Issue 48 - The Housing Market Continued - Feb 2009

Over the coming months, it looks as though a regular topic on these pages is going to continue to be the housing market. Beware of what you may read elsewhere as there is so much badly thought-out comment out there at the moment.

For example, I note that one economist was saying (Herald Jan 6th) that for rental property to return to its historical yield of an average of 7.7%, it would require an increase of 71% in weekly rents or a drop of 42% in the price of the median house price – or more likely a combination of the two will unfold.

While his maths is probably spot-on, his logic is not necessarily so. About 30 years ago, we bought a couple of residential properties at yields in excess of 10%. Should we therefore expect that similar yields were going to pertain for years ahead? Of course not.
Looking only at gross yields on property prices is not necessarily a good way to assess the rental property market. A better indicator would look not only at the gross yield but also at the age of the housing stock, the general, overall condition of that stock and the length of time that it had been owned by the present owners. Interest rates and taxation policies also have a bearing.

The reasons for New Zealanders’ high level of interest in the property market are many. Over the years, the share market in New Zealand has probably been seen as having served investors poorly. This may well be why the Kiwis have tended towards the ‘bricks and mortar’ approach to investment. Now that returns are so low in the residential property market, (although better than they were late 2007), it may well be that those with investment dollars to spend, will spend them in the equities market, which would tend to increase share values.

Even for those with no interest in investing in equities, keeping an eye on the sharemarket may prove to be beneficial. Usually the first indicator to move up or down, is the sharemarket. Once the sharemarket is considered to be past its lows, there will be renewed interest in other investments and people will feel rich enough again to consider buying real estate. Obviously, the greater the interest from buyers, the more likely are price rises for properties.

Going back to house prices, again, I have seen recently that there has been a considerable cut in the number of applications being made for building permits for new homes. From the point of view of the average home-owner, this would be something of a blessing as a surplus of houses leads almost inevitably to lower prices for existing housing stock.

In the last 12 months, there has been only a small gain (5363 in the 12 months to November 2008) in population in New Zealand. Population growth in the early 2000s was the main reason for the huge increase in prices – that and easy access to credit. Should immigration start increasing again, we could well see a rise in the number of sales taking place. People added to a population have to be accommodated somewhere, whether it be rental accommodation or by way of owning their own home. Either way would increase demand for property. What would really help, however, is easier access to credit from the major lending institutions by way of smaller deposits being required of home buyers.

One of the comments heard frequently is that New Zealanders invest too much money in property. As a simple statement, this is clearly absurd to the extent that people and businesses have to be housed somewhere. I think that the real problem is not the amount that is invested by Kiwis in property (either for their own use or the use of a paying tenant), but rather for any amounts invested in overly large family homes (in terms of the ongoing requirements of the owners) and holiday homes. To this extent and this extent only, do we invest too much in property.

The real problem, as I see it, is that not a lot of Kiwis aspire to more ‘unearned’ income in their retirement years than that provided by a rental property or two. Presently, the wide-spread ownership of equities that is seen in other Western countries has simply not happened in New Zealand. One of the factors could be that in a number of countries, large amounts of housing stock are owned by institutions, housing trusts or by government agencies, precluding ownership by citizens.

As to our market locally, we have noticed an increase in the level of activity since Christmas, with more people out and about looking. Those properties that are well-priced are presently being sold more readily, but the buyers are still being very cautious over price.

As a footnote, it is pleasing to advise that our monthly sales volumes don’t appear to have declined as much as the market in general. In consequence, our share of local sales appears to have made some gains. May that continue!