New Zealand Residential Investment Martket -Value It report

Please find below a report by 'Value It' regarding the
residential property market in New Zealand. It is an
excellent report which I am sure you will enjoy reading.
Happenings in the residential market have a direct impact
on the economy and commercial property market......this is
why I feel this report is important for better
understanding..........

............................................................

2009 is shaping up to be a very interesting year. We have
a couple of items of good news for property investors to
start the year off. As the economic markets remain in
turmoil, both locally and internationally, the Official
Cash Rate has dropped to the lowest level yet and mortgage
interest rates continue to head down. The drop in interest
rates has raised the question on break fees on mortgages to
take advantage of the lower rates and this has certainly
become very topical. There is also a summary on house
prices and what happened in 2008. As always please read,
learn, enjoy ...

.. and happy investing.
Shaping up as a good year for investors

A return to positive cash flow is expected this year for
many cashed up property investors. This has resulted from
a combination of factors including:

*
falling interest rates - see elsewhere in the
newsletter;
*
falling house prices – a combination of increased
mortgagee sales, the reluctant landlord deciding to sell,
and vendors realising that prices are falling and accepting
a lower price to get a sale;
*
Vendors possibly being more motivated to sell due to
increased unemployment, concerns about job security, weaker
income growth and other economic influences;
*
Increased rents due to fewer houses available for
renting and more demand for rental property;
*
House sales volumes will be higher than in 2008
meaning there will be opportunities for purchasers;
*
Tougher lending criteria, while it affects investors
as well, makes it harder for first time buyers with a small
deposit to buy, so they end up renting for longer.

More Positive news for Investors

This comes from Tony Alexander at the BNZ from his weekly
review for 29 January 2009:

“If I were a property investor I would still have no
worries about a capital gains tax being introduced and I
would have greater confidence in my ability to extract rent
increases over the next few years from a canny property
purchase. This is because of plummeting construction, the
20% deposit requirement, a likely migration improvement
later this year, and the rise in the unemployment rate
pushing more people into the rental market for a longer
period of time.”
Economic

Recent key points include:

*
New Zealand Institute of Economic Research quarterly
survey (end December 2009) showing business confidence at a
39 year low.
*
Mortgage interest rates are down at levels last seen
in July 2003
*
The Reserve Bank of New Zealand expects the recession
to last until the middle of 2010.
*
The level of unemployment was at 4.6% (105,000
people) as at the end of the December quarter. This is the
highest level for 6 years. Economists are expecting an
increase to approximately 7% by early 2010. It was noted
that the total number of people in work increased by 0.9%.
*
The economy is expected to shrink by 1.2% in 2009.
*
It is believe that net migration will increase
towards the end of the year as expatriates return to New
Zealand and fewer people leave for overseas.

Official Cash Rate ("OCR")

The rate was reviewed on 29 January 2009 and dropped a
further 150 basis points (1.5%) to 3.5%.

The OCR has dropped from its peak of 8.25% (June 2008) by
4.75%. This is the lowest rate since the OCR was
introduced. Economists are expecting the OCR to go as low
as 2.5% - 3.0%.

The gap between the OCR and home loan rates has increased
during the liquidity crisis. The cost of borrowing money
off-shore by the banks in New Zealand that they then lend
as mortgages has increased and this has been passed onto
the borrowers, meaning that not all of the reductions in
the OCR have been passed directly to borrowers.
The next review of the OCR is 12 March 2009.

House Prices

Some interesting facts have come out about last year. The
value of houses, as calculated by a national valuation
firm, dropped over 7%. The figures provided by the Real
Estate Institute of New Zealand showed a 4% decline in the
average median sale price.

From the REINZ sales volumes were down. As an example in
November 2003 there were 10,774 properties sold (December
2003 was 8,669). In November there were just 4,279 sales
(December 4,302 sales). The days to sell have increased in
December to 45 days (44 in November). In December 2007 this
was 36 days with just 23 days being required in December
2003.

The Reserve Bank’s Monetary Policy Statement in December,
projects a fall in house prices of 16% by the end of 2010.

Economists are picking various figures for a drop in house
prices, based on either the value of houses now or from the
peak of house prices and whether it is a real drop in value
or some other measure. Basically all economists are saying
house prices will drop (for at least the first part of
2009).

Mortgage Break fees
With mortgage interest rates falling so low so quickly many
people with mortgages are considering breaking their
mortgage to take advantage of the lower rates.

People have become upset at the amounts the banks are
charging to break mortgages, even if the mortgage is being
broken for what borrowers consider legitimate reasons -such
as the property being sold.

The banks are advising basically that the cost of the break
fee reflects the cost to the bank and is the difference
between the cost of the loan to the bank when the loan was
taken out and the rates now (the various banks have
slightly varying formulas on how they calculate the
amount). The issue has become political in the past weeks
with both major political parties commenting on the issue.

As a rough rule of thumb for every year remaining on the
fixed term loan, the borrower can expect to pay in fees
approximately $1,000 per $100,000 loaned for every 1% fall
in interest rate.

Rent to Buy

As banks lending criteria is tightened, in particular with
a minimum deposit of 20% required, rent to buy arrangements
are becoming popular.

These arrangements suit the potential purchaser if they
have good income flow but not the required deposit, if
rents are rising, or are not disciplined enough to save a
deposit, or are not confident to negotiate a good purchase
price (relying upon property traders expertise to negotiate
a good deal), and want their own home now.

There is an issue with the IRD and as to how property
traders should treat the GST liability on such an
arrangement. It is recommended that you consult your
accountant to clarify this.
Government Plans to improve the housing market

The new Government plans to introduce new measures that
will help improve the housing affordability issues in New
Zealand. Initiatives are to include:

*
Resource Management Act. Improved planning system
(councils to allow a sufficient supply of land zoned for
new housing, development of existing and unused land to be
easier), speed up the time taken to get approval, provide
the ability to lay complaints against councils for the time
taken to consider applications, appeals to Environment Court
limited to legal issues only, applications for resource
consent can go straight to the Environment Court if the
council agrees to skip the council hearing;
*
Building Act. Changes will be made to reduce costs
incurred by councils and the building industry (and
ultimately past onto the end purchaser in the purchase
price of houses);
*
Adequate infrastructure is in place to support
development and growth of towns and cities.

Property developments on hold or worse

There are significant developments on hold given the
current client. Some examples include:

*
Flat Bush. Manukau, Auckland. Plans to grow this from
a suburb of 10,000 people to a town of 40,000 people
(approximate size of Nelson) by 2020 have been scaled back.
Some of the main features of the town have been put on hold.
*
8 other large developments in Auckland have been
scaled back or put on hold indefinitely.
*
Property developers are looking to off-load
developments - In some case whole sub-divisions.
*
One bank has placed a whole subdivision of 26
sections up for mortgagee tender.
*
16 sections have been put up for mortgage auction by
a finance company that is in financial difficulties.
*
Currently it is estimated that there are thousands of
coastal sections available north of Auckland yet sales
generally average in the hundreds for such sections.

.............................................................

I hope you enjoyed the report.


Best regards,
Colin Kumar
c.kumar@barfoot.co.nz
WE LOVE SELLING AUCKLAND

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