Where house sales go, prices don’t necessarily follow
Back in January 2004, Infometrics put outa press release concluding that "property values will begin to fall before theend of this year â€¦ some areas that have experienced large price increases (suchas Nelson) could undergo a nasty correction." After four years of resolutelypredicting an impending slowdown in the housing market, it seems we’ve finallygot it right!
Now everyone else has jumped on the wagonof gloom, but we’re not sure it’s as bad as the headlines suggest. At themoment, the biggest challenge for the doomsayers is trying to find thethousands of investors and homeowners that are being forced to sell. Admittedly, there have been incidents of significant losses incurred byapartment owners, but New Zealand’s apartment market remains incrediblyimmature by international standards and has provided ample scope for buyer naivetyto be exploited. And there has been a lift in the number of properties beingtouted as "mortgagee sales", but that may simply be a convenient way to attractbuyers who are looking for a bargain.
House sales figures for March were plainhorrible. The Real Estate Institute reported that sales numbers were down 53%on March 2007. To put this fall in context, the previous biggest drop sincedata began in 1989 was a 38% fall in April 1998. With turnover plunging sorapidly, it’s small wonder that real estate agents are rushing off to find newjobs.
Other commentators have been quick tolatch on to the trend in house sales activity and talk up the extent of thelikely price falls over the next 1-2 years. For example, BNZ, who arecurrently the biggest cheerleaders for an economic recession, state that "houseprices risk falling by more than the 10% we already presume for this year." BNZ estimates that house prices are currently 30% overvalued â€“ a number thatour estimates suggest may be on the light side.
Looking back over the last 60 years,there have been two previous episodes where property has become significantlyovervalued. After a 66% increase in real house prices (adjusted for consumerprice inflation) between 1950 and 1954, real property values tracked sidewaysfor the next 18 years, with no discernible increase occurring until the early1970s.
Then real house prices jumped a whopping 59%between 1971 and 1974. Over the next six years, those gains were completelywiped out as real property values plunged. House prices still averaged 6.1%pagrowth between 1974 and 1980, but failed to keep pace with rampant consumerprice inflation of 15%pa.
Which outcome is most likely for thehousing market? Right now, the New Zealand economy looks a lot more like a1950s version than the 1970s one. Unemployment is low, prices for our exportsare strong, and inflation is more or less under control.
That’s not to say a soft landing is arisk-free proposition. Soaring oil and food prices are having a significantnegative effect on consumer confidence. Trading banks are finding it tougherto obtain funding as a result of America’s credit crunch. And there is achance that the government’s push to create "affordable housing" results in toomany new houses being built, as occurred in the mid-1970s.
Infometrics’ view is that the massivedrop in house sales activity in recent months reveals a firm dichotomy betweenthe prices that vendors want for their property, and what buyers are willing orable to pay. The fact that property is not changing hands implies that no oneis being forced to sell â€“ yet. Two factors suggest that situation is unlikelyto change much over the coming year.
Firstly, demand for rental accommodationremains strong given that first-home buyers have been priced out of the marketfor the last 3-4 years. With property investors no longer increasing theirholdings, the supply of rental property is relatively static, allowinglandlords to push up rents (currently by around 7%pa) without significant risksof vacancy. So as a landlord, your ability to keep servicing the mortgagelooks good.
Secondly, low unemployment and the tightlabour market indicate good job security and continued income growth. As ahomeowner, your ability to keep servicing the mortgage also looks good.
Neither of those points is to deny theinevitable fact that some people will have overextended themselves â€“ mostlikely highly or negatively geared property investors. But our table showsthat even someone stretching themselves to buy an average house in 2004 shouldhave more money left over after paying the mortgage than they did two or fouryears ago. Admittedly, recent price rises for essentials will be stretchinghousehold budgets, but there are mechanisms to temporarily ease the pressure. In this example, an interest-only mortgage would free up around $300 per month.