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  • Bnz - Housing Market Update

    HOUSING MARKET UPDATE
    Slowing Signs Apparent
    Recent data on New Zealand housing market have tended to be firm. Sales in the three months to May
    were up by 4.2% from a year earlier and on average in May it took 30 days to sell a dwelling which was nine
    days faster than the average for that month over the past 10 years.

    This improvement over the average time
    taken to sell was the same as in April and similar to the 8.8 days in March and 10.3 days better than average
    in February. House prices are also continuing to rise with the median dwelling sale price in May of $350,000
    up by 14.8% from a year earlier.

    But if we look really deeply we can see some signs that this burst of activity is now waning. One sign of
    weakness is the fact that in May sales were down by 3.7% from a year earlier. More significantly, in rough
    seasonally adjusted terms sales in the three months to May where down by 3.8% from the three months to
    February.

    But perhaps more significant than this is what we are seeing right now in our own contacts with the housing
    market. Investors are again stepping back from making purchases as they did in the first half of 2006.
    There are major concerns about cash flows as a result of the relatively sharp jump recently in fixed interest
    rates. These rate rises are highlighting the way in which rents have not kept up with house prices. In
    addition perhaps some investors are getting concerned about what is happening with the net migration
    numbers. In seasonally adjusted terms the inflow is now running at about 5000 per annum compared with
    an average over the past 10 years of 10,000. Below average population growth means below average
    growth in housing demand.

    There are also concerns about the policy attacks being made on housing investment with the Reserve Bank
    recommending a change in the tax regime and the Minister of Finance suggesting ring fencing residential
    investment property losses.

    For the past few months our warning has been that people should not blindly extrapolate the recent strong
    housing market numbers and expect continued price rises over 10% over the next couple of years.

    Our interpretation of the market surge late last year has been that it was driven by
    • the Reserve Bank failing to back up their warnings of tightening monetary policy with any further rate
    increases until March this year,
    • a rebound in a net migration inflows numbers over calendar 2006, and
    • investors jumping back into the market from the middle of last year when they realised owner occupier
    demand was still very strong and assisted by things like the Working for Families package, strong wages
    growth, and a continued very tight low market.

    In that regard we are not surprised by the easing signs we are starting to pick up. But the question now
    becomes will the market become quite weak perhaps with falling prices on average?

    We don't think so. The market is still going to remain very well supported by good wages growth, a tight labour market, what we believe is a backlog of owner occupier buyers, a perceived structural shortage of dwellings in New Zealand, continuing increases in construction costs, and a government focus on improving home affordability by boosting demand from low income buyers rather than improving supply.

    In addition, just as there have been many older farmers hoping for better returns so that land prices would
    fall and they could pick up the some cheap extra assets, we also believe there are many well-heeled
    investors hoping the market becomes exceptionally weak so that they can make some cheap purchases and
    build up a strong long-term focused portfolio. And we are not concerned by the bleating noises from lobby
    groups and some current investors warning that if the government takes away their distortionary tax
    advantages they will fight back by aggressively raising rents.

    If the market was able to tolerate higher rents
    they would already be in place. And a few people seem not to realise that their threat of selling their
    tenanted properties is not a threat at all. It is in fact the very thing many of us want to see as a result of
    removing the tax bias in favour of residential property.

    For every house a disgruntled investor sells an owner
    occupier will be able to make a purchase and start smiling.

    For political reasons however it seems very unlikely that we are going to see the tax advantages of
    residential property investment removed.
    This is a huge pity because it would be good in terms of diverging
    investment toward productive assets, reducing inflation slightly, improving home affordability, and causing
    interest rates and the exchange rate to sit at slightly lower levels than would otherwise be the case.

    Perspective
    When you read commentary on the housing market it pays to keep in mind the employer and motives of the
    person making the comments. For instance there are at least two people employed as economists working
    for managed funds firms and the line they have taken on housing has been unerringly negative over the past
    couple of years and remains that way even in the face of strong evidence that their forecasts are off the
    mark.

    In particular one person produced a piece of very poor “research” last year purporting to show a large
    excess supply of houses in the market with the implication that prices would flatten off or fall. Instead they shot upward again.

    Another commentator has apparently suggested fixed interest rates may rise to 12%.
    That is blatantly ridiculous but a nice story to scare the youngsters with if they won't go to bed early.

    So just keep this in mind if you are an investor in the property market or somebody contemplating making a
    purchase.

    There are plenty of people with a vested interest in talking the market lower - not least one or two trying to flog books on the basis that a major slump is coming and if you buy their book you'll make money out of. The world loves a trier.

    As a final point, what is our vested interest? On the face of it you would think we would be biased towards
    talking the housing market up so people would borrow more money. But in case you haven't noticed we
    bank economists are in the fortunate position where influence on what we say by our bosses while present is
    not dominant.

    We have all at times warned that house prices would fall, or that a recession is coming up, or that some important commodity price is going to fall away.

