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Since global financial issues are important to New Zealand, it is important to keep tabs on the largest economy of them all in the United States.  One of the world’s wealthiest companies is the US Federal Reserve (no it is not Government owned like in New Zealand, Australia, United Kingdom and the vast majority of other countries).  Their chairman Ben Bernanke has huge responsibilities and has the unenviable challenge to try to resurrect the ailing US economy.  This cannot be an easy task and it must be hard for Americans to stomach the fact that it is not if but when they will be overtaken by China as the largest economy in the world.  Earlier this month China overtook Japan as the second largest economy in the world.

Ben Bernanke - US Federal Reserve Chairman

Last month Ben Bernanke told a congressional committee that the economy was “unusually uncertain”, however importantly he did not predict that it would fall back into recession.  Who am I to argue against Ben Bernanke on the US economy – so I am not panicking and can’t recommend that you sell your assets know.  Far from it, as there are some very good opportunities to those who have the cash to buy them.  I have seen a mentoring student purchase a commercial property at half of its CV on a vacant property, and another student buy a residential rental property at $200,000 below its CV (just over 30% below value its independent registered valuation), and there are some exciting businesses to purchase shares in with different degrees of volatility.

Then earlier this month the US Federal Reserve said it would use the proceeds from its own investments in various mortgage securities to buy longer-term US Government Treasuries.  As a result significant amounts of money will be pumped in to bolster the US economy and companies like Apple and General Electric will continue to enlarge their already massive treasure chests.

Bernanke’s four options for the US economy

At the annual Jackson Hole (Wyoming) symposium yesterday with central bankers, Bernanke said the recovery had slowed to “a pace somewhat weaker” than forecast.  He said that there are four “unconventional” options for the kickstarting of growth in the US economy.  With the US June quarter GDP growth at just 1.6%, a worsening balance of trade position, and continued high unemployment statistics, it appears that there will be a long hard road to recovery over the next couple of years for the United States of America.

What option or combination is yet to be seen.  The monetary policy intervention will continue and it has to.  Lets hope the US can recover and that this will spread onto Europe, which is not in great shape either.  As a global financial markets are facing challenging times.  There may be a positive spin-off to this bad news, if you are a borrower in New Zealand in terms of lower interest rates.  It is likely that the US medium and long term swap rates will stay at their current low rates for a significant period of time.

There’s a lot happening with interest rates at present, with many severe interest rate movements.  Also I have heard financial commentators on the radio, read in newspapers and seen on TV about how interest rates are going up, interest rates are going down and interest rates are going to stay relatively stable.  This is causing confusion amongst many borrowers.

The thing is all the commentators may be right.  This is because there is no such as the one interest rate.  For example if you went to your lender to get a loan right now, if approved you would be offered the choice of a floating or fixed rate.  If you choose a fixed rate, you would be offered the chance to fix this for 6 months, 1 year, 2 years, 3 years, 4 years, 5 years and if you are with BNZ, you have the additional choice of a 7 year fixed interest rate for maximum certainty.  For my overseas readers, we sadly do not currently offer the 10, 15, 20, 25 and 30 year fixed interest loan periods that many other developed countries and in particular the USA have.  I am hoping for a 10 year fixed interest rate in the near future – but I got told by a leading banker that this is unlikely.

Current interest rates

Leading financial website Tarawera Publishing Limited lists all interest rates from their providers.  I would highly recommend all serious property investors bookmark their interest rates page:  http://www.mortgagerates.co.nz

The average floating rate across all major banks is a smidge over 6% (when acknowledging the Westpac Choices rate discount).  The fixed rates for when you lock in a certain defined interest rate for a set period of time, have a strong yield curve currently.  That is the rates of interest you pay as the length of time you fix go up sharply.  It has to be noted that this yield curve is now flattening (visually you can see this here).  Floating rates have gone up a bit, and the longer terms rate down a lot lately.

From last Thursday to today all the major banks dropped their 2- 5 year fixed interest rates.  We saw a week or so after the Official Cash Rate was put up 0.25% by the Reserve Bank that the floating rates went up by around 0.25%.  The OCR doesn’t strictly control interest rates.  It however is highly influential on short term (variable, 6 month and 1 year fixed rates).  On longer term fixed rates (3, 4  and 5 year) it is not very influential at all.

