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  1. #1

    Default Interesting market comment

    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!
    Last edited by muppet; 15-05-2008 at 11:43 PM. Reason: Article can now be read.

  2. #2

    Default

    Quote Originally Posted by halfempty View Post
    Residential property sales are at their lowest level for decades.
    I checked that on the REINZ site.

    Month on month - in April 2008 there were 4,464 transactions reported by the REINZ. It is the lowest (month on month) since January 1992 (4,427), though December 1999 (4,562) came pretty close too. Lowest in decades? Actually, no. Lowest in a decade in a half? Yes.

    On a rolling quarter basis, in February / March / April 2008 there was 15,949 reported sales (again, REINZ). As recently as the rolling quarters ending September 2001 through to February 2001 (inclusive) there were less sales. Lowest in decades? No. Lowest in 7 years? Yes.

    That opening statement is an exaggeration of the facts.

    What else is exaggerated in that article?

    M
    Comments may not be relevant to individual circumstances. Before making any investment, financial or taxation decision you should consult a professional adviser.

  3. #3
    Join Date
    Jan 2008
    Location
    North Shore, Auckland
    Posts
    1,079

    Default Mark

    Quote Originally Posted by Mark_B View Post
    I checked that on the REINZ site.

    Month on month - in April 2008 there were 4,464 transactions reported by the REINZ. It is the lowest (month on month) since January 1992 (4,427), though December 1999 (4,562) came pretty close too. Lowest in decades? Actually, no. Lowest in a decade in a half? Yes.

    On a rolling quarter basis, in February / March / April 2008 there was 15,949 reported sales (again, REINZ). As recently as the rolling quarters ending September 2001 through to February 2001 (inclusive) there were less sales. Lowest in decades? No. Lowest in 7 years? Yes.

    That opening statement is an exaggeration of the facts.

    What else is exaggerated in that article?

    M
    What if we adjusted it per capita or per liveable dwelling?

  4. #4

    Default

    Quote Originally Posted by 67910241 View Post
    What if we adjusted it per capita or per liveable dwelling?
    If only we could all alter the rules after we've broken them.

    M
    Comments may not be relevant to individual circumstances. Before making any investment, financial or taxation decision you should consult a professional adviser.

  5. #5

    Default

    The article is a breath of fresh air if it's good news your after as long as you use the basic rule of media.

    (86.4% percent of all facts used will me made up on the spot to suit the argument at the time)

  6. #6
    Join Date
    Jan 2008
    Location
    North Shore, Auckland
    Posts
    1,079

    Default Rules?

    Quote Originally Posted by Mark_B View Post
    If only we could all alter the rules after we've broken them.

    M
    Where were they defined?

    "Lowest Level" = lowest adjusted level, non-adjusted (raw) level, etc?

    Also, looking decades back till we hit the old socialist era may not be that relevant either - it was a very different market in the 1970s.

  7. #7
    Join Date
    Dec 2004
    Posts
    2,081

    Default

    What Tommy either forgets or fails to see is that the issue with a turn around in the market when it happens and its bad is that economic fundamentals don't have a lot to do with it, its all about perception, facts are you can not make quick money in real-estate anymore, perception is what is now driving the market and the perception is we are going down, we may go down far enough not to recover for a while, after all this is what is called a bust in the cycle is it not.

    As far as fundamentals are concerned interests are high, returns low, finance is not easy to get, and jobs are being lost.

    But I say that with the hopes of picking up cash-flow positive property in Auckland again when the turn happens.

  8. #8

    Default

    As usual, it was the writers job to specify, not the readers job to qualify.

    The statement, as written, was not true.

    M
    Comments may not be relevant to individual circumstances. Before making any investment, financial or taxation decision you should consult a professional adviser.

  9. #9
    Join Date
    Jan 2008
    Location
    North Shore, Auckland
    Posts
    1,079

    Default

    Quote Originally Posted by Josko View Post
    What Tommy either forgets or fails to see is that the issue with a turn around in the market when it happens and its bad is that economic fundamentals don't have a lot to do with it, its all about perception, facts are you can not make quick money in real-estate anymore, perception is what is now driving the market and the perception is we are going down, we may go down far enough not to recover for a while, after all this is what is called a bust in the cycle is it not.
    I suggest the only reason this drop has nothing to do with the fundamentals is that they've been left a long way down, possibly in 2004 and no later than 2005.

    Since then, it's pure ballistics and kinetic energy. Now that the gravity has depleted the upward V, let's see how far it has to fall. My guess is - sometime around if not after the fundamentals (affordability, rent-substitute comparison and investment yields) are strong again.

  10. #10
    Join Date
    Apr 2008
    Posts
    2,086

    Default

    It's all about the liquidity of the market. In a liquid market, like the sharemarket, a 'bad news' announcement causes an immediate fall in the market price, and the fall usually goes a little bit too far, so the profit-takers then move in and buy. In a liquid market, this takes a couple of days. But in a highly illiquid market, like property, it can take years.

    As for property, market prices must fall. You can cut the cake any way you like, but you still arrive at the same answer.


 

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