The Unconditional Blog

The impartial voice of the industry

 

Archive for the ‘Money Matters’ Category

1

Mortgagee defaults – is the NZ market on the rise or reaching a peak?

Posted on: March 30th, 2009 | Filed in Buying / Selling a home, Money Matters

In the US literally millions of home are either being foreclosed or are likely to be foreclosed. This has certainly sent a cold chill through the international property market and spiked discussion around mortgagee sales here in NZ. However as yet we have seen nothing approaching the relative scale of the US mortgage defaults.

The key question though here could be as to whether recent spikes in mortgagee sales be more to do with second tier lenders foreclosing on borrowers to liquidate their investments rather than a sign of high street banks wielding the tool of mortgagee sale? – analysis of sales and inventory data may provide some valuable insight.

The reported mortgagee sales for January as presented by Terralink International show a continual rise with a 121% increase for the month and a rolling 12 months figure of 1,385 as compared to the prior year at 515.

As the chart below shows when stacked up against the peaks of mortgagee sales in the early part of this decade on a comparable basis of mortgagee sales to total house sales the current figures are by far and away the highest in relative terms with 4% of all January sales being mortgagee sales.

Mortgagee sales of NZ Property 2000 to 2009
The analysis of the make-up of these sales as detailed in the report by Terralink is changing “In December more than 70% were pushed by second-tier lenders such as smaller finance companies, many of which collapsed last year. But in January this dropped to 58%, meaning an increasing number of forced sales are being initiated by banks”.

Preliminary figures for February they report indicate a continuing rise. Set against this backdrop is the inventory of mortgagee listings being placed on the market by banks and other mortgage lenders. The tracking of this inventory has been undertaken over the past 2 years on realestate.co.nz and the chart below shows this statistic.

Inventory of mortgagee listings 2007 - 2009 NZ realestate.co.nzWhat is very clear is that over the past 6 weeks inventory of mortgagee property has actually been falling. Having reached a peak in the first week of February at 412 the number has fallen subsequently to where the current level is 338 – down 18%.

These listings have been compiled together with interest.co.nz and have been filtered to remove listings which include the keyword of “mortgagee” as some real estate agents have been adding this keyword in an effort to attract attention to their listing. The regional breakdown of these mortgagee listings is available to review in dynamic charts showing the past 2 years of data on interest.co.nz.

It therefore remains to be seen if the rise in mortgagee sales continues into February and March at the same level or whether this decline in listings will see the number of future sales tail off. Certainly the economic pressures which can result in mortgagee sales – namely unemployment is a growing and ever present concern.

16

Should government incentives support the property market?

Posted on: February 12th, 2009 | Filed in International, Money Matters

istock_000005541249xsmallThe US senate has just passed a component of the staggering US$900,000,000,000 economic stimulus package providing support for property purchase in the states.

The proposal is to offer a 10% tax credit of up to US$15,000 to property buyers. The estimated cost of the package is set at $18.5 billion. Now in theory (based on annual sales of around 4 million properties in the US) this would mean that over 30% of all property purchased would benefit from this credit. This seems an odd calculation when you sense that anyone who was buying would naturally take advantage of it, unless it is going to be used to aid the purchase of a lot of properties below US$150,000 (of which there a few due to plummeting prices!).

This initiative is being looked at and examined by other governments around the world – most recently last year Australia introduced a 2 tier grant for first time home buyers of between A$14k and A$21k.

The US stimulus was likened to a similar incentive implemented back in the midst of the 1974 crisis when a US$2,000 tax credit was offered to home buyers which was cited as a factor to helping restore some confidence to the then very unstable property market.

These incentives would certainly have supporters and detractors especially as a question will naturally be asked as to the possibility of a similar incentive being offered by the NZ government as part of their economic stimulus package.

In support of such a scheme is the principle that it would generate interest and demand into the property market which has clearly shown a very low confidence and activity for now approaching 10 months whereby the sales have flatlined at c.4,000 per month irrespective of seasonality. If targeted to the first time home buyers it would encourage the adoption of the habit of home buying – a long held objective of most governments.

