Did NZ really flip out during the boom?

House-flipping. Where to start? On the one hand, lifestyle channels are stuffed with shows full of happy couples buying a daggy house, demolishing the eyesore kitchen or tumbledown deck and putting a sparkly Pinterest-worthy home back on the market in weeks, often for huge profit.

On the other hand, we have commentators castigating property speculators — both local and overseas — for distorting the housing market, heating up prices and making homes less affordable (not to mention pushing investment dollars into property instead of other productive assets).

In New Zealand, the real story, lies somewhere in between.

OneRoof and data partner Valocity looked at properties sold and re-sold between 2013 and 2018, as the market was going up — and on its way back to balance.

In that six-year period, just over 647,000 residential properties sold in New Zealand. Of those, 25 per cent (165,098) were sold and resold within five years. But a whopping 71per cent of those sold only once, pretty much a natural movement as home owners move up or down the property ladder, move towns or suburbs.

Real estate agents tell us that professional flippers are usually in and out of a house in six months (three, if they’re really smart), so that they are buying and selling in the same market and minimising the cost of finance. Nationwide, only 8.9 per cent of resales were houses flipped within six months, and 18.9 per cent within 12 months.

New Zealand’s flipping rates are higher than Australia’s (although measurement tools are obviously different between markets). In June 2017, only 5 per cent of Australian property resales were flipped within one to two years. But in 2015, Australia’s Treasury Secretary John Fraser blamed the proliferation of home renovation TV shows for the housing bubbles in Sydney and Melbourne, saying such programmes tempted people to over-invest in housing. In the US, home flipping rates are around 5 per cent, down from 6.6 per cent in early 2018 and off from a high in 2017.

Anxiety about flipping — “property speculation”, in other words — prompted the National Government to introduce the bright line test in 2015, taxing capital gains on non-family homes sold within two years. Announcements at the time said it was aimed at taxing overseas speculators and intended to “take the heat out of the Auckland market”.

National’s finance spokesperson Amy Adams says that National was tackling older rules where profits for buying and selling property were taxed only where the buyer had the primary intention of reselling for capital profit (speculating).

“The issue that National addressed through the bright line test was that it was very difficult to prove intentions and therefore ensure that speculators were paying the appropriate tax,” Adams says. “It worked as a practical way of assessing intentions to remove the evidential problem with the law as it stood.

“The issue was about ensuring speculators weren’t able to avoid the tax due by making sure the existing law had a practical method of enforcement. It wasn’t about introducing a new approach to land taxation, nor was it aimed at any group of speculators in particular.”

Moving up the ladder

When the bright line test was extended to five years by the Coalition Government in February last year, it was also about dampening property speculation and making homes more affordable, and “discouraging investment that distorts the housing market”.

What evidence is there that it did the cooling job?

James Wilson, Valocity director of valuation and innovation, says the data shows property flipping by investors was not the dominant driver it was made out to be. Over 56 per cent of resellers were first home buyers; another 25 per cent were investors with only three to five properties. And 1.5 per cent of resales were people selling three times or more in the five-year period, the so-called speculator spot.

“[Much of the resales] were to first home buyers and movers going up the ladder,” he says.

“When capital growth started moving, it prompted a faster turnaround, as people decided that it was time to jump while next rung up the ladder wasn’t such a big leap. The ‘flippers’ weren’t big, bad investors, they were mum and dad.

“So if the data doesn’t support the claim that investors or speculators were fuelling the market, what was the point of the bright line test or its extension? It was more the Reserve Bank’s changes to loan-to-value ratios that drive the market slowdown, not the bright line test.”

Economist Cameron Bagrie says the changes in the housing market were the result of a combination of factors, not solely the bright line test.

“If there is no capital gain and yields are low, you’ve got a problem, so those markets are under pressure,” he says. “The key is affordability, and we’ve hit that boundary in Auckland.”

Reselling rates varied around the country.

At its peak in 2015-2018, 31 per cent of Auckland properties changed hands within five years, but only 12 per cent within six months.

Hamilton and Tauranga were close to the national average of 9 per cent. In Christchurch, Dunedin and the rest of the country, flipping was between 5 and 7 per cent, closer to Australian and American levels.

The “flip capital” of the country was, surprisingly, Wellington, where flips inside six months reached 14 per cent.

Wilson says: “Wellington prices didn’t move until much later than, say, Hamilton or Tauranga but buyers had been exposed to years of headlines about people leaving it too late to make a move and missing out getting into property further up the price ladder.

“The capital was the last of the big property markets to take off, and valuers and agents on the ground tell us that when prices in the capital did start to move, buyers had heard all the stories and were faster to sell and jump up to the next rung while prices were still affordable.”

Disappearing market

Colliers national head of residential project marketing Pete Evans says the speculation market that existed in 2015 and 2016 – when flippers were buying house and land packages off the plan in parts of Auckland — has now gone.

“Supply was a key to areas such as the North Shore, Flat Bush and Hobsonville Point,” Evans says.

“Riding a market drove everything to maximum size.

