Double digit house price rises not the norm
Friday, May 15th 2009, 11:24AM 
15 Comments
What drives the property market?
There is plenty of commentary around at the moment about the state of the property market and where it is going. Much of it, in my view, is misguided.
Let’s sit back for a moment and think about what the key factors are.
Three of the biggest are: mortgage rates, immigration and affordability.
I would argue things like the United States economy, mortgagee sales and what farmers are doing has a marginal influence on the market. Indeed, using these factors as arguments for where the market is heading is misleading.
Mortgage rates are a critical factor in the affordability of property. Right now rates are at or near historical lows which help make the property equation stack up.
Buyers in this market are getting a real leg up with low rates and people with existing debt will see their servicing costs come down as they roll over loans. The Reserve Bank has made it clear it sees interest rates staying down for some time, which must be a plus for the market.
History shows us that immigration numbers and the housing market are closely related and tend to move in tandem. The basic logic, which is hard to argue with, is that when people move to New Zealand they need a roof over their heads. Thus, supply of property has to increase.
Right now there is an uptick in immigration numbers which should help stabilise at the least and even support house prices.
The other positive factor for the market now is one which doesn’t generally get a lot of air time and that is consents.
It’s like immigration. With a growing population base the country needs more houses. Right now, new consent numbers are low. Basic supply and demand economics says that in such a situation, house prices will rise.
The big unknown at the moment is rising unemployment.
And finally, a little reality check.
Double digit returns aren’t likely to be widespread in the property market for some time. So what? They shouldn’t be, and nor should there be an expectation that there should be. The risks of rental property investing aren’t high enough to justify double-digit numbers.
Secondly, people shouldn’t look at the residential property market as one big generic asset class. It is made up of lots of sectors and segments. You can break it down in a myriad of ways from coastal to apartments; from lower value rental property to high value prestige properties; from urban to provincial. Each of these markets is different and should be understood.
Many investors are jumping into the market, not for massive quick capital gains but for low risk, cash flow positive properties. This is quite understandable considering some of the other investment options available to them at the moment.
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Comments from our readers
On 15 May 2009 at 6:21 pm Grant said:
The property prices in my mind are influenced by supply and demand ie. when everybody leaving this country for them greener hills there was no demand for properties now that they are returning the demand goes back up. Remember when the two towers were destroyed kiwis came home in droves that what pushed the prices up. Another demand is split marriages where they lived in one home now need two.
Do you think I could become an economist
On 15 May 2009 at 6:23 pm Marty said:
looks like Brendon got out of the wrong side of bed this morning...what a grouch... On 15 May 2009 at 8:09 pm Radek said:
All the factors named above are correct, but closely connected with performance of economy; less money, less sales, lower prices. Add the fact 1: like it or not,NZ economy is in tow of global economy, which, as anybody knows, is in crisis. fact 2: historically proved, impact of movements in the world shows up in NZ with significant delay. Fact3: the slump will most likely continue for a while. Conclusion : What's a problem? This is absolutely normal and will change in time, however, not that soon as many "experts" expect. On 15 May 2009 at 9:47 pm Miles said:
The housing boom price rises were led by cheap credit. That credit support has gone down the gurgler for a long time to come. International investors lost trillions which are lost forever. House prices generally follow the economy -somewhat obviously. Where is that going? Probably down the same gurgler. Just wait and see how far. Ten percent down so far may be the bottom; but more likely offshore recession will drag NZ down a lot more in year to come. My bets are on more down side until mid 2010 than upside for 3.5 years after that according to expert Kerr Nielsen. I expect that house prices will drop by a further 10% to 20% making 30% down in total. REINZ / QV figures will one day have to catch up. So expect a big correction in their figures in a short period to get rid of the losses. Feel sorry for buyers who believe the current story as pushed above. On 15 May 2009 at 9:49 pm Miles said:
305 years is 3.5 years On 15 May 2009 at 10:34 pm Arthur said:
Hello
I think real estate prices have not yet had the full correction downwards that must happen.
The low OCR is a distortion and interventionist. The current rates cannot be sustained past the short term. The relief for borrowers is temporary.
Property investors (and others) have borrowed way to much money from overseas lenders for our little economy to repay. The assets are largely of sub prime grade as the upward price movements were completely out sync with incomes.
