Auckland house sales volumes have remained very weak all year, averaging only 1400 sales per month. This is in stark contrast to the average volumes over the past five years of 3000 sales per month and are down over 50% on past activity. All indications are that sales will remain very soft for a long time yet. Total sales this year to date are at only 11,908 which is a 16 to 17 year low – a level last seen in 1991-1992.

Time to sell has risen to around 50 days on average and with a growing gap between asking price and selling price, there is more pressure on sellers to discount their house prices to achieve a sale.

Signs are still very ominous for an even greater downward correction in prices than has occurred to date.  Current data shows a decline in average median property values so far of 8% from the peak of $460,000 achieved in December 2007.  This is effectively a drop of about 1% per month.  The median price is now at $423,500, a level last seen in February 2007.  Wide variations in price falls are being seen however – anything from 5% to 20% down on last year’s prices.


In our view there is still a long way to go in this phase of the downward cycle due to:

• The New Zealand economy is in recession and not looking positive.  Global growth will be weak and commodity prices have suffered sharp falls.  This will have a flow on effect to our economy and dampen any chance of a meaningful revival in the market for some time, notwithstanding the up coming tax cuts.
• Because of the systemic failure of the global credit machine, the cost of sourcing funds from overseas will remain high, impacting on interest rates here and reducing the scope for banks to decrease rates significantly.
• Unemployment is likely to rise as the recession bites.  Job losses and redundancies in particular from the banking and property industry plus other areas of the economy affected by the slowdown will be felt.
• Property investment for return based solely on the rental income still does not make sense.  In the absence of any capital gain, the returns from investing in property remain well below average returns from parking your money in the bank – assuming its safe there!
• Rental returns after deductions for outgoings (rates, insurance, maintenance etc) are only around 3% to 4% at best on a conventional house purchase, compare this to bank returns of 7% to 8% with much reduced risk.  This also takes no account of any likely capital loss that is likely to occur on a property investment at the moment.
• Investment buyers have disappeared from the market and won’t return until prices and rental returns are more in balance with returns from banks/government stock, or there is evidence of capital gain.  This corrective phase will continue as the market retreats from over-valued levels.
  

The economic outlook remains poor.  Growth will be very subdued. 

Retailing is weak, house prices are falling and building consents have fallen to a 20 year low.  Considering that this consumption and residential investment accounts for two thirds of the economic activity, there isn’t much scope for things to get better.  Households have borrowed and spent up large for a long time on the back of appreciating house values.

Now they are having to reign in spending to offset high cost of living pressures and debt servicing.  Debt reduction and reduced discretionary spending will be the primary focus of many households now.  The party is well and truly over.

DECLINE IN PROPERTY VALUES CONTINUES IN ALL AREAS
National property values have declined by 6% over the past year.  In the main centres Tauranga has slipped to –7.6%, Hamilton –8.8%, Wellington –5.4% and Christchurch –7.1%.  Auckland as already reported is down –8.0%.

The decline in the market has picked up momentum with no sign of a normal seasonal spring lift in activity.  Sales volume is down significantly in all areas, under half normal levels for this time of year.

There is no sign things will change in a hurry as the various factors at a local, national and international level that are affecting investment decisions will continue to impact on property prices for some time yet.  We expect further price reductions as the supply of homes for sale increases and demand remains low.

The impact of the recent tightening of lending policies by the major banks will only start to filter through to the market now.  The requirement to have a significant deposit will take many first home buyers and investors out of the market which will further reduce the pool of potential buyers, resulting in continued downward pressure on prices.


In the words of a few sage commentators……

“The singular feature of the great crash of 1929 was that the worst continued to worsen.  What looked one day like the end proved on the next day to have been only the beginning.  Nothing could have been more ingeniously designed to maximise the suffering, and also to ensure that as few as possible escaped the common misfortune.

Then as now the markets rallied and bounced around.  Many a false dawn was heralded by desperate optimists.”

JK Galbraith – The Great Crash:  1929

“Be fearful when others are greedy, be greedy when others are fearful.”

Billionaire investor Warren Buffet – Investment bible

“Buy at the moments of maximum pessimism”.

Sir John Templeton

There are undoubtedly good buying opportunities that will be had and a cashed up investor could do very well as distressed sellers bail out.  There has not been an overly excessive building boom through this property cycle so New Zealand is not completely awash with excess housing as has occurred in the US.  If anything, longer term housing supply constraints will mean future demand is underpinned.  Thus with a longer term outlook, a canny purchaser in this market environment could do very well in the future.

The property cycle we are seeing has all been before – to be precise, about every seven to eight years.  Although market commentary is full of pessimism now, and likely to remain so for some time, we must remind ourselves that there is nothing new here.  This downward phase will eventually stall, the market will move sideways for some time and then boom again.

For Valuers at the coal face of determining fair value, this is a testing time.  Valuation has never been an overly precise science but attempting to work out how much to discount last year’s values has become much more difficult. 

In a rising market, a property valuation was relatively safe as the effect of house price inflation over time would take care of any over valuation around the margins.  The difficulty then was keeping up with market trends and increasing prices.  A huge volume of sales and quite liquid market meant most property would sell sooner or later.

This issue would equally apply to any lender where relatively loose lending practice (90% to 100% loans) in the past has been saved by rising house prices.  But in a falling market far greater attention needs to be made to the security offered.  A valuation should be a prerequisite for any lending or purchasing decision now.

Falling prices are being seen across the board so valuing from month to month and attempting to adjust for downward trends is tough.  This is particularly so where a real lack of sales activity has meant little or no very recent sales occur with which to base an opinion.  Valuers are always looking at historical records and attempting to translate these into today’s terms.  But sales that occurred four or six months ago may be entirely different to current conditions.  The market has become very illiquid – property is simply not selling.