QV Values - May 2011

[cube]

From the latest QV newsletter:

Property values continue to stabilise

Residential property values remain relatively stable at a national level according to the QV indices for April.
"Nationwide property values have now been relatively stable for several months after falling slightly throughout most of 2010. Values are now 1.9 percent lower than the same time last year, and 5.8 percent below the market peak of late 2007" said QV.co.nz Research Director, Jonno Ingerson.

That 5.8% is a nominal value - if you take in to account general CPI inflation, prices are now around 15% lower.

A $300,000 house in Q4 2007 would cost $331,553 now, allowing for inflation.
In fact a 5.8% decline means it costs $282,600, close enough to 15% off where they 'should' be.

[Shane D]

Cube,

You make a very good piont about taking inflation in account when calucating "real" house market pricing.

I am of the opinion that in 2011, we will see the market bottom for Auckland house prices in nominal price terms. You may see some statisical "noise" showing Auck prices flucuating a few % pionts depending on the basket of houses that sell in any particular month.

My reasons for picking a 2011 market bottom for Auck nominal house prices

- official inflation now running at 4.5% and I expect inflation to get worse over the coming years. This should put a nominal bottom on prices and I would expect houses to start to rise with inflation starting 2012

- lack of new house builds will keep housing supply tight and will get worse from 2012

- Immigration (particularly from China). The NZ government puts high barriers to immigration into NZ. The new immigrants that actualy qualify are very rich in $NZ dollar terms and will buy property. Some will buy not only a PPOR but also investment properties. Most Asian cultures are very focused on home ownership and avoid renting if possible.

The above is just my opinion and like *ssholes everyone's got one :-).

Shane

[buxlo122]

I think it could still stay flat for another year or year and a bit.

I think we will have drop in the share market in the next few months. This will scare consumer confidence, delay the general economic recovery, and keep house prices suppressed for a bit longer.

A year either away is not going to make to much difference in longer term especially with the current low interest rates.

The above is just my opinion and like *ssholes everyone's got one :-).

[Rosco]

From the latest QV newsletter:



That 5.8% is a nominal value - if you take in to account general CPI inflation, prices are now around 15% lower.

A $300,000 house in Q4 2007 would cost $331,553 now, allowing for inflation.
In fact a 5.8% decline means it costs $282,600, close enough to 15% off where they 'should' be.

Compare to REINZ stats.
Nov 2007 median NZ house $352,000
March 2011 median NZ house $365,000

Doesn't seem to be a decrease?

Also inflation adjusted? For a lot of investors they have borrowed a large % of the house purchase price. Therefore a lot of the money invested is the bank money not theirs.
In my opinion if you adjust for inflation, this should just be on the owners actual equity.

[Bob Kane]

I've never understood why anyone would adjust their house price by inflation.
What use is this calculated figure?

[Shane D]

I've never understood why anyone would adjust their house price by inflation.
What use is this calculated figure?

Because inflation robs your purchasing power so needs to be taken into account. If inflation runs at 5% a year and your house price stays flat then you just lost 5% purchasing power of your capital.

Shane

[Bob Kane]

Without meaning to sound too dumb, so what?
If you've lost 5% of your purchasing power - should you sell up or buy more or what should you do?

[Shane D]

Without meaning to sound too dumb, so what?
If you've lost 5% of your purchasing power - should you sell up or buy more or what should you do?

Bob,

I think its more a case of "being aware" of how our capital is performing with inflation taken into account. If your capital is loosing ground to inflation for a few years I don't think the alarm bells should be going crazy but if your capital started loosing ground for a number of years then you would probably want to reconsider how you allocate future capital. i.e. look for other investment opportunities that keep pace with or beat inflation.

Shane

[damage]

Without meaning to sound too dumb, so what?
If you've lost 5% of your purchasing power - should you sell up or buy more or what should you do?

Effectively this means that your asset is deflating in terms of value compared to everything else.
So if you have inflation running at say 5% and house prices at 0% then you actually losing paper capital.

[Rosco]

What happens if have a 100% mortgage? So house worth $300k and mortgage $300k

Over 10 years if house prices go up 1% per year, and inflation is 5% per year, you still win. ie house now worth 330k approx and mortgage still $300k. So after 10 years have $30k equity, compared to none initially. Yes $30k buys less than $30k 10 years ago, but $30k buys more than $0 10 years ago.

Ross

[damage]

What happens if have a 100% mortgage? So house worth $300k and mortgage $300k

Over 10 years if house prices go up 1% per year, and inflation is 5% per year, you still win. ie house now worth 330k approx and mortgage still $300k. So after 10 years have $30k equity, compared to none initially. Yes $30k buys less than $30k 10 years ago, but $30k buys more than $0 10 years ago.

Ross

maybe after 5 years, would you'd be better off pulling the money out?

[Bob Kane]

Bob,

I think its more a case of "being aware" of how our capital is performing with inflation taken into account. If your capital is loosing ground to inflation for a few years I don't think the alarm bells should be going crazy but if your capital started loosing ground for a number of years then you would probably want to reconsider how you allocate future capital. i.e. look for other investment opportunities that keep pace with or beat inflation.

Shane

Thank you, Shane.
You've got me thinking:
- historically house values go up by (inflation + 2%) eg inflation = 4%, house value = 6%.
- if house values stay flat (0%) and inflation happens (4%?) for a few years then you might reach the stage where houses have fallen 15%-20% behind inflation - over 5 years or so.
- in which case there is a pending 'catch-up' phase about to happen.
- if you sold up at this point (to invest more profitably in some other asset class) you would miss out on the 'catch-up' boom.
- house values in real terms is another way of measuring where we are in the boom/slump property cycle
- financial advisers might advise to sell up when houses fall in real terms but property investors would realise that it's probably a good time to quickly snap up a few houses and ride the impending boom.

Have I got that right?

[sbw]

A bit off topic maybe... but in terms of pure speculation... (I know you'll love this question damage)

in the last ten years (approx) we have seen house prices double (approx)

In ten years, and in twenty years time do you think house prices will double again?

[Perry]

If house prices have doubled in that ten years,
does that mean a good sale would net enough
proceeds to buy two, similar houses? Approx)

[Bob Kane]

You've got that back to front, Perry.
Buy two houses and when they double after 10 years, sell one and keep the other (free) house.