Ten reasons why house prices have 10pc to fall

I want to detail 10 reasons why I think house prices have another 10 per cent to fall, but first a bit of background.

Back in March 2008 before the Global Financial Crisis hit and before finance companies collapsed en masse, I predicted house prices would fall 30 per cent from their late 2007 peaks.

I got a lot of stick for saying such an outrageous thing. Our Home Loan Affordability analysis showed then that prices were unaffordable for most and I was worried about the stability of the global financial system, although not the New Zealand system.

I thought New Zealand house prices had been pumped up with NZ$100 billion of foreign debt over the past 5 years and would subside once the cheap foreign credit dried up.

Then most of the property finance companies collapsed through May, June and July of 2008. Lehman Brothers and AIG collapsed in September 2008 and global credit markets froze through until early 2009. All hell appeared to be breaking loose and there was genuine fear for the future of the financial system.

In early October Australasia's banks were granted government guarantees and between July 2008 and April 2009 the Reserve Bank of New Zealand cut the Official Cash Rate from 8.25 per cent to 2.5 per cent, helping to bring the 2 year mortgage rate down from over 9 per cent to under 6 per cent. This stabilised the economy and the housing market, where prices had fallen as much as 11 per cent by early 2009.

So in early 2009 I revised my view on house prices to a fall from the late 2007 peak of 15 per cent, rather than the 30 per cent I forecast a year earlier. House prices bounced through mid 2009 thanks to the drop in interest rates and the decision by many investors to abandon low interest rates in banks, a collapsing finance company sector and a discredited stock market to put yet more leveraged cash into rental property.

Also, it appeared, New Zealand's economy had dodged a bullet because of our stable banking system and our close connections to the strong-growing Australian and Chinese economies.

But the fundamental problems had not gone away. Housing was still vastly overvalued compared to incomes, households were carrying too much debt, and the cheap foreign credit had dried up.

And now those fundamentals are coming home to roost.

In the last six to eight weeks the sheer weight of these problems has ground down growth in the economy and the housing market to a virtual standstill.

Reports on the housing market from Quotable Value, REINZ, Barfoot and Thompson and First National indicate the winter of 2010 has been awful for the housing market. Buyers have gone into their shells and those that haven't are demanding price reductions.

Those that still want to borrow are reporting the banks are being cautious about Loan to Value ratios and the types of property being bought, in particular apartments, townhouses and sections.

Two events locally and one internationally seem to have been the catalysts for this slowdown. The May 20 Budget was initially welcomed by property investors as being a weaker crackdown on property tax breaks than they had feared, but it was still a crackdown of sorts.

Also, the Reserve Bank's widely expected decision to start putting up the Official Cash Rate from June 10 appears to have shocked those who thought interest rates would stay low for a long time. The European Financial Crisis in May to June was the final nail in the coffin.

So now prices are falling again.

Here's why I think they have another 10 per cent to fall, taking the fall from the late 2007 peak to 15 per cent. QV figures show prices are now down 4.7 per cent from the late 2007 peak.

1. The cheap foreign credit has dried up

Before the Global Financial Crisis banks could borrow as much as they wanted for around 15 basis points above the prevailing wholesale interest rates. That cost rose above 200 basis points early in 2009 before subsiding to around 120 basis points earlier this year.

The European Financial Crisis boosted that cost to back over 150 basis points and now it's clear that the cost is never going back to the 'normal' levels of 2002-2007 when New Zealand's banks borrowed almost NZ$100 billion on these 'hot' money markets and passed it on to home buyers at a sharp margin.

This chart shows how much those margins have risen during the crisis. Interest rates are likely to remain around 1 percentage points higher than they would otherwise have been.

This makes it harder for the banks to offer fixed mortgage rates that are significantly cheaper than floating rates and keeps the margin between mortgage rates and the OCR relatively high.

2. Home loans remain unaffordable for most in the bigger cities

The Roost Home Loan Affordability reports that we prepare show that it still takes 61.8 per cent of a single median income earner's after tax pay to afford an 80 per cent mortgage on a median priced property in New Zealand.

