Along with stocks we are also seeing a plunge in housing prices. The mortgage payment/rent equation is still wacko (it should be about 1-1) but 3 weeks ago I decided to place a tender offer on an apartment that I liked in Wellington.
With tenders you place a binding bid into a box, and when the box is opened the tenders are examined by an independent person, and then passed on to the buyer. They usually take the highest cash offer and if it meets their price then the tender is accepted and the sale is final.
Two bids were in the box when it was opened – mine and one other, which was not bad in a plunging market with news of global financial turmoil swirling around.
Interestingly those offers (well mine – I don’t know about the other one) roughly paralleled this situation in Auckland, where a “million dollar property” sold at auction for $685,000. I constructed my offer from a grounds up equation what would I spend on a mortgage, renovation and building fees versus what I believed I would pay in rent for the place/ I arrived at a figure around two thirds of what the apartment would have listed for in the middle of the bubble.
What happened next was also eerily similar to the Auckland situation, where the vendor has gone AWOL, I guess after being disappointed in a low result.
The tender amounts for the Wellington apartment were apparently well beneath the vendor’s expectations, and so while the financial crisis worldwide expanded some more both parties were invited to bump their offers, while the vendors expectations downshifted.
I did so, and then I won.
Well apparently my tender was higher, and the vendors were willing if not keen. With a tender that is it- take the highest cash offer and move on.
Relatives of the vendors then stepped in, insisted the property was worth about $150,000 more than the second round’s highest offer and wanted to start again. The beauty of a tender for the vendor is that buyers simply place their highest bid. There is no mucking about. With this situation I felt I was already past a reasonable valuation for the property, and there was no juice left.
So I gave them 24 hours to accept the offer and then withdrew.
Those relatives may eventually eek out more from the sale, but the numbers certainly didn’t work for me and I wasn’t going to get into an overpriced auction in the midst of a global financial crisis.
The mortgage to rent ratio, after adjusting for building fees and required renovations and the like was still over 2.5 times my current rent for a superior place in Wellington at my tendered price. The new price would raise that well over 3, which is a moronic financial decision in a market that can only see housing prices fall over the next few years.
So I shall continue to bide my time until sanity prevails, and keep reiterating that current prices are froth.
The upside to this is that there seem to be plenty of cool private start-up opportunities around to throw money at across Australasia. The medium term returns from those as a portfolio are substantially higher than the medium term prospects from real estate, and they each contain a chance for making substantially more. They are also a heck of a lot more fun!