Hi Guys
Kieran Trass's comments for 2004 in Saturday's NZ Herald.
End of the boom?
10.01.2004 - Late last year, buyers and sellers played a game of tug-of-war, slowing down activity in the real estate market after a period of phenomenal growth. Everybody is wondering where it's heading now. KIERAN TRASS shares his views on what's in store for 2004.
While the key market drivers I refer to below still indicate that their respective strengths remain relatively intact, I see a collective trend emerging that proves the property cycle is nearing the end of its boom phase.
Net migration/household formations.
We can now see a changed trend with less migrants arriving and more Kiwis leaving New Zealand, resulting in fewer new household formations.
New Zealand is an attractive place to live but it's starting to lose some of its shine, because:
a) The world is becoming more acclimatised to living with terrorism, so New Zealand's safe haven status value is diminishing.
b) The country's climate is not the best in the world.
c) The New Zealand dollar is strong, making New Zealand a less desirable destination for creating wealth.
d) We are still a tiny economy (by international standards) and our economy can be somewhat volatile as a result.
e) Rents are expensive, compared with Australia, for example.
f) Incomes are low, compared with Australia.
Incomes
Incomes have a major impact on not only the desirability of New Zealand as a place to work and live, but also on the affordability of buying and renting property. Incomes are not growing strongly enough to compensate for increased living expenses.
Rents
These are reaching unsustainable levels in some parts of Auckland.
Property values
These are achieving unsustainable growth levels in some parts of Auckland.
Affordability
This is suffering as a result of the above-mentioned income, rent and property values.
Number of people per household
The number of people per household is set to increase markedly as a result of diminished affordability (think back to the South Auckland overcrowding seen in the mid-1990s as a result of rents being unaffordable - ie multiple families sharing houses to reduce living expenses).
Return on investment
Returns on residential investments are now reaching low levels and it is becoming much less attractive to invest for the fundamental return obtained from rents. Returns are only being artificially buoyed by the potential of capital gains.
Alternative investments
Other investment vehicles are starting to compare favourably with property returns. You only have to look at the NZSX 50 index to see it has recorded a 20 percent increase in the last 12 months or so. As soon as property starts to consistently show lower growth than it has over the last two years then alternative investments will become much more attractive.
Construction
We are seeing high levels of construction and it is still cheaper right now to build rather than buy. But expect this to reverse early in 2004 as construction costs continue to come under strong upward pressure.
In summary, I don't see a property crash coming but collectively these factors give a snapshot that indicates the property boom will end in 2004. Contrary to popular opinion, the boom is not immediately followed by a crash in values but rather a declining percentage increase in house values followed by a plateau in values.
Regards
Kieran Trass's comments for 2004 in Saturday's NZ Herald.
End of the boom?
10.01.2004 - Late last year, buyers and sellers played a game of tug-of-war, slowing down activity in the real estate market after a period of phenomenal growth. Everybody is wondering where it's heading now. KIERAN TRASS shares his views on what's in store for 2004.
While the key market drivers I refer to below still indicate that their respective strengths remain relatively intact, I see a collective trend emerging that proves the property cycle is nearing the end of its boom phase.
Net migration/household formations.
We can now see a changed trend with less migrants arriving and more Kiwis leaving New Zealand, resulting in fewer new household formations.
New Zealand is an attractive place to live but it's starting to lose some of its shine, because:
a) The world is becoming more acclimatised to living with terrorism, so New Zealand's safe haven status value is diminishing.
b) The country's climate is not the best in the world.
c) The New Zealand dollar is strong, making New Zealand a less desirable destination for creating wealth.
d) We are still a tiny economy (by international standards) and our economy can be somewhat volatile as a result.
e) Rents are expensive, compared with Australia, for example.
f) Incomes are low, compared with Australia.
Incomes
Incomes have a major impact on not only the desirability of New Zealand as a place to work and live, but also on the affordability of buying and renting property. Incomes are not growing strongly enough to compensate for increased living expenses.
Rents
These are reaching unsustainable levels in some parts of Auckland.
Property values
These are achieving unsustainable growth levels in some parts of Auckland.
Affordability
This is suffering as a result of the above-mentioned income, rent and property values.
Number of people per household
The number of people per household is set to increase markedly as a result of diminished affordability (think back to the South Auckland overcrowding seen in the mid-1990s as a result of rents being unaffordable - ie multiple families sharing houses to reduce living expenses).
Return on investment
Returns on residential investments are now reaching low levels and it is becoming much less attractive to invest for the fundamental return obtained from rents. Returns are only being artificially buoyed by the potential of capital gains.
Alternative investments
Other investment vehicles are starting to compare favourably with property returns. You only have to look at the NZSX 50 index to see it has recorded a 20 percent increase in the last 12 months or so. As soon as property starts to consistently show lower growth than it has over the last two years then alternative investments will become much more attractive.
Construction
We are seeing high levels of construction and it is still cheaper right now to build rather than buy. But expect this to reverse early in 2004 as construction costs continue to come under strong upward pressure.
In summary, I don't see a property crash coming but collectively these factors give a snapshot that indicates the property boom will end in 2004. Contrary to popular opinion, the boom is not immediately followed by a crash in values but rather a declining percentage increase in house values followed by a plateau in values.
Regards
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