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Real estate

by Bob Hargreaves

Almost one in 10 of New Zealand’s 1.5 million homes is bought and sold every year. A house is the biggest investment most Kiwis have. That makes the real estate industry big business, especially when you take into account rural, lifestyle and commercial property sales.


The real estate market

The residential market

In the early 2000s most New Zealanders lived in stand-alone, single-family homes in towns and cities. Two-thirds of households were owned by the occupiers, so residential sales dominated the urban real estate market.

In 2007 there were around 1.5 million dwellings in New Zealand, including houses, flats, townhouses and apartments. These changed hands at the rate of 7–10% each year, depending on market conditions. The urban housing market is driven by factors such as location, views, and neighbourhood type.

Homes in the private-sector residential rental market were usually owned by small investors with one or two rental units. Dwellings owned by central and local government made up around 5% of all housing stock.

The rest of the urban real estate market consisted of vacant residential sections and industrial and commercial properties. Large industrial and commercial properties were generally owned by institutions, while smaller ones were often owned by individual investors and owner-occupiers.

The rural market

The rural property market is split according to the main types of land uses – dairy farming, grazing, arable farming and horticulture. The price of rural land is influenced by export commodity prices for pastoral products (milk, meat and wool), horticultural crops (mainly apples and kiwifruit), wine and forestry products.

In 2007 there were approximately 100,000 rural units (blocks of land), and 2,500–3,000 real estate sales. Only slightly more than a quarter of rural units were classified as ‘economic farms’ (farms that can make a profit). Most of the rest was farmed in combination with other rural units, or the owners had another source of income. Most economic farms were on dairy land.

Lifestyle (rural residential) blocks accounted for around 9,000 sales in 2007. The lifestyle-block market is driven by the same factors as the urban housing market. Building size, age and quality are also important.

Market cycles

The number of sales and the average length of time each property is on the market are used by property analysts to predict changes in house prices. For example, decreased sales between 1997 and 2000 led house prices to flatten or even drop. Between 2000 and 2003 sales volume nearly doubled due to demand caused by low mortgage interest rates, increased migration, tax benefits for housing investors and lack of confidence in other investments. Economic conditions that influence population shifts, and the cost and availability of mortgage finance, also contribute to changes in the property market.

On average the length of the housing market cycle is 7–10 years, but each cycle is different.

Queen City versus Queenstown

In the early 2000s the Auckland property market, which previously had the highest average house prices, was surpassed by the Queenstown Lakes area. Queenstown Lakes was also the least affordable when local wages were factored in. This is because the Queenstown district is an international tourist destination and a high proportion of properties belong to wealthy overseas owners.

Regional variation

Local supply and demand results in house prices varying widely across locations. From the 1970s until the early 2000s (when it was surpassed by the Queenstown Lakes district) the Auckland area was the most expensive housing market in the country. According to migration projections, people are likely to continue moving to Auckland and the Bay of Plenty, and away from Southland and the West Coast of the South Island.

Effects on the building industry

Housing market fluctuations affect the wider economy, especially the building industry. In most years new housing made up about a quarter of sales. Builders are susceptible to changes in demand. They may end up with unsold houses in periods of economic downturn, and have to lay staff off. On the other hand, in buoyant times builders may not be able to keep up with demand, leading to house price increases.


History

Land agents

After organised settlement of New Zealand began in 1840, land dealings became a central concern for both Māori and Pākehā, and land agents (the forerunners of real estate agents) played a critical role.

From 1840 to the mid-1860s the Crown had the sole right to buy land from Māori, and even after this time it was a significant purchaser of Māori land. Government land agents negotiated with Māori owners, so fluency in the Māori language was an important skill. This remained the case after 1865, when Māori sold directly to individuals as well as the Crown. Often private land agents would also be licensed interpreters, and some Māori became land agents.

Land booms

Demand for land was often affected by regional events. Gold rushes in Otago led to the expansion of Dunedin in the early 1860s, and there was a boom in property values in Auckland after the end of the Waikato war of 1863–64.

Political policies were also influential. The public works programme initiated by Julius Vogel in the 1870s led to further booms in residential and public building around the country, creating more work for land agents. As well as negotiating land deals, land agents could also be valuers, accountants or auctioneers.

Buyer bribes

During a real estate boom in Auckland in the 1880s, land agents used all kinds of gimmicks to create interest in properties and subdivisions. Potential buyers were often given free train or bus passes so they could view the land for sale. Sometimes a ‘gala inspection’ was arranged, and people could listen to a brass band while eating a picnic lunch on site. The auctioneer of a Mt Albert estate in 1885 even promised to distribute gold watches and jewellery amongst would-be purchasers.

Real estate companies

Companies were formed to sell subdivisions in cities. Some companies founded in the 19th century were still in existence in the 2000s. For example, the locally owned company of Harcourts began in Wellington in 1888 and gradually expanded. By 2008 it had 450 branch offices spread across New Zealand, Australia, China, Fiji, Indonesia, Singapore and Zambia.