These longer term fixed rates are driven more by the returns NZ term deposit savers expect, and thanks to the Reserve Bank’s rules in June 2009, banks are not permitted to raise as much ‘hot money’ that they got from institutional foreign lenders – this was short term money typically rolling over every 90 days.

What Borrowers Should Do?

As mentioned in previous blogs on financial topics, do not have all your borrowings on one rate. Split your borrowings across a variety of interest rate periods.  Just like I advise having different banks as your property portfolio grows (to avoid the one bank trap – thanks Kieran Trass for teaching me this in 2003), it is imperative to split your borrowings at times like this.  Consider having a property schedule like I do and all my mentoring students do, where they have the loans on their properties set out including the fixed period expiry date.  Then graph this to split your borrowing and have an interest rate averaging strategy (“IRAS”) for your borrowings.   Imagine if you have total loans of $600,000.  You split them in this way:

1. $100,000 floating at 6.00%
2. $100,000 1 year fixed at 6.50% fixed interest rate period expiring 5 July 2011
3. $100,000 2 year fixed at 6.90% fixed interest rate period expiring 5 July 2012
4. $100,000 3 year fixed at 7.30% fixed interest rate period expiring 5 July 2013
5. $100,000 4 year fixed at 7.60% fixed interest rate period expiring 5 July 2014
6. $100,000 5 year fixed at 7.80% fixed interest rate period expiring 5 July 2015

In one years time your loan when the one year fixed rolls over, ie loan 2, you fix this loan for 5 years so it expires on 5 July 2016.  That way you have 6 loans all expiring at different times.  This does give you some protection in that if interest rates move up suddenly by 3% in one year (unlikely but possible), you only suffer an average rise of 0.5% in this way (as opposed to suffering all 3% rate increase if you were floating).  Conversely if interest rates fall 3% in one year, you would only get 0.5% saving, than if all your interest rates were floating.  This IRAS also makes choosing your next interest rate period quite easy!

Now of course life isn’t that simple and you can’t expect to be able to do this exactly – I don’t.  In fact like my mentoring students who I professional advise I am overweight to loans expiring around March 2014.  I broke this IRAS when the 5 year interest rates were so fundamentally cheap in March last year – I just couldn’t help myself!  The result of this is the saving of hundreds of thousands of dollars in client wealth from the number of people I was able to convince 6.5% for 5 years was a great deal.  It wasn’t a hard sell either – the catch is you have to follow financial cycles and interest rate movements.

Issues

There is a risk of a double dip recession.  Lets face it, whilst we are out of a recession the market is hardly booming.  I see Mortgagee Sales slightly rising, the number of days to sell a house rising, more fear in the market as to house price drops owing to fears investors will sell up with reduced returns thanks to the ETS, GST rises they cannot pass on (residential rental income is excluded from GST, as are interest costs, but rates, repairs & maintenance, property management fees etc are all subject to the GST increase).

With floating rates rising and scheduled to rise over the next 18 months, their may be some benefit fixing your rates.  The 4 and 5 year rates at around 7.5% – 7.85% now are looking more attractive (they simply weren’t at 8.5% or so).

The 2 and 3 year rates at 6.74% – 7.3% are other good possible options.  No-one has a crystal ball.  I think house prices will continue their slight decline to be down around 5% for the calendar year 2010.  This is on thin volumes too.  There is no doubt that we are in a property market downturn stage of the property cycle.

Talks of a recovery are too swift.  You only need to drive around Albany, down Wairau Road, around the back of Lynnmall in New Lynn, along Marua Road and to talk to commercial property investors and agents, look at the share price and annual financial reports of the listed property trusts to see that the commercial property market is struggling.  Taking depreciation off commercial property owners (including many owner occupiers) as well as residential property investors hasn’t helped things either.

Without trying to sound too special, I did say fix your borrowings last March in my blog titled Why are you floating – FIX LONG NOW!  If you didn’t consider my opinion and thought that you could outsmart the financial markets, and were proved wrong, you may have cost yourself and your families many thousands of dollars in extra interest paid to your bank.  That is ok, everyone makes mistakes including me.  However there is little point trying to fix it by floating everything now.  Spread your risk and spread your borrowing across a variety of interest rates, floating and various fixed terms.

