David Whitburn

The New Zealand property market is in for challenging times over the next little while.  Whilst most investors I talk with believe the boom is over, there are still a few holding on to the hope that this boom will continue.  Whilst I don’t like shattering people’s dreams, I do like to share my well considered opinions.  The boom is over because the economic statistics tell us so, and we know that the property market is cyclical.  Sure we have some pain to go through, and those over leveraged investors are best to reduce debt asap (which may include selling properties now).  Properties values are heading downwards. I think that 2008 will eventually turn out like 1998 and be a negative equity year.

Statistics

Here are some of the facts. The REINZ nationwide median sale price in November 2007 (the peak of the cycle) was $352,000 (on 7,837 and $3.28 billion of sales).  In January 2008 despite the great weather that this month virtually always provides, we have the REINZ nationwide median sale price as being $340,000.  This is a considerable decline when paired with the REINZ reported 32.1% decline in the volume of sales in the latest quarter.  Auckland’s largest Real Estate Firm Barfoot and Thompson said that last month (January 2008) was their worst January since 2001.  They sold 604 dwellings which was a decrease from a year earlier by an appalling 42%. The average sale price fell to $518,000 from $559,000 in December.

Immigration numbers are nowhere near as strong as they used to be and currently are on track to be just half of what the 10 year average migration rate has been.  Interest rates are extremely high and well ahead of the weighted (across floating, 1, 2, 3, 4, 5 year fixed terms) 10 year average interest rate of 8.0%.  Floating interest rates are around 10.75%, and the various fixed rates are high too (typically 8.8 – 9.6%).

American Market

There is strong evidence that the American Housing market is under severe pressure with subprime (low doc, no doc) lending that often had low introductory rates resetting onto standard rates.  Loans of $400,000 where the applicant on a single income could self declare their income (to a level their mortgage broker told them would get them their house) or not have to declare their income would often have an interest rate of 4% for a couple of years.  This in itself was usually fine to service, but now the introductory periods are coming up and the interest rates are falling between 7.5% and 12%, and many tens of thousands of buyers cannot keep up with their commitments.  Just as to how far the ripple effect will reach is an interesting question – we will have to watch eagerly.

The issue is the huge amount of debt injected into the housing market – this empire of debt America has, causes me concern, as I think it is unsustainable and reckless lending.  But then again I may be being overly conservative.  Watch this space over the coming year.

Now is not the time to go out and buy lots and lots of properties – the market will go down in value.  The boom is over and there is going to be little pressure on prices to go upwards for a while.  Businesses will hurt more and more and unemployment will head far higher over the course of the year – particularly in unskilled jobs, and in the construction sector.

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