    At the BNZ we have also stridently warned about
    the upside risk to interest rates. None of these things would be positive for the lending side of our business
    but we are free to say them. Interestingly we get most of these dire predictions wrong (apart from the
    interest rates one)! This really is a dismal science.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    It will be interesting to see in a couple of years time the impact the relative returns from the Kiwisaver scheme verses the returns from the housing market. Many commentators are predicting an average return of only 2.5% pa from funds invested in Kiwisaver nett of all fees. It will be interesting to see the response of Joe Public to such a low return when many other investment avenues will offer better immediate returns.
    Should inflation zoom away again for whatever reason many kiwisaver investors will see their nesteggs relative buying power diminish whereas a property investor will retain relative buying power.
    Remember those great deals on term life policies offered 30 years ago which are worth ziltch today.

    Vested interests perhaps from the finance sector who have much to gain from Kiwisaver.

    Comment


    • #3
      Originally posted by Realtorman View Post
      It will be interesting to see in a couple of years time the impact the relative returns from the Kiwisaver scheme verses the returns from the housing market. Many commentators are predicting an average return of only 2.5% pa from funds invested in Kiwisaver nett of all fees. It will be interesting to see the response of Joe Public to such a low return when many other investment avenues will offer better immediate returns.
      Should inflation zoom away again for whatever reason many kiwisaver investors will see their nesteggs relative buying power diminish whereas a property investor will retain relative buying power.
      Remember those great deals on term life policies offered 30 years ago which are worth ziltch today.

      Vested interests perhaps from the finance sector who have much to gain from Kiwisaver.
      It is interesting you bring Kiwisaver into this discussion. I think it will be interesting to see what happens to house prices when all the first time buyers can take money out of thier kiwisaver account as a deposit for a house, (i am not sure if this is after 3 or 5 years in kiwisaver). I do however think there may be a big rush for houses on the relevent anniversary of kiwisaver.

      Rob

      Comment


      • #4
        Originally posted by Halfway To Paradise View Post
        It is interesting you bring Kiwisaver into this discussion. I think it will be interesting to see what happens to house prices when all the first time buyers can take money out of thier kiwisaver account as a deposit for a house, (i am not sure if this is after 3 or 5 years in kiwisaver). I do however think there may be a big rush for houses on the relevent anniversary of kiwisaver.

        Rob
        I doubt it, because most people won't have saved enough to make a decent deposit by then. (4% of, say, $40,000 is $1,600 * 5 years = $8,000 ; hardly enough to pay the for lawyer, the movers and the moving in party!)
        DFTBA

        Comment


        • #5
          Originally posted by cube View Post
          I doubt it, because most people won't have saved enough to make a decent deposit by then. (4% of, say, $40,000 is $1,600 * 5 years = $8,000 ; hardly enough to pay the for lawyer, the movers and the moving in party!)
          I am not suggesting that kiwisaver will give people a deposit, or be the answer to would be purchasers problems, however on the 5th anniversary of the start of kiwisaver there could be a lot of people who will take the chance at getting on the housing ladder at the same time, with the assistance of kiwisaver. The $8k you suggest could be double that with 2 people working.

          Comment


          • #6
            Originally posted by cube View Post
            I doubt it, because most people won't have saved enough to make a decent deposit by then. (4% of, say, $40,000 is $1,600 * 5 years = $8,000 ; hardly enough to pay the for lawyer, the movers and the moving in party!)
            It could be a lot more than that.

            If it's a couple with combined income of less than 100k they would also be entitled to a first home deposit subsidy from the government. This amounts to $1000 for each of them, for every year they have been Kiwisaver members. So after 5 years that becomes $10k extra.

            So if we have a couple on a combined salary of $100k, that equals 4% * 5 years = $20k in savings + the above $10k from the government - that's a $30k deposit.

            That would be a good start for a first home.
            High resolution Fractal Art on quality canvas: www.FractalArt.co.nz

            Comment


            • #7
              Originally posted by Rolf View Post
              It could be a lot more than that.

              If it's a couple with combined income of less than 100k they would also be entitled to a first home deposit subsidy from the government. This amounts to $1000 for each of them, for every year they have been Kiwisaver members. So after 5 years that becomes $10k extra.

              So if we have a couple on a combined salary of $100k, that equals 4% * 5 years = $20k in savings + the above $10k from the government - that's a $30k deposit.

              That would be a good start for a first home.
              In five years time 30k will have very little purchasing power after inflation eats it up, unless we have a deflationary bust in housing. Even in todays dollars 30k doesn't leverage you into much. A 90% loan will get you a 300k property. It will be better than not doing anything at all though which is what most will do.
              No price is too high to pay for the privilege of owning yourself. - Friedrich Nietzsche

              Comment


              • #8
                Sure it is not buying you much, but I wanted to point out that it could very well be $30k - rather than $8k.

                Also people's attitude may change. The motivation one might get from watching savings grow is not to be underestimated, especially for people who would otherwise not have saved anything.
                High resolution Fractal Art on quality canvas: www.FractalArt.co.nz

                Comment

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