Disclaimer:

The information contained on this website and from any communication related to this website is for information purposes only.  David Whitburn, Iodide Limited or entities owned, controlled or associated with David Whitburn (“David Whitburn entities”) do not hold themselves out to be providing any legal, financial or other advice.  David Whitburn entities do not make any recommendation or endorsement as to any product, investment, advisor or other service or product or to any material submitted by third parties or linked to this website.  Furthermore, David Whitburn entities do not offer any advice regarding the nature, potential value, viability or suitability of any particular investment, security or investment strategy for you or your needs.

The material on this website does not constitute advice and you should not rely on any material in this website to make or omit to make any decision or take or omit to take any action.

Before I jump into my next blog on New Zealand house prices, we have scored a remarkable 1-1 draw against Slovakia.  The highlight for me was the perfect Shane Smeltz cross and then a powerful Winston Reid header to score this vital goal in the World Cup, which meant that the mighty All Whites claimed New Zealand’s first ever FIFA tournament point.  I’m supporting our country in the football World Cup, and know most readers will be doing so too.  Our next game is at 2:00am Monday 21 June against Italy – thank goodness for replays and MySky.

Now it’s time to review what the market has been doing recently.  Here are the latest house prices to May 31 as reported by the Government Valuation agency, Quotable Value.  Over the past 12 months from 1 June 2009 to 31 May 2010, New Zealand’s average house sale price has gone up by 5.6% to $403,070.  This is an interesting statistic as it shows a decline in the rate of annual change, meaning last month nationwide house prices fell.

It was the first decline in the annual change since March 2009, since the rate of annual change was 6.1% to in the 12 months to April 30th.  Nationally, values are now 4.1% below the market peak of late 2007, which is also down from the 3.9% reported from the 30 April 2010 statistics.

Regional Breakdown

My prediction is for a cold winter both temperature wise and house price wise.  The Reserve Bank is raising the OCR which will cause interest rates to eventually rise relatively sharply, and credit criteria with our lenders is very tough, especially when compared to the prevailing conditions of late 2003 – early 2007.  There is a lot of fear and uncertainty around still in light of the continuing global financial crisis, particularly in light of Greece being downgraded to ‘junk bond’ status and fears of defaults by large banks and countries in the Euro zone.

Where are we in the Property Cycle?

I would note that we are in the downturn phase of the property cycle, and there is still much more time to go.  Property market researcher Kieran Trass and Author of Grow Rich with the Property Cycle (whom I worked with and got a lot of advanced property investment mentoring from, in 2003 – 2004), showed me research that every property slump or downturn, laster longer than the boom immediately preceeding it.  Leading economists from ANZ National Bank Ltd – Khoon Goh and Chief Economist Cameron Bagrie have written and spoken in the past comparing the events of the last 15-20 years, including the last two property cycles.  They have predicted this downturn to last for several more quarters.  I am picking the recovery to begin in late 2012, and currently I predict that the next boom will begin in late 2013.

This will happen on the back of house prices reducing very gradually across the country over the next part of the year. Then wage inflation will help, combined with increased immigration (and indeed internal migration will continue to help Auckland), easing bank credit criteria once the global financial crisis is over, simple supply and demand with the under-building of houses (especially in Auckland where the majority of immigration is to), affordability easing in slight of slightly lower house prices & increasingly higher wages, and higher rents.

Saturday 29 May 2010

8:30am start to 6pm finish (registrations from 8am)

Parnell Jubilee Hall, 545 Parnell Road, Parnell, Auckland

The 2010 Annual Budget has just been presented and it implements the largest tax reforms New Zealand has seen in 25 years.  To arm you with the knowledge and tools to succeed in light of the Budget and in today’s market, the not-for-profit Auckland Property Investors’ Association (APIA) have a 1 day seminar BUDGET BUSTER 2010 – Strategies for Today’s Market with tickets at just $49.

