10 Jan Finding Opportunity in times of Crisis
With interest rates still climbing, the cost of living increasing, and fewer properties being sold, it is no wonder that many people would consider these times to be a crisis. Although the term crisis may bring negative connotations, and it may be tempting to give in and wait out the storm, I recommend looking at it through another lens: Below is a section taken out of my book which summarises what lessons times of crisis have taught me and how I have learned to react to these spells of adversity.
Building our own home
In late 2007, I was asked if I wanted to become a Mobile Insurance Manager. This meant a 40 percent pay cut, but in return, there would be a commission as part of the remuneration package. It was a bit of a risk as quite a bit of our mortgage was reliant on my salary; however, I have always loved learning new skills and enjoy new challenges so I took the offer and never looked back.
Fast-forward to December 2008. I had been in my new role for over a year and was travelling all over the country arranging risk insurance for clients. We were right in the middle of the GFC, the outlook was blurry and clients were clamouring for insurance, especially redundancy cover. One day a builder friend rang me looking for work and since we still had that drawing of our dream home, we decided to meet. Three people from his team came over to our place and did a presentation, quoting us just $588,000 + GST to build our home compared to the $960,000 we had been quoted just 18 months earlier.
We simply couldn’t believe it. The builder who had built the minor dwelling couldn’t believe it either. Our disbelief was not unfounded. We paid the deposit and the project started very quickly; however, not long into it, I was told by the builders that they had calculated the price incorrectly and that it would cost $25,000 more. We didn’t have the extra money and I was also worried that if I gave in now they would keep coming back for more, so I held my ground and said no.
They completed the project but cut a lot of corners in the process. These were all minor, but we were nonetheless annoyed. The contract we had signed had stated that we would get a hardwood kitchen but in the end we were only left with a $10,000 budget for the kitchen and had to pick appliances within that budget too. The quality of the house was not as good as the minor dwelling, but the build was completed. Later on, our builder friend told us the company that had undertaken our build had gone into liquidation and he had done his best to ensure they didn’t cut corners on our project. He himself lost $100,000 in that joint venture. This was during the height of the GFC. I have other friends who invested heavily in property during that time and had to sell it all at a loss in order to save themselves from bankruptcy.
Reflection
Sometimes, looking back, I feel lucky I didn’t invest during that time. The sharp increase in interest rates ruined a lot of people’s finances and lives. I believe, if the Reserve Bank of New Zealand was more restrained and kept the interest rates more stable during that time, there wouldn’t have been so many losses. Well, Reserve Bank of New Zealand did it again. Last year, the Reserve Bank of New Zealand admitted that they made the mistake of not raising the rates earlier in 2021. In early 2021, we were threatened by them that New Zealand was heading into negative interest rates. In fact, they should really do the opposite.
I am also thankful to my friend for safeguarding our project and doing what he could to protect our interests over those of his business partners. After the company went into liquidation, my friend actually moved away from building and into planning and designing, where he wouldn’t lose money in construction.
One of the questions I often get asked is, “what if there is another GFC?” I actually worked through the GFC while I was in my job at the bank and, in my opinion, there won’t be a GFC like the one we experienced in 2008. At that time, the banks were reckless, giving loans of up to 100 percent or even 110 percent of the value of the property. For example, a client would purchase property for $500,000 and the bank would give them $550,000 – $500,000 to purchase the property and 50k to buy the furniture. The lenders expected the house prices would continue to rise hence they were comfortable with the high LVR. Some of you may still remember the days getting LVR 90% lending from the main banks to purchase your investment properties. The banks even came up with a low document loan, where customers just declared their income with no proof of income required. It was basically a no document loan rather than a low document loan. It wasn’t surprising the crash hit some people so hard. The banks learned a valuable lesson as a result of the GFC and we have a much more stable banking system now with the Responsible Lending Code in place.
Whilst the GFC was a crisis, it also provided opportunity. In September 2009, we were living in our dream home. In Chinese, the word for crisis is 危机. The first character means danger and the second character means opportunity. They go hand in hand. During the GFC of 2008, there were people who made fortunes by seeing the opportunity. So, if there is a crisis, make sure you look for the opportunity. This mantra can be applied to every part of our lives.
In 2012, we spent a further $80,000 to complete stage three of the project: we closed off the ground floor and converted it into a two bedroom granny flat with a workshop space. This brought the total cost of the project to $1.5M and the valuation at that time was probably the same. In 2022, the property estimated value was sitting at $2.8M.
The most important lesson from all of this is that we survived. We held on to it. Had we sold it in 2007, we would have made a loss. The beauty of property investment is that if you can hold on during the bad times, you won’t realise the loss, time will always correct the mistakes you make because the value will go up eventually. Survive the Winter, Spring will always come.
For those of you looking for bargains the time is now, there are more houses for sale, it is the buyer’s market. We don’t often see the buyer’s market, usually approx. 2 years in every 10 years. Yes, the interest rates are probably 4% higher from the lowest, but the house prices have come down more than 20%. Don’t wait, make the date, if you want to find out if you are able to buy, give us a call.