Whilst its impact on sales would naturally be seen as positive, the impact on prices may not be so certain for whilst it may mop up current high levels of inventory (116,000 current listings) – it may have a short term cessation on price falls which only prolongs the long term natural market trend.

The detractors would argue that it merely supports those who would have bought anyway and could cause more uncertainty with a short term “sugar fix” which eventually would have to be withdrawn with all the consequential impacts on market confidence. The detractors would also argue that property should be a function of the economic activity of the country not a driver of the economy and as such focus of economic stimulus should be on jobs, investment, technology and business development to grow real sustainable economic wealth.

So far the new government has not entertained any such plan for stimulating the property market – it will be interesting to see the view in the coming weeks and months as well as to observe the impact of these US and Australian initiatives.

14

Benchmarking NZ housing affordability

Posted on: January 29th, 2009 | Filed in Money Matters

The recently published Demographia Interntional Housing Affordability Survey has as ever captured the headlines.

This is the 5th such survey and as with the survey last January I have taken the time to read through the 46 page report to provide an insight and perspective to the facts and analysis. Interestingly I undertook this task last year – it is as ever interesting to reflect on the changes that have occurred in the local and global property market as well as the broader economic environment and think where we may be 12 months from now reviewing the 6th annual report!

The report provides a very valuable comparative model using the measure of median price to median income in reviewing 265 markets (cities) across 6 countries. It provides a rating scale from Affordable where the ratio of median price to median income is below 3, right through to Severely Unaffordable where the ratio is 5 or more.

When used to compare like-with-like within a country I think the report shows enormous value. The 8 NZ markets are bar one all classified at “severely unaffordable” with Tauranga topping out at a multiple of 6.6.

demographia-nz-report

It is interesting to recalculate the multiples in the light of the past 3 month falls in median price since the report utilises September 2008 data (I have not made any assumptive change to the median household income). It shows that whilst all 7 of the 8 regions are still categorised as severely unaffordable the trend is downward with the exception of Auckland which has gone up.

demographia-nz-report-revised-dec-08

Having provided a favourable assessment of the survey in the context of NZ data, I must share my misgivings as to the cross country analysis.

Firstly it seems odd that a survey that purports to provide an assessment of International Housing Affordability seems to apply a disproportionate weighting of contributing markets to the countries of NZ, Ireland and Australia. With a population base of just over 4 million NZ with 8 markets and Ireland with 5 are proportionately over represented as compared to the UK – 16 markets on a population of 61 million and even the US with 175 markets on 304 million – both making NZ some 3 to 6 times overrepresented.

This means that when you analyse the chart of the top 50 most unaffordable markets NZ has 5 markets represented, with the UK with just 6, Australia tops out with 21 in the top 50 and believe it or not the USA with just 13 of the 50!

There is no hiding the agenda of the authors of the report which is squarely focussed at the proposal that constraints on land availability drives up land prices and thereby property prices. This has already been latched onto by politicians who are eager to examine the rules around Maori land use for housing. However it is important to note that the markets identified in the report as those most severely unaffordable happen to be in the main cities bounded by the sea which does naturally created land use expansion constraints. Taking the top 50 most severely unaffortable markets you have to read down to #47 Boulder Colorado to find a land-locked city.

So whilst there is no denying the fact that using this measure of median multiple of household income to propery prices NZ does rank at a high level; to say that we have some of the most expensive property regions internationally is not truly comparing apples with apples.

25

House affordability is key to understanding the future trends in the market

Posted on: January 23rd, 2009 | Filed in Buying / Selling a home, Money Matters

Interest.co.nz Home Loan AffordabilityThere is no substitute for good information when it comes to buying a house and of late the access to rich information keeps getting better. The latest Home Loan Affordability Index produced by interest.co.nz is a perfect case in point.

The report does highlight an improving position whereby in December the index which measures the % of one median income to pay the mortgage on a median priced house fell below 60% for the first time in 3 years. At its peak the index reached 82.9% just over a year ago.

The report draws data from a robust set of statistics and provides transparency of methodology as well as detailed “drill down” to regional affordability.