The speakers include multiple best-selling Author and NZ Property Investors’ Federation Vice President Andrew King, who provides a State of the Property Investment Nation address, then sets the theme for both newer investors and more experienced investors with substantial portfolios.  APIA’s Treasurer & Chartered Accountant Ann Loudon has the all important topic of tax changes to go through, particularly in light of the depreciation changes and the taxation treatment of LAQCs to have to become aligned to Limited Liability Partnerships.  APIA’s Honorary Solicitor & Property Lawyer Tony Steindle then talks about structures, including the legal aspects of the Limited Liability Partnership, and APIA Vice President, Property Mentor & Trust Lawyer David Whitburn talks about what to buy in today’s market, how to buy it and how to analyse just what is a good deal or not.  APIA President & former NZ Mortgage Broker of the Year Sue Tierney then talks about finance in light of the turbulent global financial crisis we are in, particularly with the highly indebted European Union countries and the relevance of this to New Zealand.  ANZ Mobile Mortgage Manager Vanessa Murch then covers off financing in New Zealand, including why fixed interest rates are so high in comparison to floating loan rates and just how we get our loans approved.  In case this wasn’t enough content, we provide further value to you in relation to tenancy management with APIA Board Manager and Principal of leading boutique Property Management Firm Corinthian Limited Jan Galloway, presenting on how you should manage your property to get the best tenants and lowest vacancy rates.  This is combined with a presentation by Tenancy Practice Lawyer Scotney Williams, giving his expert advice on the Residential Tenancies Act including recent times and also proposals to reform parts of it.

So don’t delay, BOOK YOUR TICKET for Saturday 29th May at the Parnell Jubilee Hall by emailing admin@apia.org.nz now.

We are in a very interesting phase of the property cycle at present.  There is no mistaking the fact that we are still in the downturn phase of this current property cycle.  New Zealand business confidence has not returned, there is an international environment of some fear with Greece, Spain, Portugal, the State of California in the USA, all having serious credit default issues.  Employment figures and the amount of mortgagee and indeed fire sales are hardly rosy news for the property market right now.  What’s worse is that there is a lot of fear in the market particularly amongst property investors with interest rates forecast to rocket up and uncertainty over tax changes.

As a result there is little wonder that house prices are slightly reducing, and the number of days to sell a property has been increasing in many areas across the country.  Uncertainty creates fear, and the manifestation of this emotion is to make excuses to defer a property based decision (such as buying or developing an investment property).  I think that we are in a W shaped recovery, and we are heading down towards the second V (of the W).  Fortunately this V is less unpleasant than 2008′s deep V, that we recovered from in 2009.

Revenue Minister Peter Dunne’s Comments Today

There is currently a lot of conjecture about just what the Government will do on 20 May 2010 in the budget.  Peter Dunne has suggested to a meeting of the Internal Fiscal Association at Christchurch (as reported in the NZ Herald), that:

This is not an attack on landlords, as some have protested, but a rebalancing act designed to address the concerns highlighted by both the Tax Working Group and the Governor of the Reserve Bank over the years about distortions favouring property investment over other forms of investment

There are also likely to be lower personal taxes across the board – not just for the top end of the income scale as some allege – to encourage productivity, investment and saving.

The proposal that GST be lifted to 15 per cent, would only go ahead if appropriate compensation was provided for those who need it, while no exemptions for specific items would be introduced.”

Anti-property commentators like Bernard Hickey will be very happy to hear of these tax changes, but still will no doubt be disappointed that the changes didn’t go far enough!  That said we all need to wait and see what the budget holds for us.  I agree that there needs to be a balance, but the reason for the perception of property investment being the best asset class in New Zealand is only a comparative one.  There is significant under performance in our shares and managed funds.  Some of this is indeed not helped by Government policy.  If we had a company tax rate lower than that of Australia and other countries in the world would we have had so many of our companies delist from the NZX.  Being a smaller country means that we cannot really afford to lose Nufarm, Fletcher Forests, Fletcher Paper, Fletcher Energy, Lion Nathan, companies have reduced the available pool of investment.

The simple fact is that the Australian Share Market is a much better performer than the New Zealand Share Market with better opportunities in for diversification, and in general growth.  Additionally the Australian Property Markets have also risen faster than those in New Zealand – that is capital growth rates are slightly higher than in New Zealand.

So why are so many bashing property?

Sadly it is all too common in New Zealand that if someone or something does well we try to knock it down a peg or two, to become “normal”.  The most unfortunate thing is that we should all be trying to bolster the lame ducks that are the share and managed fund industries in NZ.  Lets encourage and foster growth in shares and managed funds, rather than trying to slam property investors.

An example of the misinformation is that property investors make a net tax loss.  This is total fallacy.  Information sourced by the New Zealand Property Investors Federation from NZ Inland Revenue proved that in only two of the past 28 years did property investment make a net tax loss.  Yet the Tax Working Group and NZ Government still think property investors cost the country money.

