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House market still shows signs of life - but silly season over

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  • House market still shows signs of life - but silly season over

    House market still shows signs of life - but silly season over
    22 June 2006

    This week the Real Estate Institute released its monthly data on dwelling sales around New Zealand. Its numbers for May show that the median dwelling sale price was unchanged from April at $305,000 while being 10.9 per cent ahead of a year earlier.

    But two months ago the median price was $302,000 so one gets a picture of house prices rising at an underlying rate which is actually very low. The best indicator of the state of the market comes from the average number of days taken to sell a dwelling. In May this was 38 days. This was up from 34 days in April but a month-to-month change is meaningless because what really matters is how it compares with a year earlier.

    A year ago it took 29 days to sell a home.

    The increase in this measure of nine days shows quite clearly that the market is far less active than back then. But when one allows the fact that on average during the month of May over the past 10 years it has taken 40 days to sell a dwelling one can still say that the market is displaying a slightly above-average degree of strength.

    With regard to turnover, the number of sales in May was up from a year ago by 3.9 per cent. But this piece of information is distorted by when Easter fell this year versus last year and for this reason we think that something not distorted by the number of trading days, such as the days to sell measure, gives a more accurate picture of what is happening with residential real estate in New Zealand.

    Our opinion is that the market is still in the process of flattening out and that it will go through a slow period lasting two to three years.

    Reasons why we see activity remaining flat include slowly rising average mortgage rates as people roll off old lower fixed rates into new rates.

    Population growth is running below average with the net migration gain below its usual level. Consumer confidence is strongly in negative territory and this is reflected not just in a willingness to pull back on housing expenditure but reduced growth in spending in retail stores as well.

    Investor sentiment has grown cautious in light of the low yields on offer, the absence of much increase in rents on average, and increasing difficulties getting tenants in some areas. We also don't expect to see much interest from overseas buyers in the next couple of years as they wait for the Kiwi dollar to reach its cyclical low levels. Foreigners will be wary of buying an asset in a country whose currency is clearly depreciating.

    But one thing in particular makes us cautious about the market in terms of prices and turnover over the next two or three years and that is increasing dwelling supply. In spite of the slowdown in the rate of growth in our economy the number of dwelling consents issued over the past year still sits above the 10-year average.

    An increasing supply of dwellings in an environment where we expect migration flows to worsen and investor sentiment to back away a bit further will, we believe, produce some weakness in prices.

    But we certainly don't expect a rout in the housing market, given that we expect job security to remain very good and the economy not to enter into recession. For vendors it is now become more challenging selling one's house but not depressingly so. It is more that hopes of achieving what one knows to be a truly ridiculous price for one's house will be dashed.

    And for buyers the need to buy whatever comes on the market has disappeared.

    Tony Alexander is the BNZ's chief economist

    TonyAlexander @bnz.co.nz

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