Land Agents Act 1912

The Land Agents Act 1912 was the first law to regulate the work of agents. They had to obtain a licence to do business, and there were penalties for non-compliance with this requirement and for misuse of trust funds.

Real Estate Institute of New Zealand

Some land agents felt that the 1912 act did not provide adequate protection for licensed agents, and did not prevent undesirable people from becoming agents. They also wanted to improve the public reputation of agents, which had been damaged by some shady land deals. These concerns led to the establishment of a national organisation for land agents. Regional associations of land agents and auctioneers in Wellington, Auckland and Waikato banded together to form the Dominion Estate Agents and Land Auctioneers Association in 1915. Other regional associations joined, and in 1923 the association was renamed the Real Estate Institute of New Zealand (REINZ).

Law changes

One of REINZ’s main aims was for better regulation of the activities of agents. There were some minor changes in the Land Agents Act 1921–22, and the Land Agents Act 1953 recognised the institute and allowed it to manage the professional activities of its members. However, the first major change came with the Real Estate Agents Act 1963. This made it compulsory for licensed real estate agents to be members of REINZ, which was given powers to determine industry standards, set examinations and discipline members. Under the Real Estate Agents Act 1976 an independent licensing board was set up, but REINZ retained its role in regulating the real estate industry.

A new act, the Real Estate Act 2008, came into force in late 2009. REINZ no longer has regulatory powers, but it continued to play an important role as a professional association.


Real estate practice in the early 2000s

What real estate agents do

When buying and selling real estate most people use the services of valuers, bankers, mortgage brokers, lawyers, building inspectors and real estate agents. The role of real estate agents is to market property and negotiate sales. In the early 2000s more than 90% of property sales involved real estate agents.

Real estate qualifications

Under the Real Estate Act 2008 anyone running a real estate business has to be licensed. In 2008 there were around 1,790 licensees and 16,000 salespeople.

A salesperson’s certificate, gained by passing an exam after two to three weeks’ part-time study, is needed to enter the sales force. Branch managers of real estate offices require a more advanced qualification. Some branch managers and licensees also sell real estate.

A New Zealand franchise

Bayleys started as a small operation concentrating on the industrial and commercial sectors in Auckland. They then used franchising to achieve national coverage and enter both the rural and residential markets.

Real estate companies

In the early 2000s real estate sales were dominated by a small number of large companies, owned by either local or overseas interests. Nationwide coverage is often achieved by franchising a real estate brand. The local licensee owns the business and pays a fee to the head office of the real estate brand.

Real estate fees

Real estate agents are paid a commission by sellers – in the early 2000s it was usually 3–4% of the sale price, negotiable depending on the level of service offered. Sometimes an agent charges a fixed amount regardless of the selling price.

Most real estate agencies offer a comprehensive marketing package, but some cheaper agencies leave more of the marketing to the vendor and may not run open homes. Increasingly, sellers pay for advertising costs.

The commission is usually split 50:50 between the licensee of the agency and the salesperson. Sometimes 50% goes to the licensee, 25% to the salesperson who listed the property and 25% to the agent who actually sold the property. Some salespeople rent a desk from the licensed agent and receive a larger share of the commission. A few agencies pay their staff a salary, plus pay them bonuses dependant on the sales they achieve.

A competitive business

It is said that most real estate business is conducted by a small percentage of the sales force. Top agents earn more from commissions and can negotiate with their agencies for a higher percentage of commissions.

The competitive nature of the commission system results in a high staff turnover – a large number of new salespeople last a year or less. Because of this many are inexperienced, resulting in quality control problems for the licensee, and service problems for the consumer.

New legislation

Responding to concerns about dishonest practices by some agents and a lack of protection for consumers, on 4 September 2008 Parliament passed the Real Estate Act 2008. It became law in November 2009, replacing the Real Estate Agents Act 1976.

The new act establishes a public register of real estate agents, and sets standards for agents’ training and the conduct of real estate businesses. It creates an independent real estate agents authority to oversee licensing of agents, provide consumer information, deal with complaints, and carry out disciplinary processes. An independent disciplinary tribunal will deal with serious cases and, if necessary, award compensation.


Selling

Setting a price

Real estate agents advise sellers on setting a price for a property, taking several factors into account. These include the current state of the market and the valuation of the property (the government valuation and a private valuation can differ markedly). Many sellers decide in advance what they are prepared to accept for a property, but do not state this in advertisements. They may instead give a range or a bottom price and wait to see what offers come in.

Women real estate agents

Real estate companies used to be reluctant to employ female salespeople, but this began to change by the late 1970s and early 1980s. It was observed that women agents were more successful because they were often better listeners and had more awareness of mothers’ concerns about local schools, neighbourhood facilities, and security. In 2004, 49% of salespeople were women. Only 27% were branch managers and 21% were licensees, but percentages were increasing.

Listing types

General listing

Under a general listing, the property is listed for sale with a number of real estate companies, and benefits by obtaining wide exposure to the market. However, most real estate agents discourage this type of listing. They argue that everyone’s listing becomes no one’s responsibility, and general listings have a relatively low success rate.