Developers put up the biggest houses you could fit on small lots — six or more bedrooms — through 2015 to 2017, but those places have been sliding for the past 12 to 18 months.”

Flipping for speculation is not good for the market, says Evans. However, renovators are different. If they are well-financed, cashed-up and can buy a property at market price or below, they can do it up and take it back to auction within six months.

Tim Irvine, branch manager at Barfoot and Thompson Ponsonby, in Auckland, has seen changes in the speculation market in the last 20 years.

Some of the old hands who bought and renovated for profit have moved onto other things, such as high-end renovation projects and even custom new-builds to order.

“Build costs are a lot more expensive now. [Traders] need to be in and out within four to five months, tops,” he says, pointing out that most successful traders are skilled builders working with designers who know the market. But even then, they don’t do projects that can get tied up with council consents.

“Doing anything that needs consents just chews up the margins, and time,” says Irvine. “These days they’ll take something a bit tired but liveable, maybe an ex-renter, maybe done up in the 80s, and replace like with like — paint job, landscaping, updated kitchen and bathroom, not a complete do-up. And for the right property — and these traders all go to auction — their time on the market is only three weeks.”

The data bears this out: in central Auckland, fewer than 9 per cent of resold properties had a building consent lodged.

Further out, where prices were lower and there were more opportunities to add value, it was higher. In Papakura and Franklin, for example, over 16 per cent of re-sales needed consents. In Rodney it was 14 per cent. Nationally, it was under 15 per cent.

Irvine says smart operators know when to walk away from costly, time-consuming projects. Rewards come from a property that can be easily re-worked to create extra off-street parking. At the market peak, Irvine saw benefits of $100,000 to $150,000 for double off-street parking.

Gain and pain

The average gain on resale properties nationally was $155,000 in the five years to 2018, but that figure varied from region to region. In Auckland, median difference in price from initial sale to resale ranged from 26 per cent in Waitakere and 21 per cent in Franklin to 25 per cent in the city, Papakura and Rodney. In Hamilton and Tauranga, the median difference in price from initial sale to resale was 22 and 21 per cent respectively. The difference dropped to 14 per cent in Christchurch, 12 per cent in Invercargill and a low 11 per cent in Gisborne.

Wilson says that while these increases look big, the housing market in general was experiencing rapid price inflation anyway. “These numbers show those who captured their equity growth, but don’t take into account things like tax payable.”

Not every reseller is making a profit.

In the boom years in Auckland, 5.8 per cent of resellers sold at a loss.

In Tauranga, 7.3 per cent of resales were for a loss, while in Hamilton and Wellington the figure was 3.3 per cent.

Tua Saseve, who runs Auckland Property Mentor, says traders who fail to adapt to changing market conditions face selling at a loss.

“Before in Auckland, you’d have to be very unlucky not to make money,”

he says. “Now it’s a lot harder to sell: banks are a lot more controlling, there are no more huge overdraft facilities and there are fewer properties on the market.”

Saseve says the combination of buyers demanding better quality renovations, project management getting harder (“going over six months your costs blow up”) and selling times stretching out, means profit margins have drastically dropped.

He says that in 2015 and 2016, traders could make $100,000 or $200,000. Now it’s more like $30,000 to $70,000.

“But with the right sales evidence, you can spot the anomalies and good deals in a suburb that deserves to go up.

The party is certainly over for some, but it’s just starting for others.”

Valuers are often called in to put a number on property prices in rapidly changing markets. Rene McLean, from Property InDepth, who works mostly around south Auckland, says that in a lot of places, land values don’t justify the investment in house improvements.

He says that non-professional renovators usually have issues with the process, or disputes with builders. Often, cost overruns eat into the margin they’ve allowed for contingencies and banks are unhappy to extend more money to finish the project.

McLean says one homeowner whose property he recently valued spent $400,000 to add just $300,000 to the value of the property; another homeowner spent $100,000 on landscaping that added less than $75,000 to the value.

“Back in 2015, the thinking was spend $1 and get $2 to $3 back, but that wasn’t what was happening. All the money was in the market going up,” he says.

“Now the money is in buying properties well under-value, doing them up and selling at market value. But you still have to hang on for maybe two or three months, as there’s not the cashed-up buyers at auctions that there were in 2015.”

Property InDepth’s Adrienne Mikkelsen sees more opportunities for traders and resellers in areas such as Rotorua, where they are meeting demand in the market for first home buyers. But she says quality is needed to make renovation stand out, especially where there is competition with new building stock that’s at an attractive price point.

“In Tauranga, the expectations of quality and fashion are a lot higher,” she says, adding that she’s seen traders buy for $325,000, do a $25,000 tidy up and then sell for $380,000 three months later.

“You have to catch the price and value levels of the market that you’re in.”

Rookie errors she’s seen include inexperienced renovators not calculating the costs of demolition and removal before installing a new kitchen or bathroom; not upgrading the toilet when changing the bathroom; and not matching the exterior and landscaping to the new interior. Smart resellers, she says, aren’t “churning and burning” but doing a simple upgrade to attract good tenants, and then sitting on it.