Archive for September, 2009
Reserve Bank Governor Alan Bollard stated that “we have a hell of a long way to go” to have our economy recovering. I set out all of the economic drivers that I like to follow and my comments on them below. On balance and my nutshell summary is that the factors are pretty neutral to leaning towards minor house price growth at present.
Affordability continues to be an issue. Investors geared at over 65% LVR with more than 2 houses are definitely not flavour of this month, however new immigrants with money, high income earners buying their first investment property or own house are highly desirable and the banks may even consider lending to these people at higher than 80% Loan to Value Ratio. I have attended some of the Barfoot auctions this month and what I have observed is that property in the higher sought after Grammar zone (typically in Epsom, Parnell, Remuera and parts of Mt Eden) are going for big money and many of the buyers are Chinese. Epsom is already one-third Chinese and with education being so vital in Asian culture, it has an amazing lure with its decile 10 glamour schools: Auckland Grammar School (Boys), Epsom Girls Grammar School, Epsom Normal Primary, Epsom Normal Intermediate, Cornwall Park Primary, Kohia Terrace School, and perhaps the country’s two finest girls private schools in St Cuthberts College and also Diocesan School for Girls are both in Epsom. On the whole this is a neutral factor.
Interest Rates are an interest proposition with a steep yield curve at the moment. We have typical floating rates depending on lender ranging from mid-high 5%s to mid 6%s. However the 5 year fixed interest rates are well over 8%, the 2 year rate has gone up by 1% over the past 6 months to be around 6.7%. One year rates remain very low at around 5.6%. Comparing the one year rates now to those of 12 – 18 months ago is fascinating – they are around 3% cheaper! With floating rates being typically 4% or more cheaper in the same period, it is much easier to service loans and other debt obligations. This is helping the mindset of home owners and investors. Finance is still hard to get though, so I view this as more of a neutral factor, and I see interest rates going up too.
Migration is increasing with August showing arrivals exceeding departures by 1,610. For the 12 months to 31 August 2009, the net migration gain was 15,642. Even better is that we are on track to exceed 20,000 for the calendar year to 31 December 2009. This is particularly good news for the Auckland region that traditionally takes around 70% of immigrants into our country. House prices typically go up with more migration, as this gives more demand for housing.
Supply/Demand Balance – this measure is an interesting one and is actually region specific. Dwelling consents are still at very low levels. With the natural growth rate increasing in New Zealand’s population, net migration increasing, the average household size staying much the same, we have a strong demand particularly in Auckland and Wellington. Conversely the supply is not there with relatively few consents for new houses. Strict council rules, length of time to get resource and building consents and of course the difficulties in obtaining finance from risk shy lenders, mean that supply is low. We are likely to see demand outstrip supply for sometime yet. This factor points to house prices moving up.
House sales & Building Consents – the number of house sales varies greatly across regions in the country. In general there is an undersupply of listings, so the number of sales are lower than usual, but the houses are selling faster than usual. The number of building consents remains very low. These factors put pressures on house prices to go up.
Liquidity – this is an interesting factor as the growth in private sector credit relative to GDP is examined to assess the availability of credit in assisting the growth of the property market. The credit growth is extremely low, and in light of Lehman Brothers collapse and the difficulties faced by AIG and a plethora of other leading financial and insurance institutions, lenders are still nervous and getting a loan is extremely difficult (compared with how much easier it was to get a loan in 2004 – 2007).
Global Financial Issues - the property markets in the USA, UK and Australia are recovering a little bit from the decimation and carnage that there was in the UK and USA, and Australia who not only ever had a recession, but they never had one single quarter of negative credit growth, is showing some signs of upward price movement. These countries like New Zealand all have their own economic challenges and are faced with high level of debt, and have no overwhelming reasons or pressure for house prices to boom. There are still difficulties and expenses in obtaining credit from offshore. This is a negative factor still on New Zealand.
I believe that weighing all these factor together that NZ will achieve 4% house price growth in the year from 1 July 2009 – the 30 June 2010, with Auckland outstripping this largely on the back of northward drift to the ‘big-smoke’ and immigration to achieve 6 – 7% growth in this period. Rents in the North Shore and Central Auckland to increase 3%, and in other areas to stagnate, with the exception of rents falling 1.0% in South Auckland and Papakura, as they have a higher percentage of unskilled (and unemployed) people than other areas of Auckland, and the dark hammer of unemployment hits unskilled workers harder.
Introduction
This month has been an interesting one with the market showing some signs of life, and strong demand and rent increases coming through in the desirable areas of the Auckland’s North Shore and Central and Eastern Beach suburbs (St Heliers, Kohimarama, Mission Bay & Orakei). The house prices are climbing in Auckland, albeit on thin volumes. The number of days to sell a house has improved too (down to just 30 days).
Fixed mortgage rates are continuing their ascent, but we now have extremely low floating interest rates. I cover off what I think investors and borrowers should be doing later in this article, after something that is worrying me a bit at present: New Zealand’s debt.
Government Debt
Unemployment is continuing to rise and manufacturing firms and exporters (including tourism operators) continue to do it tough. Whilst our economy is stabilising, we are not going to do an Iceland and have our sovereign nation bankrupted.
New Zealand is quite different to Iceland as whilst we have a lot of foreign debt, it is more of a hill, as opposed to the mountain that Iceland had.
If you look at New Zealand’s Financial Statements – as a registered company in the US (Company Number: 216105), we (NZ) have to file annual audited accounts, which are provided to the Securities and Exchange Commission, and stored here: http://sec.gov/Archives/edgar/data/216105/000110465909016652/a09-7159_1ex99dd1.htm you will note that NZ has $31.9 billion of direct public debt (ie. Government debt) as at 30 June 2008. Unfortunately this number is now rising and apparently the Government is overspending to the tune of $200 million per week. That’s right, New Zealand is making a ‘loss’ of over $10 billion/year, and is forecasting to make losses until 2020.
Whilst some of you may not care, for our children and grandchildren’s sake I think we should care. This is far too much. We need to ramp down Government services and stop the overspending. Obviously after several quarters of recession, the policies of the previous Government and the global financial crises, we have a greatly reduced tax take. Surely the corollary of this must be to reduce expenditure. Sure it may mean that we have to pay more in ACC premiums, more tolls on roads, to use our national parks, but doesn’t this beat having such high debt amounts to service. Or does having such high debt not really matter. There are some conspiracy theorists out there that say this doesn’t matter, the money system we have is a crock, and just a system of control designed to benefit very few. They would tell you to watch Money as Debt:
As for me I think the system isn’t that bad, and that increasing your financial and property knowledge is directly proportional to your financial and personal success. What I am uncomfortable with is New Zealanders collectively owing $303.5 billion dollars. Refer to the C3 Monetary and Credit Aggregate table shown by the Reserve Bank here:
http://www.rbnz.govt.nz/statistics/monfin/c3/data.html
This page is updated monthly with new statistics so you too can monitor New Zealand’s level of debt.
Property Market Drivers
The property market drivers that I rely on are:
- Affordability
- Interest rate levels
- Migration
- Supply/Demand balance
- House Sales and Building Consents
- Liquidity
- Global Financial Issues
I will cover off each one next week in another blog though.