Issue 46 - The Housing Market - Where to From Here? - Nov 2008

After the recent turmoil in the markets and the measures taken by various governments to rectify the financial problems besetting the world, it may be thought that we must surely be about to see some change in the direction of the housing market.

Afraid not. My belief is that there is still a long way to go yet. Some opinions expressed in the Herald, to the effect that the fall will come to a halt by March 2009, may well be biased given that one or two of the commentators are closely associated with buyer/investor groups.

I see the following factors as all having a bearing on the present housing situation:
Interest rates: Whilst there has been a small reduction in the interest rates that banks charge on housing loans, they are still higher than those of two years ago. Consequently, this will constrain all those who want to borrow to purchase a home or use their home equity for some other purpose. It will also impact on those who had previously fixed their rates and whose loans are now due for interest rate review.

Interest rates are normally determined by availability and cost of funds. Presently, funds from overseas are scarce and expensive. Apparently, banks fund up to one-third of their New Zealand loans, from overseas sources. Presently, the effect of this is to keep our interest rates high. Decreases in the Official Cash Rate cease to have much relevance when banks have to pay higher rates to overseas funders.

The recent move by the Australian authorities to reduce their official cash rate by 100 basis points has brought about an adjustment of 80 basis points for borrowers from some of the Australian banks in Australia. Whether the New Zealand arms of those banks would adjust their rates in response to a similar move by our Reserve Bank, is a moot point. Further, the effect of any adjustments will take longer to ease the interest burden of existing home borrowers as New Zealanders have a higher proportion of their home loans with fixed interest rates.

While interest rates are part of the problem, the availability of funds is probably a greater restraint on the ability of borrowers to secure a loan. It is all very well telling us a low price but if the supply is not there, we are no further ahead.

Additionally, consumer spending in New Zealand is still being constrained by price rises in excess of increases in take-home pay. Although the recent personal tax adjustment will be of some assistance, increases in rates, electricity charges and food items more than use up the increase.

Presently, a number of the homes that are unsaleable at the prices that sellers want for them have been put, instead, onto the rental market. This has increased the supply of properties available for rent which has, in turn, decreased the rental returns available. This has abruptly stopped the rise in rentals rates that had been evident from June 2007. Many properties cannot now achieve levels of rent that they would have been able to achieve just six months ago.

Migration: Newspaper reports show decreases in immigration and increases in the numbers of those seeking to leave our shores. Recently, the gap between the two figures has narrowed to the point where immigration is almost swallowed up by emigration, leaving only a small, net increase in population. In the year to 31 August 2003 (the period in which permanent arrivals were at their peak) there were 96,245 long-term arrivals and 55,091 long term departures, a net gain of 41,154 long term arrivals for the period. In the corresponding period in 2008, there were only 86,706 arrivals but 81, 768 departures, a difference of only 4,938 people.

The large number of new houses and apartments built in the past few years, has created a small surplus so the normal laws of supply and demand mean that overall, prices are going to continue falling for some time yet. If we get to the stage of having a nett outflow of people, falls could become even more drastic.

Despite all of the above, if people want to change their accommodation then now is not such a bad time. Certainly, you will probably receive less for your property than you think it is worth (isn’t that always the case anyway?) but that will be more than balanced by an increased ability to purchase well. This is particularly so for those who are buying a more expensive property as the difference in value between their property and their purchase will have shrunk quite markedly.