In Auckland Wellington, Hamilton, Tauranga, Queenstown, Nelson and Christchurch that portion of after tax income is between 65-75 per cent.

New Zealand's house price to gross income multiples are still well above historic norms and those of other countries such as Britain and America, albeit not Australia.

Those with two incomes in provincial cities such as Wanganui, Palmerston North, Invercargill, Whangarei and New Plymouth can still afford to buy a house, while first home buyers with two incomes can also afford a cheaper property in these markets.

Rodney Dickens makes the point in his piece about the property outlook here.

3. New Zealanders are migrating to Australia again.

The exodus of New Zealanders to Australia through 2008 was a major reason for the decline in house prices through mid to late 2008.

During 2009 the exodus slowed as the Australian economy slowed, but it has restarted again in recent months as Australian wages are now growing at a rate of 5.5 per cent while New Zealand wages are growing around 1.5 per cent.

Australia's unemployment rate has fallen to 5.1 per cent versus New Zealand's on 6.8 per cent. The likely reduction in non-New Zealand immigration to Australia after the upcoming Australian election will intensify the pressure for New Zealanders to migrate to Australia. The wage gap between Australia's average weekly earnings and New Zealand average weekly earnings has blown out to NZ$643 from NZ$565 in the last two years.

That translates into an annual gross wage gap of NZ$33,400, up from NZ$23,000 two years ago. New Zealand wages are now on average worth 60 per cent of the Australian equivalent, down from 66 per cent two years earlier.

At current wage growth and exchange rates, New Zealand wages will be half those in Australia within 7 years. By then annual wages will be NZ$65,000 higher in Australia than New Zealand.

4. The property tax changes are hurting more than expected

The tax changes in the 2010 Budget were less than some had expected or hoped or feared, depending on your exposure to property. But they are having a real impact on demand for residential investment property, particularly by those already heavily geared.

It is forcing many to ask whether than can afford to take the risk of going negatively geared when they may not be able to claim so much of the losses back against their regular incomes.

The IRD is also cracking down around the fringes of the property trading, LAQC and family trust areas. The recent Penny vs Hooper case has sent a chill through the sector.

Independent economist Rodney Dickens believes the property tax changes are having as big an impact on property demand as a 100-150 basis point increase in the OCR.

5. The developed world is deleveraging from property bubbles

The forces of deleveraging globally cannot be underestimated. The scale of the debt now embedded into developed economies in Britain, Europe and America is enormous.

Consumers, in particular, but also governments, will spend at least 20 to 30 years either repaying or restructuring debt to reduce their debt loads.

This chart here shows the scale of the debt in the US economy, the world's biggest. To reduce leverage levels to anything near normal will take decades of slower growth, less consumption, more savings and higher interest rates. Debt is now much higher than it ever was before the 1929 Depression.

New Zealand's banks depend on these international funding markets and will be affected in one way or another by this huge sinking lid of deleveraging.

6. NZ households have hit debt saturation point

New Zealand's household debt to disposable income hit a peak of 159 per cent in the fourth quarter of 2008, right at the time of the Global Financial Crisis. Since then it has been trending down as New Zealanders chose either not to take on any more debt or chose to repay debt.

Reserve Bank figures show many New Zealanders either left their mortgage repayments at relatively high levels, even though interest rates had fallen, or 'downsized' their houses and repaid debt.

Leverage is reducing. It has a long way to get back to 'normal' levels of around 100 per cent, which is widely seen as the sustainable maximum for any government or household.

To get back to around 100 per cent, New Zealand's household sector would have to repay around NZ$45 billion of debt over the next five to seven years.

House prices will not rise without the impetus of extra debt.

7. Our debt is relatively high compared to many others

New Zealand's household debt to disposable income ratio is actually higher than some of the countries such as Britain, America, Spain and Italy, who are seen as heavily indebted and in danger of being ostracised by lenders.

New Zealand is lucky in that government or sovereign debt is much lower than in those countries, but it's the reason why our government can't afford to 'pump' up the economy with deficit spending.

