Issue 47 - The Housing Market Continued - Jan 2009
With the U.S. election out of the way, possibly we will begin to see a little more clearly, the way forward. Although it will be some weeks before his inauguration, it seems that Barack Obama is moving quickly to do what he can to mitigate the effects of what has become known as the credit crunch.
It is interesting to observe the global effects that the shortage of funds is having on world trade, quite apart from the effects within U.S.A. Because banks and investment companies in U.S.A. sold what turned out to be increasingly shonky investments to an investment hungry world, the world now has to bear the pain that should have been confined to the U.S.
While the effects on New Zealand were slow in coming, that they are here now is very, very obvious. Banks are again requiring deposits of a minimum 20% in many cases. (As an aside, I have always thought it ridiculous that at and near the top of the housing market, banks would lend 100% of the purchase price. This merely extended the apparent ‘boom’ in the housing sector and increased both the likelihood of a crash and its severity.)
The effect of this increased deposit requirement is that most first home buyers are being shut out of the market for now. Just as we were getting to the point where lower prices for existing housing stock were making it easier for buyers, we have this increased deposit requirement making it harder again.
If we assume a typical ‘first home’ in this area as being worth, say, $300,000, then most buyers of such a property are going to have to find $60,000 for their equity contribution whereas previously they weren’t required to save anything. While in the medium term this is not necessarily a bad thing, it does mean that there is presently a ‘log-jam’ with many potential buyers struggling to save deposits, while the houses they could have bought sit on the market unsold.
I firmly believe that it is this deposit requirement that is behind the apparent increase in the price of houses sold in October. Because of the dearth of sales in the lower end of the market (as a result of the deposit requirement) the median price is somewhat higher than it would have been had the new deposit regime not been in place. That higher-priced properties are still selling at all, may well be because the buyers of those properties have sufficient equity in their existing property to use as the deposit for their purchase, while retaining the original property as a rental.
I have to take issue with those who, at the first sighting of what appear to be statistics favourable to themselves or their cause, leap into print without first thinking about all the reasons why those statistics are as they are. That there has been a marked decrease in lower value sales (as shown by the closure of a number of real estate offices in our immediate area) should have been a clue. Sales volume has decreased markedly and the number of salespeople has similarly decreased. When volume decreases, prices also retreat. Sale prices are unlikely to rise until the surplus of properties available for sale, has been reduced markedly.
Believe me, property prices are still going down and they will continue to do so until such time as a sufficient number of potential buyers manage to save enough for a deposit on their first home. With a little bit of luck, the world’s financial systems will be mended sufficiently in the not-too-distant future for banks to relax their deposit requirements. That will be the day that the great log-jam starts to become un-jammed.
In the meantime, there are a number of factors that will preclude any widespread increase in property sale prices. Apart from the deposit requirements, there are increasing prices of imported consumer goods reducing our capacity to save (as a result of our dollar being worth so much less); possible decreases in our export sales (just when we thought that the lower value N.Z. dollar would help boost sales, we find ourselves in a global financial meltdown); and lower consumer spending within N.Z., all pointing towards increasing unemployment (tipped to reach 6% before too long) that may increase the number of forced property sales.
The October tax cuts will assist N.Z. consumers and the promised further cuts scheduled for early 2009 will assist further. What would really help, however, is a boost in confidence for every New Zealander. For that, I think that we will have to wait a little longer.