Making sense of current house prices
Monday, August 9th 2010, 10:37PM 
12 Comments
It seems like we are into another round of mindless predictions about how low the housing market is going to fall.
There is no doubt the housing market is going to remain soft and subdued for a period of time – just as the Reserve Bank governor Alan Bollard wants.
Two pieces of information came out recently which make a lot of sense around what will happen.
One comes from the ASB in its quarterly confidence survey. Most people agree that there is an issue with affordability. That is when you look at the economics globally it appears New Zealand house prices are expensive relative to income levels.
However that doesn’t mean, as some have wrongly argued, house prices will fall to “where they should be”. Rather, as ASB says, house prices won’t go anywhere fast and they will wait for incomes and earnings to rise and meet them.
The other point, and one which annoys me somewhat, is that many commentators talk of the New Zealand housing market as one big homogenous market. This is rubbish.
QV provided some excellent graphs with its monthly commentary yesterday which show what has happened to houses in the main centres over the past few years. If you haven’t seen them you can find them here.
They are fascinating as they show that each market has its own characteristics. For instance Hamilton and Tauranga show similar trends, but they are different to Auckland.
It seems Auckland is far more bullish than other centres and again this comes through in the ASB survey which shows Aucklanders think their house prices will rise more than other centres.
When it comes to factors driving the market I am not sure house buyers and investors give a single thought to factors like what is happening in international markets.
They think of interest rates, rents and prices.
The one economic factor which does stand out in this market is immigration.
It is here we have seen a big change recently – more people are leaving this country – which will undoubtedly impact on the overall housing market.
This is the week of market data, which is probably why the headline hunters are out. A recurring message is that the market is slow and subdued.
What interests me is why it is like this. Investors appear to be staying in the market, some of the pressure has come off interest rates and it is considered a buyers’ market. Why then is there not more action?
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Comments from our readers
On 10 August 2010 at 5:46 am chris said:
I think you answered your own question at the beginning of your article with Bollard raising the ocr/interest rates. Besides, the housing market is terribly overpriced still and factor in rising interest rates and you have a flatening out. But if i had to come up with another explanation for the current state of the market it would be that investors are waiting for prices to drop even further still in the hope of off-setting rising interest rates. On 10 August 2010 at 9:42 am bob said:
The market has got a fair way to fall. Having spent a few months in the USA recently I can assure you their housing market is in the crapper; the newspapers each day had hundreds of foreclosures [that's the same as our mortgagee sales], the experts over there don't expect things to improve for at least 18 months. Here we have the same problems. Banks not making loans, investo rs keeping out or selling out now that the depreciation rout has gone,insecurity with people's jobs and us old baby boomers selling down and of course the Aussie exodus...My advice, is the same as drinking and driving. If you buy now you're an idiot. Have a nice day. On 10 August 2010 at 9:56 am ChrisW said:
During the period of 1996-2002 a property owned by my father increased in value by 12% in nominal terms. Of course when you account for inflation it actually lost value in that time. Fortunately he held the property for another four years to the middle of the bubble and was able to achieve an annualised return of around 4.5%. In the end he was ahead of inflation, but not ahead of the interest costs (even accounting for tax).
I think this is the situation many landlords are facing: a good 5-6 years of no capital growth. If you are holding for the very long term then you should achieve a real average return once incomes catchup, but if they don't then interest costs (and opportunity costs of simply putting your equity in the bank) make property in general (there will always be bargains, so stay sharp!) only likely to be an average to below average investment.
Cheers, Chris W.
On 11 August 2010 at 2:36 am SteveH said:
We'd better hope that home prices do indeed fall. Far too much of the country's investable capital is wasted in overpriced housing, whilst the foreign debt banks use to fund the continuing bubble remains NZ's greatest economic vulnerability. On 13 August 2010 at 10:38 am John Cooper said:
My parents bought for $25,000 sold for $645,000 thirty five years later, this will happen again unless the whole world money capitalist system falls over. Inflation the only way any Government can pay there debt, with inflation the debt you have gets smaller. Great time to be a buyer over the next year or two unless the whole money system does fall over and if that happens who really cares we will have a lot bigger problems. On 13 August 2010 at 10:59 am Christopher said:
Hard to believe that the very tiny increase in interest rates and the threat of further small increases are deterring prospective purchasers - it hasn't in the past when other factors such as confidence and and the job market are strong.The diminishing confidence will further evaporate if house prices really go through the floor so let's hope ASB is correct. Removal of the depreciation factor was not the end of the world either. Looks more like a case of batten down the hatches and ride out the storm for most of us. On 13 August 2010 at 11:03 am Miles H-R said:
The Landlord says ''many commentators talk of the New Zealand housing market as one big homogenous market. This is rubbish.''