As has often been stated the dynamics of the property market are governed by the supply and demand components of buyer and sellers matched to the capacity to pay – this valuable monthly report provides such insight into the affordability and thereby can assist buyers and sellers look into the future to see the likely trends for the coming year.

22

A higher degree of certainty appears to be creeping into the property market

Posted on: January 7th, 2009 | Filed in Media commmentary, Money Matters, Real Estate Industry

istock_000006631415xsmallMedia speculation of the prognosis for this year’s property market has in my view started with a very level headed perspective – and I thank Anne Gibson of the NZ Herald for that.

For whilst the headline may be designed to capture the attention “House prices – how low will they fall?” – the substance of the contributors comments show a higher degree of alignment and with that I would judge comes a degree of certainty and stability – something that was significantly lacking in 2008.

The key comment from Tony Alexander (BNZ)Although sales remain very weak they may almost be at their cyclical low and some improvement is likely before the middle of 2009” reflects well the sales statistics which will see the final number for 2008 at around 56,000. This is an all-time low and likely-as-not will see an improvement in 2009 mainly as a function of the fact that there is always a segment of the market that has a need to move house, rather than a simple “want”.

On property prices whist there is no complete consensus, the trend expressed by all commentators is for a fall in prices in 2009 – that group includes the Real Estate Institute. Whilst extreme views will always exist the main body of opinion expects to see prices down in percentage terms by single figures rather than double digit falls.

It is interesting to apply the percentages to the median prices to see what might be the outcome in real terms. Remembering the current median price as reported in November was $337,500 and the peak of prices was at $352,000 which was in November 2007, so prices are down 4.1% from the peak.

  • The Reserve Bank estimates that by end of 2010 prices will fall in real terms by 16% from the peak – that would see the median price at $295,680
  • REINZ expresses a view of a fall of between 5% and 10% this year, that would see prices at this time next year of between $303,750 and $320,625
  • The BNZ is stating a further 5% fall in prices this year, that would see prices at this time next year of $320,625
  • UBS economist Robin Clements expects prices this time next year of $299,200
  • Brendan O’Donovan Westpac’s chief economist expects this year to see a 5% fall to $320,625

Whilst the world is still facing economic uncertainty and growth is at best slowing considerably and as stated earlier in terms of NZ property there is no complete consensus on price expectation, I think there is some valuable take-away from the fact that there is a sense of certainty of the direction and general scale of price falls for the year ahead. This could well assist the market as a large component of the stagnation of the market in 2008 was directly attributable to uncertainty in the minds of property owners.

1

The case for institutional investment in residential real estate in the form of shared equity

Posted on: December 16th, 2008 | Filed in Buying / Selling a home, Money Matters

istock_000005645792xsmallI do not profess to be an economist or a qualified economic journalist, I merely run a real estate website. However I like to share insight and information of contextual relevance to the property owners, buyers and sellers of NZ. Yesterday I was directed by Steve Koerber to one of those articles that kind of hits you right between the eyes as blindingly obvious.

The context of the article by Christopher Joye writing in the Australian title “Overlooked solution to credit crunch” is that the asset class of residential real estate is fundamentally over leveraged with debt and at the same time hugely (and up until now) significantly under-represented in the portfolio of institutional investment.

This idea is not somehow recieving its airing for the first time this week – the concept worthy of your reading was first proposed by Joye back in 2003 when he was the principal author of a report commissioned by the Australian Prime Minister’s Home Ownership Task Force that presented a solution to the high levels of household debt that triggered the global credit crisis. It is clear from the article that some of the lessons have been implemented in Australia over the past 5 years as well providing valuable impetus for some of the shared equity schemes proposed in both NZ and the UK.

I concede that back in May of this year I posted a somewhat cynical assessment of the then government shared equity scheme, believing that it may cause an outcome contrary to the expected. I judge that this broader more cross-market proposal could provide a paradigm shift to the real estate market – here in NZ as with any country that might chose to adopt it.

I can share my layman’s perspective of the way it would work.