That will restrain the ability of our government to restart economic growth with heavy government spending.

The risk is that foreign lenders will work out how indebted we are and increase our interest rates.

8. Rents are not increasing in most places

Data from the Department of Building and Housing up until the end of June shows the median rent across New Zealand has been flat since December 2008 at NZ$300/week.

However, they have risen in Auckland in recent months, particularly for larger houses rather than apartments.

However, rental growth remains significantly below inflation and has stubbornly remained less than growth in house prices.

Landlords looking to increase rents more than wage growth have consistently failed to impose such increases.

Increasing costs and the potential removal of tax breaks will dampen demand from residential property investors, given rental growth will not be enough to compensate for higher costs and the removal of tax breaks.

That sends a new chill across the market.

9. Banks face even more funding pressure

The pressure from the big banks to pass on increased funding costs and to restrict their lending growth will become more rather than less intense in the coming two to three years. This will keep the pressure up on interest rates and ensure banks remain cautious.

European and US banks have to replace over US$2 trillion worth of funding in the coming 18 months, raising the likely cost of such funding on international markets.

The Reserve Bank's Core Funding Ratio (CFR) is expected to increase from 65 per cent to 75 per cent over the next two years, forcing the banks to raise more funds from the expensive long term and local funding markets rather than the cheaper 'hot' short term money markets.

The likely imposition, albeit slowly, of tougher rules for capital and leverage by the Basel Committee for international capital rules will also keep credit growth contained in coming years.

10. The baby boomers will start selling down their houses and rental properties to free up cash

Fresh research published over the weekend by the Bank for International Settlements estimates real New Zealand house prices could fall more than 35 per cent over the next 40 years as a growing population of elderly are forced to sell assets to a smaller population of younger people to fund their retirement and health care costs.

By Bernard Hickey

Auckland house prices slump in June

Auckland house sales slumped last month as winter malaise set in among buyers amid declining demand in the property market.

The number of sales sank 16 per cent to 665 in June from a month earlier, and was down 23 per cent from a year ago, according to Barfoot & Thompson, Auckland's biggest real estate firm.

The average sale price dropped 3.6 per cent to $523,058 month-on-month, and was up an annual 0.2 per cent.

"Housing market activity is likely to remain very weak throughout the remainder of 2010, reflecting waning demand," said Jane Turner, economist at ASB Bank.

"Given the weakening fundamentals we expect to see house prices decline slightly this year, however, the low level of supply, as indicated by weak consent issuance and the low level of new listings, will limit the degree of downside pressure on house prices."

House prices are expected to fall at an annual pace of 2 per cent for the next two years with several years of subdued sales volumes, according to Westpac Bank.

That comes after the government clamped down on tax benefits for property investors in its May Budget, while the Reserve Bank embarked on tightening monetary policy.

Barfoot chief executive Wendy Alexander said the Budget contributed to lower sales, but didn't have much impact on prices.

The firm added 1,194 new listings in June, down 13 per cent from May, and had 5,794 properties on its books at the start of July. At the start of June, it had 6,023 properties on its books, and on July 1, 2009, it had 5,597. ASB's Turner said new listings had been "very subdued" for some time.

Barfoot's average weekly rent rose to $403 last month from $398 in May and $388 a year earlier. It rented out 690 properties in June, up from 649 a month earlier, though down from its 735 in 2009.

Turner said anecdotally, landlords have been lifting rents in response to the budget's tax changes, though "the ability to increase rents may be limited by prospective tenants' ability to pay given the weakness in wage growth over the past year."

Kiwis willing to miss mortgage payments

Up to 20 per cent of New Zealanders say they would be prepared to miss a mortgage repayment over the next 12 months, according to new research.

The latest Consumer Priorities Study by credit reporting agency Dun & Bradstreet showed that up to a quarter of New Zealanders said they would be late paying bills over the next year, with 20 per cent saying they might even skip a mortgage repayment.

In the past 12 months 21 per cent of New Zealanders were late in settling their credit card accounts, 20 per cent were late in paying their home phone bills, and 19 per cent were late in paying their mobile phone, internet and pay TV bills.