I totally agree so why then go on to talk about Auckland or Hamilton as if each is just one market. It is not. Each city is divided up into strata based on price. Lower price properties collapsed near 30% about 18 months to 2 years ago in Auckland South. Higher priced properties did not collapse at that time. But now the recessions has a delay factor whereby business owners are really starting to find it hard going. And then higher priced investors bailed out. Many sold under pressure but not mortgagee sale. Now Terralink tells us that the higher priced family homes are making up the mortgagee sales. Of course higher priced homes being sold holds up the median and average and every other statistic which does not differentiate market segments. For every higher priced mortgagee sale, there will be many pressured but not bank forced sale. QV excludes mortgagee sales on the basis that they are not market sales meaning between a willing seller and a willing buyer. Rubbish. If you beat the bank to force you, your sale counts. If the bank beats you, the sales does not. What rubbish. The figures are distorted. The unknown is what will happen to the statistics when the pressured higher priced property sales run out in a year or two. Will the RE median / QV index drop like a stone as the various markets return to a normal balanced spread? Of course, that will merely show history well in the past which is now. That is the problem with statistics which purport to summarise combined markets based on short term monthly or quarterly change but do not adequately deal with the ''sub-markets''. The published statistics do not tell us anything. Do not rely on them.
On 13 August 2010 at 11:39 am Mike said:
to John
That works out to an annualised increase of approx 9.7%. That may be good or bad depending on which years were involved. ie in the 50's and 6o's that would be good, in the 70's and 80's that would be bad or mediocre.
On 13 August 2010 at 11:40 am Miles H-R said:
A little back-up research shows......
RBNZ Report on STRATIFIED housing prices [McDonald and Smith April 2010] states:
‘The composition of dwelling sales may also vary through the housing cycle. The portion of sales for the lower strata increased over the 2001 to 2004 period. More recently, these strata have been declining as a share of total sales. The portion of lower valued housing sales has tended to be positively correlated with differences in QV and REINZ measures of housing price inflation.’
In other words, the QV and REINZ measures do not accurately represent higher priced properties. Again, do not rely on published house price statistics. They tell you nothing especially about higher priced properties.
On 13 August 2010 at 1:23 pm Alan said:
It is interesting to read all the comments , but I believe everyone needs a place to sleep.A house is what most people what to have- to rent or own.
The market is slow , but the press have this terrbile ability to make sweeping statements that are not correct.
The market is like a box of chocolates , some hard centre,
some soft centres so sweet centres.
I am aware of properties that can return you 7, 8 or 9% return in Auckland. If that is a result of a depressed market- bring it on!
On 13 August 2010 at 1:44 pm David said:
I believe the previous commentators are simply trying to drive the market price down further. The reality is if the prices are not near where the vendors want they simply wont sell. This is one of the main reasons volumes are going down and prices are remaining relatively stable.
We will see an increase in the proportion of sales being mortgagee as the total volume reduces - again this is because there is a proportion of the market which is forced to sell.
House prices in New Zealand in general are not higher in proportion to wages compared to other places - what is different in New Zealand compared to say the UK or the US is that the bank interest rates here are much higher and principally geared towards the affordability index of the Australian wage earner - and because we are quite a bit behind that mark it seems expensive. This is what happens when the banking system is allowed to cartel - some would say even encouraged to by this government
I had a flat in Scotland - i bought it in 1985 and sold it in 2007 - the value grew by an average 11% per annum in a straight line as did much of the property in the uk - wages in the UK are not massively different from the UK - but house prices are much higher in the main centres - its the lower interest rates that drive affordability - the cost of the mortgage basically.
New Zealand home loan rates are completely out of step with everywhere else - there was no need to raise the OCR (except for the inflationary govt policies) - in fact for the good of the economy it should be sitting a 1.5% to 2% and driving down the exchange rates.
On 13 August 2010 at 5:05 pm Miles H-R said:
David says we 'want to drive prices down'. A single comment will never affect prices. We just want to know as much as we can so we can make better decisions. We also want to contribute to better understanding among all readers. Some people take just one or two influences to draw conclusions. There are many factors including the most ignored major factor being Council costs and Metropolitan Urban limits which raise house prices dramatically. Search M U L house prices.
David says 'House prices in New Zealand in general are not higher in proportion to wages compared to other places ' That differs from many commentators who say that Auckland prices are over 6 times average salary whereas the world standard is 3 times average salary. Try a search for nz house prices salary. From marketsunplugged.com/new-zealand-house-prices-more-expensive.. which concludes ''Based on the House Price to Annual Average Income ratio, NZ house prices are 48% more expensive than US homes and 39% more expensive than UK homes. The USA has the most affordable housing of the 3 nations.''
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