a small Island nation we should never generalise as each area has different characteristics. Trends are easy to spot and categorise, you just need to know what to look for and that is “natural growth” and believe me, it is around us in abundance. We are only a young country still growing but remember the key ingredient is “natural” growth.
Look for what is happing in the area, what is going to happen, or has the potential to happen, that will affect the supply and demand in housing?
My advice this week, look out for the hot spots . . .
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