ISSUE 54: CURRENT TO 20 MAY 2008
THE FIRST WORD
FROM TOMMY
Residential property sales are at their lowest level for decades. Nationally, in March the number was half those of e
economics).
I disagree with many of the recently published observations for numerous reasons; I believe weak
statistical methodology has been used, together with 'sound bite' reporting, poor understanding of supply-side economics in residential real estate and an oversimplification of the effects of demand drivers. I believe the actual market movement is quite different.
The median house price is the central point of a number of sales; if, for example, there are nine sales
the median house price is (in numerical order) the fifth. The median house price, in any market
conditions, will move up and down on a monthly basis; but it does not measure market movement.
In this issue, we are publishing someone else's perspective on the current real estate market:
Bill Sisk (BBS - Val & Pty Mgmt, M Phil, AREINZ, AAMINZ, SPINZ Registered Valuer) whose
views provide a dose of commonsense. Bill is the general manager of Valuation Consultants
New Zealand (VCNZ), a Wellington-based valuation practice; he has worked in the property
market since the early 1980s, including lecturing in Property Studies at Massey University in the
early 1990s.
Bill Sisk is completely independent, and nothing to do with Tommy's Real Estate; but he's one industry expert whose views I endorse.
Best wishes
To demonstrate this, I randomly selected a group of suburbs in southern Wellington in 2006 where
the average increase over the six months from July - December 06) was +6.15%. The percentage
changes of the median prices month by month were: -12.34%, +18.52%, -6.25%, +2.72% and +4.71%. Even
the most statistically naive will grasp that values between the month of July 2006 & August 2006 cannot
have decreased by 12.3% or increased the next month by 18.5%; that would be plainly stupid. Yet this
measure is frequently reported as a leading market indicator.
Tony Alexander, the BNZ economist, was recently reported as saying most residential properties were up to 30% overvalued. Naturally, this gave fresh ammunition to the doomsayers. The comment was from a paper called “The Housing Correction - where will it end?” by Craig Ebert (another BNZ economist); he argues that house prices have run ahead of trend on a number of leading economic indicators.
The paper goes on to say, “even if our macro-based valuations are close to the truth, they do not mean nominal house prices will necessarily drop by 30%, or even half of that much”.
Unfortunately the statement, later repeated by Tony Alexander, appears to have been only partly
quoted so its substantial reporting was distorted; the full comment was “average falls of 30% seem highly unlikely but another 10% off the current price is possible”. The latter part was ignored, yet a 10% fall
would mean prices generally moving to last year's levels.
All markets go through cycles of growth, stagnation and decline. A simple example is a manufacturer
producing a single product, such as doorknobs. When the market turns down, there is usually a lag before
the manufacturer can scale back production. This results in an
inventory increase, because the business is holding a larger stock of doorknobs.
Supply side economics indicate that the price of doorknobs will drop until the excess stock is cleared, and the
manufacturer will continue to produce at reduced levels until demand increases (up swing). So does the housing market behave any differently? The answer is yes!
Unlike the manufacturing example, there are multiple suppliers. Some will have to sell due to personal
circumstances and may have to accept a much lower price, but the majority will take their properties off
the market, in anticipation of more favorable conditions. This behaviour is well recognised, where
homeowners will hold out, rather than accept a lower price. So, in the real estate market, 'backed up' inventories tend to clear more quickly than in other markets. Once this occurs, the market reverts to normal
with neither buyer nor seller having the upper hand.
Much has been said about the drop in net immigration, and its likely effect on the real estate market. Net
immigration for the most recent quarter is reported as 4,644, down from previous 10-year quarterly
average of 10,400. Undeniably, a reduction in potential buyers will have an influence, but has this been
overstated? Certain locations are a definitely a magnet for new immigrants and may feel the chill,
but areas that rarely see new immigrants will remain unaffected.
More important demand drivers include household formations, changing demographics, geographic
movements and income changes.
For example, I have two adult children who are making their own way. Ten years ago, our family
occupied one house, now we need three. People get older and downsize; yesterday's youths
become parents then need larger houses and sites; people move, chasing jobs and lifestyles; others
have income changes that can impact on size and quality of dwellings.
Such market activities keep on keeping on…
Our company has analysed house price movements in the larger suburbs (4,000 dwellings plus) in
the major population centres, over the past six months. I should, however, mention there is about six
weeks lag before the information becomes available. About half showed growth, including central
Auckland and Wellington; others declined but (apart from a few provincial exceptions) the
percentage reductions have been in the low, single digits.[Naturally, the future is a bit foggy;
but here are my predictions:
1) Property values will remain relatively flat over the next 12 months or so;
2) There won't be any massive reductions in values; good quality and well located homes will hold
steady and may even increase modestly;
3) Poorly presented or located properties will experience an overdue price correction;
4) People who need to sell on the present market will be no worse off as long as they buy back into
the same market;
5) Any bargains will be chased by a lot of interested buyers;
6) The number of properties for sale will decrease rapidly because people who do not have to sell
will wait for better conditions;
7) There will be an immediate reduction in new building, always the quickest sector to react. This
will help take pressure off inventories;
8. There may be a further surge of properties becoming available from September - November
when many fixed rate mortgages revert to floating rates;
9) Residential rents will increase later this year, as they have lagged behind property prices;
10)The Reserve Bank will reduce the official cash rate to prevent a full blown recession;
11) Homebuyers, particularly first timers, might see some relief in the coming budget, and that
has nothing to do with the election!