Tough economic times were cited by the majority of respondents as the reason behind their late payment, with 47 per cent saying they simply didn’t have enough money to pay on time. For others it was a case of laziness or forgetfulness – with 31 per cent saying they had just forgotten to pay their bills on time.

Different age groups had different problem areas with their financial obligations. People aged 18-34 were more likely to be late in paying their internet and pay TV bills, 35-49 year-olds were more likely to be late with their mobile and home phone bills, while older Kiwis were more likely to struggle to pay their credit card or council bills on time.

CREDIT WARNING

John Scott, general manager of Dun & Bradstreet New Zealand, said New Zealanders needed to realise that lagging in paying their bills would have a negative impact on their credit history.

"A late payment, or worse, recurring late payments, have disapproving effects on an individual’s credit history and can cause long term damage that takes years to amend," he said.

Mortgage lenders, banks, utility companies and other credit providers all rely on a person’s credit history when deciding if they want to do business with them.

Kiwis losing four homes a day to mortgagee sales

New mortgagee sales figures show ordinary Kiwis are losing their homes at a rate of four a day, as the effects of the recession still linger.

Terralink International's latest data shows there were 202 registered mortgagee sales in March of this year, and two thirds of the affected properties were owned by private homeowners.

At the height of the recession it was largely companies and property investors who were facing mortgagee sales.

But a year on Terralink Managing Director Mike Donald says it's now mums and dads who are unable to make payments on their family homes.

“Increasingly we’ve got mum and dad homeowners that are now struggling, for instance they have lost their job, haven’t been able to secure another job, run out of capital; it puts pressure on trying to pay that mortgage.”

In March there was an average of six mortgagee sales a day.

RadioLIVE

House sellers drop their prices

House sellers have dropped their prices to the lowest level since January, as large numbers of houses remain unsold heading into winter, according to a monthly property report.

The average asking price fell 3.6 percent in May to $407,349, compared with April, property website Realestate.co.nz said.

With the large number of houses remaining unsold - it would take 46.9 weeks to sell the 51,980 properties on the market - a tipping point was reached in May where both high inventory and prices were unsustainable, chief executive Alistair Helm said.

"Last year we were in a similar situation, but it was the volume of sales that decreased. This year it's price," Mr Helm said

New listings were up 17 percent on a year ago, but fell 4 percent from April to 11,733.

There had been no evidence so far that the Government's budget on May 20, making property investment less attractive, had had any effect on asking price, he said.

The asking price was up 1.5 percent in May on a year ago, although it was still 5 percent below the market's peak in October 2007.

"While we've not seen a deluge of cheap property for sale, it does appear that we've peaked on price and there's an opportunity here for buyers," Mr Helm said.

Realestate.co.nz is half-owned by the Real Estate Institute of New Zealand, with six real estate companies owning the rest.

NZPA

Property pundits at odds over Budget

A property seminar promoter says the Budget will not force out landlords and drive down house prices.

Arron Davis, who runs Investments and Projects, disagrees with SuburbWatch's Kieran Trass who predicts house prices will fall 5 to 10 per cent in the next year.

Trass told Campbell Live moves in the Budget would be extremely detrimental to investment housing.

His prediction is based partly on the loss of the depreciation tax write-off.

"Many developers have sold negatively-geared properties, and used the tax benefit of depreciation to justify the purchase price in the first place, to people who now will lose the benefit of that depreciation.

Of course some people will exit the market," Trass said, adding that he expected rental property to be in short supply and rents to rise.

But Davis said the Budget would create a stronger economy.

"When the economy is growing and there is inflation, property prices go up," Davis said.

Davis, originally from Australia, said he had run about 500 seminars.

"The main financial impact for property investors arising from the Budget is changes to rules on depreciation - changes that will cost an investor on average only another $15 a week per home.

"The fact that GST will increase means that the cost of new housing and section prices has to go up which will bring along established home values with them," Davis said.

Richard Carver, director of house-builder Jennian Homes, said building would not get cheaper because rising GST would push up the price of land and buildings.