Opportunities available

Whenever there is fear, there are also opportunities.  There are an enormous number of investors hurting and some banks are stockpiling mortgagee sales, as if they released them all the market would come tumbling down, along with their security values!  With less investors looking to buy, rents are likely to go up.  With some pessimistic  investors thinking that losses will be ring fenced (disallowed), and some business owners and people in general really feeling the pinch, some amazing deals have happened.  I know of an investor in West Auckland getting a property with council valuation at $625,000 (the registered valuation would be around $600 – 620K), for just $440,000.  Vendor finance, and options to purchase property in the future are becoming more popular options.

As a result I would encourage you not to be scared of the May 20th budget.  If you have a safety buffer and can get a pre-approval, consider buying an investment property now.  Get the best cashflow you can get, but buy well below value (aim for at least 20% of the value) and that way you will be buying a safe investment.

I remember what happened after September 11, in 2001, where the market stopped for a fair few days.  Some homeowners freaked and firesold their properties.  Those buying the properties had snapped up absolute bargains and also benefitted from the biggest boom in NZ history from early 2003 to mid-late 2007.

So gather all the information that you can, make the smart decisions and carpe diem.

Statistics NZ Population Projections to 2031

Statistics New Zealand have just released their population predictions out until 2031, 21 years away.  The nation’s economic hub Auckland, is projected to provide for 60% of our country’s population growth and number 1,940,000 people.  I am very excited by this as it doesn’t take a tax lawyer to work out that these nearly 2 million will need houses.  The 2006 census showed that Auckland had 1.37 million residents and Auckland is thought to have just over 1.4 million residents currently.  This means over the next 21 years Auckland will have 570,000 more people and need 211,000 more houses (assuming a 2.7 people per household ratio).  Around 2/3 of this increase is natural (from births exceeding deaths) and the remainder is from migration internally inside New Zealand to our country’s best city, or externally from overseas.  What a great time to be a property investor!

Consent issuance is already lagging in Auckland, some skilled tradespeople are going for better wages in Australia, where there is lower unemployment too.  However

North vs South Island

The population of the North Island is projected to increase by an average of 0.9 percent a year between 2006 and 2031, from 3.19 million to 4.00 million.  Seventy percent of this growth will be in the Auckland region with an increase of 1.4 percent a year.  The remainder of the North Island is projected to grow by an average of 0.5 percent a year during this period.  By 2031, the North Island is projected to be home to 78 percent of New Zealand’s population, compared with 76 percent in 2006.

Aging Population

Mortality

Enjoy the 20/20 Cricket versus Australia tonight and Sunday

HAPPY NEW DECADE

Wishing you all an extremely happy decade as we warmly welcome the “tens”.

Whether we call 2010, “twenty ten” or “two-thousand and ten”, it doesn’t matter.  What is important is that we step back and reflect over what happened last decade.  Did things in life happen around us, as if we were merely a passenger, or did we make things happen.

Lets commit to making 2010 a good year, and this decade to being an excellent one, where you right down some long term goals and work to achieving them.  If you need help in this regard, you should get a tried and tested mentor.

Contact me if you need help with goal setting and smart wealth creation (or maintenance) strategies for the coming decade.

My Highlights of the Noughties

Well another decade has come and gone.  It has been an interesting and fun one filled with highlights.  This is a log of highlights of the Noughties Decade where I name a few of them for me:

1. My Wedding to Bridget

A very happy day and special occassion.  I had been going out with Bridget since October 2000, and we got engaged in December 2005, so my March 2007 wedding was good timing.

As with so many people, it came and went so fast and to be brutally honest I can’t actually remember that much of it, apart from the fact it was a great day!

The honeymoon to the Yasawa Island’s in Fiji was amazing – thanks Dean Letfus for the recommendation to go to Nanuya Island Resort on Nanuya Lailai Island – home of the Blue Lagoon – yes the very place where the movie of the same name was filmed, where Brooke Shields became a household name.  We spent the rest of the time at the Sheraton on Denarau Island – super stuff.

2. My son being born

Well I didn’t know quite what to expect with my first child – I got told a lot.  Being squeamish I fainted once in hearing about the delivery process, but I managed to hold my nerve and was able to talk property investment with our midwife and specialist O&G surgeon that we had on the ‘case’ during delivery and numerous consultations and scans.  The result is one fantastic baby boy (now nearly 14 months old), Liam Whitburn, who can already run up our hallway with a full size rugby ball and trip up and score a try.  He likes eating food on our plates that he lunges for whilst we are eating, as well as soil and leaves from our garden too, so he’s a real omnivore!