Exclusive listing

Often one company is given exclusive rights to sell the property for a specified period, usually three months. Real estate agents encourage this method, saying they put more effort into this type of listing and achieve a higher success rate than for general listings. A disadvantage is that a potential buyer may not hear about the property.

Marketing

Real estate agents have traditionally relied heavily on newspaper advertising to market property. Advertising ‘open homes’, when prospective buyers can look around the property, is a common way of marketing a house.

In the 2000s most property buyers begin their search with real estate websites. The costs of electronic marketing can be much lower than for print media, and with fast internet connections buyers can view both still and moving pictures of houses for sale. Public databases containing information on rating valuations, school zonings and aerial maps are also online.

The widespread availability of online real estate information presents new challenges for real estate agents. They are now dealing with more knowledgeable and sophisticated sellers and buyers, who want to minimise transaction costs.

Sales methods

Offer and negotiation

Most homes in New Zealand are sold by the prospective buyer making an offer, and the buyer and the seller negotiating until they come to an agreement.

Auction

An auction is usually a three-stage process. First, the property is marketed before the auction. At the auction, bids are invited. The seller puts a confidential reserve price on the property which must be at least met at the auction. Most properties do not sell under the hammer, so a third stage follows, where the seller negotiates with potential purchasers.

Auctions are ideal for unusual properties, or in situations where it is hard to determine the market value – for instance if prices are rising rapidly, or if the market is in the doldrums and a new basic price needs to be set.

Tender

The tender method is similar to an auction but there is less pressure to get a sale quickly. Potential buyers are invited to submit written bids for a property. After the closing date the seller can decide to accept a bid or negotiate with the bidders.

Private sales

Some owners market their property themselves to save paying an agent a commission. However, the process may be time-consuming and may not achieve the highest price or a quick sale.


Buying

Risks

It can be difficult and costly for a buyer to get redress if a property purchase turns out badly. Under the standard real estate sale-and-purchase contract the seller has some obligations – for example, there must be no outstanding rates on the property. However, houses are not covered under the Consumer Guarantees Act 1993, and private sellers are not bound by it. All the act requires is that the businesspeople involved with the sale (property developers, engineers, lawyers, valuers, builders and real estate agents) must act with reasonable care and skill. Under the Fair Trading Act 1986 buyers must not be misled about a property, but they don’t have to be told anything unless they ask. It is important, therefore, for buyers to beware.

Preliminary checks

Buyers can check on a property by:

  • getting a copy of the property’s title from Land Information New Zealand to identify any conditions such as easements (where someone else has rights to use part of the property, e.g. for a driveway) or covenants (restrictions on how the land can be used, e.g. a council requirement that a house on the property must be built with concrete foundations)
  • obtaining a land information memorandum (LIM) from the local authority, to check on consents issued, drainage systems, and problems such as potential instability of the land
  • enquiring with the local authority about amenities or road works planned for the area, zoning restrictions and building regulations
  • asking the current owner to provide copies of building consents for any work done on the property
  • getting a builder’s or engineer’s report on the condition of the property.

Financing

Once a buyer has decided to make an offer on a property, usually the first step is to organise finance. Most people pay a deposit, but have to get a mortgage – borrow money, usually from a bank – to meet the full purchase price. The amount a lender will lend usually relates to the buyer’s income, which indicates the level of interest payments they can afford on the mortgage. It also determines the total price the buyer can afford to pay for a property.

A mortgage must be arranged before bidding at an auction.

Real estate speak

The hype and euphemisms of real estate advertisements can deceive new buyers. Cynical definitions of terms abound, such as:

Bijou = cramped

Compact = very cramped

Original features = the place hasn’t had any work done on it since 1974

It’s got potential = this house is a wreck!

Making an offer

The buyer can make an offer with a price and date on which the property will change hands. With a negotiated or tender sale, this offer may be conditional on obtaining satisfactory finance, certificate of title, LIM checks or a builder’s report. The buyer may reject or accept the offer outright, or make a counter offer, usually suggesting a higher price. Once an offer is accepted, it is legally binding on both the buyer and the seller.

Settlement

Once an offer has been accepted by the seller, the buyer pays a deposit, usually 5–10% of the purchase price. This goes into the real estate agent’s trust fund, and the agent’s commission is taken out of it. It stays in the trust fund for a minimum of 10 days, while any conditions on the agreement are met. Usually a valuation of the property and insurance are organised before the mortgage is finalised. On the settlement day the balance of the price is paid and keys to the property change hands. Formal paperwork for the transfer of ownership (conveyancing) is carried out, usually by a lawyer, and the updated title document is sent to the new owner (or their mortgager) after settlement day.


External links and sources

More suggestions and sources


How to cite this page: Bob Hargreaves, 'Real estate', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/real-estate/print (accessed 18 September 2019)

Story by Bob Hargreaves, published 11 Mar 2010