Auction Action Its Getting Wild Out There

Posted on Tuesday, March 20 2012

Wild Prices On Auctions In Auckland

Auctions seem to be flavor of the month for real estate agents at the moment, and so they should be – there’s some pretty wild prices being paid for property at the moment. I attended one around the corner from me in the weekend – it was a potential 4 unit site with a standard old dated weatherboard home, big dip in the middle and next to non-residential. I expected it to go in the $700,000 to $750,000 range, a small section in the locality would be worth $250,000 to $275,000 and subdivision costs would be at least $200,000 for a 4 unit development. Was pretty stunned to see it go for $886,000 – doesn’t leave much room for profit, I guess someone needs to keep their builders busy or is counting on a 10% price rise in the next year. Whilst I didn’t do a valuation on that one, I have done quite a few valuations for properties coming up for action in the last 6 months and they are becoming more nerve wracking! I got pretty much spot on with the ones late last year and early this year but 2 out of the 3 last ones have gone for just under 10% more than what very recent sales have indicated. Whilst net immigration has been negative over the last year for New Zealand as a whole. Auckland has been positive by several thousand, explaining the continued shortage of properties causing rents and values to climb. Inevitably the strong growth in medium to high cost area will start to have an impact on the lower cost areas, there are 2 main reasons for this (aside from the underlying economics of owning a home in these areas being cheaper than renting at present).

Home buyers simply can’t afford the prices of better areas and have to buy in cheaper areas, this could include many from Christchurch who will only be able to afford in a comparable priced suburb.
Secondly as property prices rise in the better suburbs where investors themselves live, equity becomes available to purchase an investment property, and in an area that may not have yet risen.
This is known as the ripple effect, generally an accepted fundamental of the property cycle.

Yet it amazes me comments emerging from well known property commentators – one saying that standard Manurewa homes have gone in value from around $240,000 to $335,000 in the last year and a half (40%!!) This is possible but only if you spend 50k renovating it!

Conversely another is saying not to invest in lower socio-economic areas, ignoring property investment 101: Cashflow
Sure in 2006 and 2007 buying a property returning 5.5% with 9% interest rates wasn’t great but now with 5.5% interest rates and 9% returns it’s a different story surely! The reality is that lower socio economic area are still near the bottom of their property cycle whilst better areas are well into the recovery/boom phase. (Auckland Market)
Perhaps it’s no surprise both these commentators are bankrupt.

Keep an eye on the market, investors do seem to be more active, both local and offshore – I’m not suggesting going on a buying frenzy but don’t get left behind either – there are still plenty of solid cashflow opportunities that will see you through higher interest rates.

By Rene McLean.

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One Response to “Auction Action Its Getting Wild Out There”

  1. Jamesd says:

    This is so true for the Auckland market (what a great article), first home buyers are buying which create alot of competition together with historically low interest rate and lack of supply.

    The investment market is also very competitive in Auckland but not as bad as it was back in 2004-2007 – it will only get worse as the market is recovering and growth moves out of Central Auckland. The only market which is still very slow is the large development market.

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