3. NZ Property Market

The Property Boom of 2002 – 2007 was New Zealand’s biggest highlight for me.  This is where we saw several thousand millionaires made in our country.  Yes unfortunately 2008 and 2009 tail end the decade as badly as it began in 2000 and 2001 with negative equity recorded in the 2000 and 2008 calendar years.

I am a big statistics fan and researcher, even did a stats paper at Auckland University in 1997 as part of my BSc degree. As a result lets look back at the decade’s property prices in January of each year as laid out on my blog here.  We had a 109% increase in New Zealand overall in the period from January 2000 to November 2009.  That is pretty special, and we could easily see similar growth in this coming decade.

4. Hitting my goal and becoming a millionaire in my 20s

I wrote down a very aggressive goal when I was 24 – to become a millionaire before I hit 30.  The great news was that I did it!  In addition I turned 30 in time lock in my million before the downturn and reduce my loan to value ratio to safe levels.  Fortunately my portfolio was well presented and in good locations so I had tenants the whole way through the downturn, bar 17 days in one property, and the value I lost that year has more than come back.  It’s a great feeling to have hit my goals.

5. Sporting Highlights

There are just so many to choose from with the Silver Ferns win in 2003 Netball World Championships in Jamaica (beating Australia 47 – 45 in the final), the League Team winning the World Championships in Australia in 2008 (beating overwhelming favourites Australia 34 – 20 in the final) and on an individual note Scott Dixon’s Indy Car racing successes this decade including the title in 2008, Valerie Vili’s shotputting feats, Hamish Carter’s glorious Athens Olympic Gold and Nathan Astle’s 222 off 168 balls – still the fastest double century in international cricket (including 28 fours and 11 sixes).  Michael Campbell’s 2005 US Open victory at Pinehurst (by 2 shots over the legendary Tiger Woods) was a memorable success too.

However for my decade runner up I am choosing an obscure highlight of Andre Adams securing an impossible victory for Auckland over Northern Districts chasing 161 in the 20/20 game at Seddon Park, Hamilton on 28 January 2007.  Auckland needed 12 runs to win off the last ball – usually this would be thought impossible, but not for the big hitting uber talented Aucklander Andre Adams, and Graeme Aldridge bowling a waist high full toss (a no-ball) which was slammed for 4.  Then Auckland needed 6 off the last ball – surely he couldn’t achieve the dream…  However Aldridge’s bowling and Adams clean hitting ensured that defeat was snatched from the jaws of victory, as Adams absolutely pounded the ball for a big six over long off to guide Auckland to an amazing win.

The Decade Winner has to be the All Whites who qualified for the World Cup for the first time since 1982.  Despite Rory Fallon heading home the goal just before half time from an expertly taken Leo Bertos corner, and Mark Paston saving an amazing kick from the penalty spot, the whole team played like a bunch of heroes.  Well organised, structured and solid – can we mix it on the World Stage at the 2010 World Cup in South Africa.  We are drawn against Italy, Slovakia and Paraguay – can we be in the top 2 teams of this pool to qualify for the 2nd round?

As this decade rounds out I think that it is useful to show some numbers about what has happened in this past decade.  We haven’t quite completed December 2009 yet.  However the November 2009 statistics will not be too dissimilar.  Here’s the tables of nationwide median house prices this decade from the Real Estate Institute of New Zealand statistics:

The median house price has risen from 109% over the Noughties decade.  Interestingly sections went from $85,000 in January 2000 to a $175,000 median section sales price in November 2009.  This represents a 106% gain in section prices for the noughties decade.

My question for you – is what will the median house price be in December 2019 – could they double again to be $710,000?

Watch this space if you are serious about growing your wealth from investment property.  Whilst there is little or no pressure for a housing boom no, there are positive factors in certain areas of New Zealand, including increased dairy prices, increased net migration statistics, unemployment not being as bad as feared, and comparatively low short term interest rates.

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:

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:

1. Affordability
2. Interest rate levels
3. Migration
4. Supply/Demand balance
5. House Sales and Building Consents
6. Liquidity
7. Global Financial Issues

I will cover off each one next week in another blog though.