Currently a young couple seeking their first home fall in love with a 2 bedroom house on the market for $320,000. In today’s market that would require a 20% deposit ($64,000) and a mortgage of $256,000. That mortgage at say 7% on a 25 year period would cost $1,809.35 per month. Selling the house 10 years later with a modest 2% per annum appreciation would see the property sell for $390,000 – the repayment mortgage at that time would be $200,000 leaving the couple with $190,000, a capital appreciation of $126,000.

Under this shared equity scheme the same couple buying the same house would involve an institutional investment fund who might put 25% equity ($80,000) into the house – the banks might recognise a slightly lower owner equity deposit of say 15% ($48,000) saving the couple $16,000. The mortgage required to buy the house would be $192,000 which at 7% on a 25 year mortgage would work out as a monthly payment of $1,357.02 saving the couple $452.33 per month. Selling the house again after 10 years would see the institution realise a gain of $40,000 on top of the repayment of the original $80,000. For the couple their capital appreciation would be $72,000 – yet they needed less deposit and saved over $55,000 in mortgage repayments over the 10 years.

Clearly this model is more logical for owner occupiers than investors, but after all that is the principle of home ownership – property rights and stability.

2

Real estate and the credit market are inextricably linked

Posted on: October 5th, 2008 | Filed in Money Matters

In setting up this blog I chose a statement that I felt would provide a “guiding principle” for the blog: – that statement is presented in the header of the blog

Topical, informative and relevant comments and stories related to the real estate industry that hopefully will inform and provoke debate and comment

What I did not want to do was take a political stand or endeavour to be seen as a guru or forecaster in this industry, I just want to be an information source and a point of contact on matters related to the real estate industry. Now as is so often pointed out the real estate industry relies on 3 key components (i) willing buyers (ii) willing sellers (iii) a capacity to pay the price for the property – pretty simple and for most of my life the only variables at play have been the balance between (i) and (ii) – is it sometimes a buyers market, sometimes a sellers market.

Well at this time we seem to be very close to a major issue with (iii) which has nothing to do with individuals, but everything to do with credit upon which we have all become so accustomed – we are in a credit crisis – as yet a way out of this crisis has not been found or at least demonstrated. A lot is being done to try and avoid this credit crisis becoming an economic crisis.

Now I do not have answers or wish to express an opinion of what should be done here in NZ or globally, but I consider that people (NZ property owners, aspiring property owners, anyone reading this blog) would be better off being well informed. So with this in mind I would encourage people to read this opinion piece blog post by Bernard Hickey titled “How a catastrophic collapse scenario might play out” which he wrote late onĀ  Friday 3rd October, after what was for him a period of quiet reflection. The article is valuable, but like all blogs the richness is as much a reflection of the comments that have followed the article.

I would welcome any thoughts or comments on this blog or his, you may hold an opposing view and to hear that would be of value, after all discussion is good, information is good, the broader the communication of such information is in everyone’s interest.

6

When falling house values meet rising rates – where do you turn?

Posted on: August 12th, 2008 | Filed in Buying / Selling a home, Money Matters

This is exactly the scenario likely to be experienced by many home owners who entered the market over the past 2 years, as the latest property statistics from QV show the path forward on home prices is decidedly negative.

Almost in an ironic twist it is also QV who are commissioned by the majority of local authorities to provide revised valuations of properties for rateable valuation assessments. The trouble is as was reported last week the fact is that the current round of rateable assessments will show the lag effect of property appreciation, albeit on a slower pace than 3 years ago, whilst the current prices in today’s market may well show prices below that rateable value.

So what recourse is there for the home owner? and interestingly is this another example of “fast on the price increase / slow on the decrease” pricing model shown by petrol companies? – I am thinking ahead 3 years when with property prices at best flat and at worst slipping will we see rateable values come back with a consequential reduction in council rates on the dollar?

In NZ there is an ability to lodge an appeal to the rating agency who undertook the rating assessment. However in good old California, home owners are fortunate to be able to call upon a state law (Proposition8) passed back in 1978 which allows homeowners to get a temporary reduction in their home’s assessed value-and, accordingly, their property taxes-when the housing market enters a slump. Recognizing that that applies to virtually everyone who purchased property in the state within the past few years, it is no surprise that this situation has created some industrious new businesses specifically Prop8.org which is a new consumer advocate group that was formed specifically to help California consumers take advantage of the law.

