KEY POINTS:
There is not too much that is good about getting older. The only silver lining I can find on the age cloud is you have experience - you are able to look at things with experience and recognise that you have seen similar situations before.
Now that we are well-established in a property slump, the terrain looks familiar - there are the same queues of people trying to sell with the same buyers sitting on their hands waiting, the same line of people struggling to pay mortgages, contemplating no capital growth and wondering why they bought a home or an investment property.
However, there is something new - a thing that we have not seen before in this country. There is a line of people facing negative equity - when the amount owed on a house exceeds its value.
It is a queue caused by two things - first, the past willingness of lenders to lend near to 100 per cent of a property's value and second, falling house values.
In the past, values have not fallen much. However, there are different elements to this slump - unfortunately they are not good. First, the boom was longer and stronger (outrageously so) and that will probably mean the slump will follow suit.
Property values got so out of line with the rent that could be collected on them, and renting is the bargain of the decade at the moment. You get a lot more property for each dollar by renting than you do by owning and paying interest.
Either values will have to fall or rents rise - probably a bit of both. This will take years to play through.
Second, the speed with which the boom ended was so much faster than in the past. Previously, booms have gradually slowed. This time it was like a referee blew a whistle and the game simply stopped. The positive sentiment changed overnight and will be hard to restore.
Third, there are a lot of new investors who have bought rental property. Encouraged by seminars long on motivation and short on risk-assessment, these new investors may get rattled out of the market when they no longer see the promised upside. This will prolong and deepen the slump.
In some markets, values may fall quite a lot and many markets will not be good again for years.
A lot of people will have negative equity. It is hard to know how lenders will respond to this - widespread negative equity is new to New Zealand.
People who are forced to sell their houses will find themselves with remaining debt. Lenders may, of course, pursue borrowers to bankruptcy.
However, they may not bother (pursuing could mean throwing good money after bad). Some lenders may take a quite small amount as full and final settlement and write off the balance.
For the borrower, a little cash (from the sale of a car or a small family loan) may mean avoiding bankruptcy and wiping the slate clean to make a fresh start.
Property buyers should know there will eventually be some good buying - but the time for that is some way off. For those who have patience and financial fortitude there will be reward from the property market again, but we are still a long way from the bottom of the slump.
WHAT TO DO?
* If you are a buyer, wait, because there will be better buying later.
* If you must sell in the next few years, sell now. You will have to meet the market. Remember the "three Ps" - price your house well, present it well and do not spend much on promotion.
* If you are likely to have negative equity, and think you will have difficulty holding on to the property for the long term, you should bite the bullet and sell as soon as possible. The market will stay down for so long you will be better off renting and saving. Renting is cheaper and makes up for sale costs quite quickly.
Each week best-selling financial author Martin Hawes will share his strategies to help you grow your wealth. You can email your burning personal finance questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz.
