New Zealands Housing Market – It Could Be In For A Shock!

Why is the Real Estate market showing signs of recovery? The simple answer is there must more buyers out their buying up property. Consumer confidence has jumped to a four-year high, business confidence to a 10-year high. House prices have been rising since February. So are happy days here again? I feel this optimism is built on foundations of miss guided merits and hope – a deeply mistaken belief that the status quo before the crisis was normality to which we can now happily return?
The market in terms of housing has definitely risen. But I do not feel it is with great merit that it has. From the personal experiences I have had I had one property investor I know of buy up 6 properties in two weeks and then stuck them on the rental market. Now she was telling me that the reason she did that was because she has enough equity in the rest of her portfolio so that the banks would lend her money to buy. So with relatively cheaper money she went on a spending spree. Now with the mortgage repayments that are n each of the properties the rent is going to cover them and more.
This is the sad case of today’s market. I am finding that there are more and more people out there wanting to buy property and can’t do it. There are plenty out there though who can, and these people are just scraping in and the bank’s lending them the money to buy. But there are also a great deal of people out there that have so much equity and are looking at the current opportunities with the low interest rates and are snapping up the deals that are coming along.
What we will find is the rich are going to get richer and the poor poorer. The state of the nation is something that under current conditions cannot change or get any better. Rents have been stable over the past two years, while housing affordability is again deteriorating as house prices edge up, interest rates rise and incomes stagnate. Rising house prices and interest rates combined in September to weaken home loan affordability to its worst level since December 2008, the BNZ Home loan Affordability Measure shows.
The apparent recovery in the housing market and higher long term interest rates are adding to pressure on affordability caused by modest income growth and rising unemployment.The BNZ Home Loan Affordability measure for all of New Zealand showed the proportion of a single median after tax income needed to service an 80 per cent mortgage on a median house rose by 1 percentage point to 59.7 per cent, its worst level since December 2008.
Affordability hit its worst level of 83.4 per cent in March 2008 just after house prices peaked and 2 year mortgage rates were close to 10 per cent. So we are still quite a way off this level but it is not hard to climb back up there.
The median house price rose 0.9 per cent in September to NZ$350,000 from NZ$347,000 in August and is now just 0.6 per cent below its November 2007 peak of NZ$352,000. The average 2 year fixed mortgage rate, which has been among the most popular with borrowers in recent years, rose 8 basis points to 6.58 per cent over the month and has now risen from an average 5.92 per cent in February.
There has being a definite rise in interest in the property market. A number of my friends have bought their first homes in the past few months and most of them are happy for now there is one who is now struggling very much because of the cost of servicing the loan. This person bought the property and when budgeting in he had a spare 300 per week for expences. Now all he has due to lack of work is $150. This is the harsh reality of today’s climate.
We cannot be certain yet about the market. It is definitely moving but the reasons why it is moving are not publically being truthfully told. The example I set above is not just a one off. There are many doing this and if your going to be caught out in the hype you will be burnt. The fact is that New Zealand has one of the worst housing affordability indexes in the world. This is pricing out all the younger generations from getting their hands on some real estate. Its just typical of us kiwi’s though. We are quite a greedy bunch.
But in all reality what’s going to happen from here? The writing is almost on the wall isn’t it. The media is spouting that the recession is over. But the flow on effect from the recession is going to last for years. Just look at Firestone and Bridgestone. Just in the Central Christchurch area the loss of 240 jobs will happen from December. This has got to have an impact on the state of the local economy everywhere.
Many home buyers jumped in March, April and May of this year to take advantage of lower interest rates and look for bargains, which improved the number of houses sold and stabilised prices. But short term mortgage interest rates flattened out in late March and longer term mortgage rates began to rise in line with rises on wholesale markets and higher local term deposit rates.
Affordability is increasingly out of reach for most home buyers on a single income. The threshold proportion of after tax income considered prudent to sustainably own a house is around 40 per cent. Anything above that is starting to become unaffordable.
For the first home buyer the affordability also deteriorated in September. The proportion of a single after tax pay needed to buy a first quartile house rose to 51.6 per cent from 50.1 per cent in August. This is the highest level since November 2008. The first quartile house price rose in September to NZ$250,000 from NZ$245,000 in August.
From here on in what it looks like is that interest rates will rise to try and tackle any inflation coming out of the recession. Money is getting more expensive for the banks to borrow from overseas which will mean that our mortgage rates are going to climb. But where does all this leave the old house price. Well the recent rise in housing may not be long lived. There are two things that could happen.
House prices will come down again to allow the market to actually become more affordable to the average kiwi. This may see investors and the baby boomer type of person with a few properties let their properties go for less than market value just to loosen the purse string.
The house price flat lines and the average kiwi cannot afford to buy their first home or buy a home for their expanding families. This will see many social implications for New Zealand and it will be sad.
It will be interesting to see what happens from here on in but the nice glorious days of housing and the property market is still very much under extreme pressure.