Prop8.org provides tax-assessment appeals services for commercial, industrial and residential properties throughout California. Prop8 can provide market data and analysis needed to advocate the lowest possible tax assessed value. Clients get full-service representation, from the initial filing of the assessment appeal application and supporting documentation, through negotiations with the county assessor-even including a formal hearing before the County Tax Appeals Board, if necessary. Prop8’s services are available on a contingency fee basis for 50 percent of the first year’s tax savings or via a flat-fee plan that covers the entire process-with a three-year guarantee-for USD 495. For homeowners who bought their homes between 2004 and 2006, the average savings that result from hiring Prop8 are between US$1,500 and US$2,500 per year, the company’s founders say. (All information courtesy of Springwise).

Is it about time we had more consumer advocacy groups in NZ to provide assistance to all home owners (who still represent the largest single consumer group) but are generally viewed as financially able to manage such issues, for without a strong (not hyper-inflated) housing market we all suffer as we have seen here over recent months a significant drop in consumer confidence and consequentially economic confidence.

15

Buying your first property? – a new book offers valuable insight & advice

Posted on: August 3rd, 2008 | Filed in Buying / Selling a home, Money Matters, Property Investing

When it comes to the moment that you decide that you should take those first tentative steps on the property ladder, what you want is sound advice ideally from someone that you can not only trust – but also someone who understands what people of Gen Y really want and expect!

The answer to your questions, together with a “blow by blow” account of how to get started with investing in property is all detailed in a great new book “The Young and Singles Guide to Property Investment”. The book written by Jodi Cottle is a NZ book written to help young and single NZ’ers better understand buying a house / apartment / rental; it doesn’t really matter what your first step is going to be – you will be better off reading the book.

Jodi is a very smart young person who’s bought and sold close to half a dozen properties and she is yet to celebrate her 25th birthday. In addition she runs a mortgage advisory service (Sable Mortgages) based in Auckland with a spearate business supporting ex-pat kiwis based in London buy property in NZ. We have partnered with Jodi and Sable Mortgages to provide the realestate.co.nz mortgage advice service on the site – who better to advise and support prospective buyers than someone who has this kind of track record under their belt!

The book is written without the bluster of some of the books claiming to make you a millionaire by lunchtime – it is simple – yet at the same time comprehensive, but above all it is honest.

“I certainly don’t regret any of the decisions I have made, albeit that some have cost me money. I don’t regret anything because each occasion has taught me priceless lessons.”

The book charts in detail the process for the buying of her first 6 properties – again a candid sense of empathy pervades her descriptions

“I was so pleased to get rid of this property as the tenancy issues just continued to go from bad to worse. Again, this was another good lesson for me as I got to go through a mediation process with the tenants”

The book is currently for sale in most Whitcoulls around the country or you can buy a copy online from Jodi’s website for $24.99 – a great investment or gift for someone starting out on the property ladder.

Special Offer

Now we have secured 5 copies of this book to give away for free!!

What you have to do to win one of these copies is to submit a comment to this post with your recommendation of a property currently featured on the realestate.co.nz website that would be a great first home – just post the listing number or link. The first 5 to posts with suitable properties will recieve a copy of the book.

2

The definitive set of real estate facts and information

Posted on: July 10th, 2008 | Filed in Money Matters, Real Estate Industry

If ever you need to access to the definitive set of graphs on real estate and property statistics for NZ – then this is the place for you (and for me!). The team at interest.co.nz maintain this set of 21 graphs which pictorally provide a great snapshot of the drivers of property sales in NZ.

Real estate statistics graphs - interest.co.nz

Not only just real estate statistics are provided on the website – here are the other categories comprehensively covered:

Confidence

Credit

Economy

Exchange rates

Government

Industry

Interest rates

Labour

Overseas trade

Population

Prices

Social indicators

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