It would be different if the cheap money had been channeled into business that sold goods overseas and earned income for NZ, but the cheap money funded real estate growth and speculation that has been largely outside the tax net. One would think rents would be lower as a result of the lowest OCR in history, but from what I know landlords obviously see the current OCR as a windfall.
Remember that many many savers have had their incomes savaged by the RBNZ OCR reviews, effectively the RBNZ is stealing money from savers as the current value RBNZ places on borrowed money is well below true market value. It would be like RBNZ intervening and legislating landlords rental incomes to 25% of current returns.
Savers are taking their money out of system and putting it into business bonds at 8 to 10 %, the true value of borrowings in NZ. Those funds are locked in, well past October when the Government Guarantee scheme finishes which is diminishing the money supply. Someone above quoted the supply and demand cycle.
The Government on behalf of NZ now needs to borrow overseas to fund infrastructure projects brought forward to keep Kiwis and all the immigrants we have imported in work. That is so they can keep repaying their individual debts to the overseas lenders. That means the value we receive for the tax we pay is eroded as a portion of every dollar pays interest, directly related to individuals borrowings.
It is a pity Helen Clarke and Dr Cullen could not count. No wonder Helen was so keen to get out.
Arthur
On 15 May 2009 at 11:40 pm Jim said:
Is this just another example of wishful thinking? People need to have money to pay for the excessive price of current housing (the result of the double digit growth mentioned. As the majority of householders are already seriously in debt, interest rates are relevant. But for the next 20 or 30 years. Do you really believe that with the quantitative easing (money printing) all over the world that interest rates are not going to resemble the 1970's. Astute property buyers consider all the facts, not just those that suit a particular view. On 16 May 2009 at 8:23 am marilyn said:
Arthur, not a truer word said - good comments. On 16 May 2009 at 3:23 pm Evie said:
Hi there, looking forward to reading more points of view on this topic (newbie ---> learning, observing and all the good stuff). Thanks!! On 16 May 2009 at 6:21 pm Seraj said:
Totally agree with Brendon!! This property investing magazine is no different to every other business out that preys on the uneducated. Wishful thinking plus reading a glossy magazine like this is what probably pushed the speculating bubble even further!
Try the reserve bank websites and do some real research for yourself online for free, which would be at least x1000 times better than reading these ridiculous emails and magazine!
Seraj
On 18 May 2009 at 9:39 am david said:
An interesting theory on double digit returns.
Risk and Reward - Your comment that "The risks of rental property investing aren’t high enough to justify double-digit numbers". Risk is an interesting concept and can be very subjective and it all about perception of risk. Some investments that have not been seen as a risk eg. finance company term investments, have turned out to be far more risky than the 2-3% return premium they promised.
In terms of property, I agree with you that property investment doesn't justify double digit returns BUT I would suggest that a majority of the NZ public who have funds to invest would disagree. What does this mean?
It means that double digit returns ARE available in property currently even though you could argue that this kind of return is unjustified.
Where else would you put your money in this time in the financial cycle unless you like the smell of musty money under your matress
On 25 May 2009 at 4:06 pm Simon said:
Only when nett yields are more attractive than other less riskier investments will the property market rise again. Those investing in the property market at current levels are not doing the simple math - just coz something is cheaper than before does not make it a good deal. On 28 May 2009 at 12:17 am Hamish said:
I think there will be some other bubble next, maybe gold. On 6 July 2009 at 2:06 pm JohnD said:
Property markets react more slowly to external economic conditions than shares (think heavy flywheel compared to light flywheel). People can't sell/buy houses in a matter of seconds like they can shares, and most home owners use the media as there form of economic guidance so normally don't have any great sense of what is happening as media is in the business of selling stories not producing accurate objective information for the purpose of informed decision making.
The result is U shaped recoveries not V shaped recoveries for housing markets (ref. historical house price indices). Property in N.Z will continue to decline slowly and or remain flat for a couple of years yet, and is not a good place to have several hundred thousand $$ that could be earning solid interest in other forms of investment.
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Some stat.s or evidence of research would be a healthy start. For example, wasn't a peak in the property market coinciding with high mortgage rates?? So mortgage rates being low seems not to be something that "drives the property market". I really don't know, but you seem to know less when you don't support your writing with something concrete.
Do you have anything useful to write for landlords?????
Kind regards.