THE FIRST WORD
FROM TOMMY
Residential property sales are at their lowest level for decades. Nationally, in March the number was half those of e
economics).
I disagree with many of the recently published observations for numerous reasons; I believe weak
statistical methodology has been used, together with 'sound bite' reporting, poor understanding of supply-side economics in residential real estate and an oversimplification of the effects of demand drivers. I believe the actual market movement is quite different.
The median house price is the central point of a number of sales; if, for example, there are nine sales
the median house price is (in numerical order) the fifth. The median house price, in any market
conditions, will move up and down on a monthly basis; but it does not measure market movement.
In this issue, we are publishing someone else's perspective on the current real estate market:
Bill Sisk (BBS - Val & Pty Mgmt, M Phil, AREINZ, AAMINZ, SPINZ Registered Valuer) whose
views provide a dose of commonsense. Bill is the general manager of Valuation Consultants
New Zealand (VCNZ), a Wellington-based valuation practice; he has worked in the property
market since the early 1980s, including lecturing in Property Studies at Massey University in the
early 1990s.
Bill Sisk is completely independent, and nothing to do with Tommy's Real Estate; but he's one industry expert whose views I endorse.
Best wishes
To demonstrate this, I randomly selected a group of suburbs in southern Wellington in 2006 where
the average increase over the six months from July - December 06) was +6.15%. The percentage
changes of the median prices month by month were: -12.34%, +18.52%, -6.25%, +2.72% and +4.71%. Even
the most statistically naive will grasp that values between the month of July 2006 & August 2006 cannot
have decreased by 12.3% or increased the next month by 18.5%; that would be plainly stupid. Yet this
measure is frequently reported as a leading market indicator.
Tony Alexander, the BNZ economist, was recently reported as saying most residential properties were up to 30% overvalued. Naturally, this gave fresh ammunition to the doomsayers. The comment was from a paper called “The Housing Correction - where will it end?” by Craig Ebert (another BNZ economist); he argues that house prices have run ahead of trend on a number of leading economic indicators.
The paper goes on to say, “even if our macro-based valuations are close to the truth, they do not mean nominal house prices will necessarily drop by 30%, or even half of that much”.
Unfortunately the statement, later repeated by Tony Alexander, appears to have been only partly
quoted so its substantial reporting was distorted; the full comment was “average falls of 30% seem highly unlikely but another 10% off the current price is possible”. The latter part was ignored, yet a 10% fall
would mean prices generally moving to last year's levels.
All markets go through cycles of growth, stagnation and decline. A simple example is a manufacturer
producing a single product, such as doorknobs. When the market turns down, there is usually a lag before
the manufacturer can scale back production. This results in an
inventory increase, because the business is holding a larger stock of doorknobs.
Supply side economics indicate that the price of doorknobs will drop until the excess stock is cleared, and the
manufacturer will continue to produce at reduced levels until demand increases (up swing). So does the housing market behave any differently? The answer is yes!
Unlike the manufacturing example, there are multiple suppliers. Some will have to sell due to personal
circumstances and may have to accept a much lower price, but the majority will take their properties off
the market, in anticipation of more favorable conditions. This behaviour is well recognised, where
homeowners will hold out, rather than accept a lower price. So, in the real estate market, 'backed up' inventories tend to clear more quickly than in other markets. Once this occurs, the market reverts to normal
with neither buyer nor seller having the upper hand.
Much has been said about the drop in net immigration, and its likely effect on the real estate market. Net
immigration for the most recent quarter is reported as 4,644, down from previous 10-year quarterly
average of 10,400. Undeniably, a reduction in potential buyers will have an influence, but has this been
overstated? Certain locations are a definitely a magnet for new immigrants and may feel the chill,
but areas that rarely see new immigrants will remain unaffected.
More important demand drivers include household formations, changing demographics, geographic
movements and income changes.
For example, I have two adult children who are making their own way. Ten years ago, our family
occupied one house, now we need three. People get older and downsize; yesterday's youths
become parents then need larger houses and sites; people move, chasing jobs and lifestyles; others
have income changes that can impact on size and quality of dwellings.
Such market activities keep on keeping on…
Our company has analysed house price movements in the larger suburbs (4,000 dwellings plus) in
the major population centres, over the past six months. I should, however, mention there is about six
weeks lag before the information becomes available. About half showed growth, including central
Auckland and Wellington; others declined but (apart from a few provincial exceptions) the
percentage reductions have been in the low, single digits.[Naturally, the future is a bit foggy;
but here are my predictions:
1) Property values will remain relatively flat over the next 12 months or so;
2) There won't be any massive reductions in values; good quality and well located homes will hold
steady and may even increase modestly;
3) Poorly presented or located properties will experience an overdue price correction;
4) People who need to sell on the present market will be no worse off as long as they buy back into
the same market;
5) Any bargains will be chased by a lot of interested buyers;
6) The number of properties for sale will decrease rapidly because people who do not have to sell
will wait for better conditions;
7) There will be an immediate reduction in new building, always the quickest sector to react. This
will help take pressure off inventories;
8. There may be a further surge of properties becoming available from September - November
when many fixed rate mortgages revert to floating rates;
9) Residential rents will increase later this year, as they have lagged behind property prices;
10)The Reserve Bank will reduce the official cash rate to prevent a full blown recession;
11) Homebuyers, particularly first timers, might see some relief in the coming budget, and that
has nothing to do with the election!
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