Any staged payments by people in the midst of building made after October 1 would incur higher GST, he said.

"Builders will be under pressure to have homes completed before the increase date," he said.

Andrew King, vice-president of the Property Investors Federation, said his organisation was not entirely happy with all aspects of the Budget.

But he was pleased that the Government had "seen through many of the false claims made against rental property and resisted calls for large and discriminatory tax increases for the industry".

Those claims partly centre on the value of residential property investment, variously estimated to be worth between $60 billion and $200 billion.

King said landlords would not consider big rent rises which had been predicted if harsher tax increases were introduced last week.

"Withdrawing the ability of rental property owners to depreciate their rentals is disappointing, although chattels can still be depreciated which will limit the adverse effect," King said.

The GST increase would have a minor inflationary effect on rental prices, although GST does not apply to mortgage interest costs which are often the largest expense for rental property providers, King said.

Reducing income to increase Working for Families entitlements was never a realistic reason for investing in rental property, he said.

The changes to loss attributing qualifying company structures was aimed to tax profits at the investors' top marginal tax rate rather than the lower company rate.

"There is concern about the level of losses that can be claimed and this will need to be looked at more closely."

Auckland house sales booming

House sales in Auckland climbed to their highest level in almost two years last month, signalling an improvement in buyer confidence.

Figures from Barfoot & Thompson show house sales in March edged ahead of those for the same time last year, with the average sale price in Auckland now $545,156.

This is up 4.6 per cent on the previous month, and is more than $53,000 higher than the same time last year.

Barfoot & Thompson managing director Peter Thompson cited an influx of people into Auckland, growing confidence in the economy and an Indian summer as reasons for a busy first quarter's trading.

The firm, which has about a 40 per cent share of the Auckland market, sold 927 properties during March, slightly ahead of March 2009.

Thompson said if monthly fluctuations were evened out, its sales data showed house prices across Auckland had risen an average 3.2 per cent, or $16,000 in the last year.

The number of new listings (1671 in March) while down on February's figure of 1714, was still good, with existing listings on par with the same time last year.

Thompson said the housing market was balanced and did not favour either buyers or sellers.

"Our experience is that the majority of sellers are putting realistic values on their properties, while buyers are not solely intent on bargain hunting."

"It's creating a market where a lot of properties are changing hands."

Based on normal seasonal patterns, prices would probably ease into Autumn, he said.

- NZ Herald staff

Property market still feeling recession's bite

The easing of mortgagee sales is still some way off with the January figures up 31 per cent on the same month last year, says land information company Terralink.

There were 196 registered mortgagee sales in January compared with the 150 in January 2009.

Terralink managing director Mike Donald said there were fewer sales in January than the previous month but this probably did not signal the start of a downward trend.

"We do often see a drop in mortgagee sales in January compared to other months. This may be because January is generally a quiet business month in New Zealand as most of us are on holiday.

"When you compare year-on-year figures and see that the number of forced sales was still 31 per cent higher than a year ago it shows there's no sign of a let up just yet."

Mr Donald said he didn't expect to see a return to pre-recession figures until mid next year, and only a number of consecutive months of dropping figures would show the pressure was abating.

- NZPA

Rents will go up if tax rules changed - investors

Property investors have warned that rents could go up by $34 a week if the Government scraps landlords' depreciation claims on housing, but the Government says they are wrong.

TVNZ reported that the Property Investors Association said landlords would lose on average $1750 a year if they lost the tax rebate and this amounted to $34 a week, which would be passed on to tenants.

Labour MP Trevor Mallard estimated that the increase could be as much as $45 across 400,000 households.

Prime Minister John Key told TVNZ that the figures were wrong and the Government's advice was that if there were rent rises they would be small.

The Government is looking at lifting GST from 12.5 per cent to 15 per cent to cut taxes across the board.

The Government has said they will make sure those on benefits are compensated and that no one will be worse off due to the GST rise.

It is planning to use the changes to property taxation to help fund that package and to help make such investments less attractive.

- NZPA