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  1. #1
    Join Date
    Sep 2003
    High up above and deep down under

    Default Property Klondike 2003

    Hi Guys

    Interesting article in one of this mornings newspapers.

    Property Klondike grips the nation in 2003

    TUESDAY , 30 DECEMBER 2003


    Residential property was a gold rush-like investment in 2003, but Andrew Macdonald finds change could well be in the wind for the housing bonanza.

    There were plenty of winners as the nation this year embraced a property Klondike fuelled by low interest rates and population growth.

    Real estate agents were circling, banks were rubbing their hands and home buyers were queuing up.

    But change is in the wind.

    Deutsche Bank senior economist Darren Gibbs says the residential property boom that engulfed most of this year may have peaked.

    His comment came days after Reserve Bank Governor Alan Bollard held the official cash rate (OCR) at five per cent on December 4.

    It was a call that allowed home owners with mortgages to breath a little easier, albeit under the shadow of a tightening monetary policy.

    At the December monetary policy statement Dr Bollard flagged an OCR hike next year one that will more than likely dampen the red-hot housing market, Mr Gibbs says.

    "I think what (Dr) Bollard is worried about is, if people are extremely highly leveraged and it turns out that things develop at a far more inflationary way than the bank's expecting."

    Some banks have already lifted their interest rates.

    Mr Gibbs says it is unlikely that OCR rises leading to moves in fixed and floating interest rates in the year ahead will seriously hurt those with mortgages.

    "I would have thought you would have to be fairly highly leveraged to be hurt by a (OCR) rise of 75 basis points," he said.

    But real estate agents are already whinging, wondering when interest rate rises will take the shine from their halcyon year.

    "How could they (trading banks) put the interest rates up," one agent said in December.

    "There's a lot of people upset about that," she said.

    "They (the banks) never warned us."

    On the contrary Dr Bollard warned in September of a day of reckoning for unsophisticated investors who could come unstuck if interest rates increased or the property market turned.

    "When property prices really skyrocket, real property-price deflation often follows soon after," he said.

    The result would be a so-called "negative equity", when a house's value falls below the amount of the mortgage owed on it.


    But Mr Gibbs says the New Zealand market does not look over-stretched compared with overseas markets.

    "If the market gets ahead of itself, we'll go through a period of three or four years where nominal returns will stay pretty much unchanged, so that in real terms the prices are falling."

    In other words, house prices will more or less stagnate and massive capital gains, which have characterised this year's boom, will dry up.

    Infometrics principal Gareth Morgan said in a recent article that he believes there is a realistic prospect of prices falling in nominal terms.

    He points to a period in the late 1970s when house prices fell 36 per cent in real terms, although the fall was disguised by inflation to the tune of 16 per cent a year.

    In the latest housing boom, banks have essentially bet their business on the property market.

    They claim they have "stress-tested" their business for 20 per cent downturn.

    Interest rates and capital gains to one side, the other driver of the housing boom is net migration which, says ANZ Bank chief economist David Drage, is softening.

    Annualised net migration reached 41,990 in May, its highest since August 2002, but had since fallen steadily to 38,310 in October.

    "Over time you'd expect that (softening net migration) to feed its way through into the property market," he says.

    That would equate to a fall-off in demand for housing which, along with the comparatively low cost of mortgages, has helped the residential property market boom.


    ANZ Bank figures showed it took just 24 days to sell a house in October, a record low, compared with 64 days in early 2001.

    Real Estate Institute of New Zealand figures show a whopping increase in the median house price for November, up 20.5 per cent for the year to $235,000.

    Not surprisingly, an AMP study found that home affordability for the September year had worsened by 4.3 per cent.

    Because of this and possibly because of the effect of student loans, there has been a dramatic fall-off in the number of young adults owning their own homes.

    In fact, many of the house buyers this year were on their second time around, investing in rental property and mirroring an Australian trend, Mr Drage says.

    And, as in Australia, rental yields have fallen.

    ANZ Bank says rental yields have dropped from an average of 7 per cent in 1993 to about 5.75 per cent presently.

    Combined with likely interest rate rises, this could spell trouble for those whose mortgages are highly geared.

    In September, Christchurch-based mortgage broker Mike Pero said business had never been better with banks lending anywhere between 90 and 100 per cent.

    In some centres buyers could get a $300,000 mortgage without a deposit, but that depended on factors including their income and up to 20 per cent would be at a higher interest rate, Mr Pero says.

    But how sensitive to interest rate hikes are those with mortgages?

    Household debt was now more than 130 per cent of an average household's annual disposable income, from about 65 per cent in 1991 as lower interest rates meant people could better service debt.

    "The debt servicing costs. . . are currently around their average level for the last 10 years, even though that stock of debt has increased quite markedly," Mr Drage says.

    "Overwhelmingly household debt is dominated by housing or mortgage-type debt," he says, adding that the total value of mortgages was increasing by about 16 per cent a year.

    As Bank of New Zealand head of market economics Stephen Toplis says, property booms don't last forever.

    "We think there is a very real risk that the combined influence of current strong supply growth, rising interest rates, the soaring New Zealand dollar and a reduction in net immigration may soon take the heat out of this sector."

    That might be when Dr Bollard's day of reckoning arrives with an increasingly likely hike in the OCR.

    Have a Happy New Year.


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