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Archive for the ‘Money Matters’ Category


Shared equity / shared risk / shared reward??

Posted on: February 13th, 2008 | Filed in Money Matters, Real Estate Industry

The announcement today of the government’s proposed initiatives to deal to the issue of housing affordability seems to be generating a unanimous negative reaction as judged by feedback mechanisms of various websites. Whilst I think there is a general consensus that addressing affordability is a laudable goal the proposed idea of shared equity is entirely flawed as a solution.

Far from achieving the stated aim of supporting low income families attain the home ownership dream as expressed in the prime ministers speech it would clearly create a further rampant speculation in the housing market sucking in further demand to an already restricted supply market (see the blog post on 2008 house prices) as the “subsidy by another name” would fuel the fire of the selected few deserving families who the government would choose to anoint with this shared equity, allowing them to speculate to accumulate!

The issue here is that the proposal seeks to provide a second mortgage secured by the government which is non interest bearing and repayable on sale of the property. So let’s examine this scenario.

Couple A on a joint income of $55,000 are interested in buying a 3 bedroom house in Auckland at $300,000 – thanks to previous government support and the kiwisaver home start incentive they have saved $20,000. Now on their income the deposit is less than the 10% and a bank would not lend due to credit history lets say anything more than 85% of the purchase price – also the mortgage on even the 85% ($255,000) would be $515 per week – far more than they could afford on a take home wage of $850. But here comes the shining white knight of our government to offer an interest free loan as a second mortgage of $130,000. Now the situation becomes very different.

Couple A now need only borrow $150,000 which of course is only 50% of the value and pay a mortgage of $300 per week. This all sounds wonderful – a perfect solution – Couple A can now start their property climbing aspirations, a shining example of a helping hand up rather than a hand out!

Now lets examine the situation 3 years down the track when one of 2 scenarios have occurred:

  • Firstly Scenario 1: Couple A have acted responsibly – maintained and even with a great bit of kiwi ingenuity and hard work enhanced their $300,000 home and have decided to sell. The property was bought in a good area and property prices have risen 7% per annum each year. They sell for $400,000 (7% inflation would means a growth to $367,000 plus the property improvements of $33,000 added by Couple A). Couple A now repay kindly their government second mortgage of $130,000 leaving them with $115,000 net of their mortgage repayment! – so in 3 years thanks to our government they have achieved an annual return over 200%.
    Now the key thing is this successful financial return has been achieved on the back of taxes paid by hard working New Zealanders. So where is the shared risk, shared reward of shared equity?
  • Now for scenario 2: Couple A are not as diligent and committed as in the first scenario, they become a little slack with mortgage repayments, unfortunately they also bought in a less well maintained area where property prices have not grown as the local factory and processing works closed. Mysteriously one day when the Baycorp people pay a visit they discover that nobody lives at the house, the copper wiring has been stripped out with anything else of value. The property would have been worth around $290,000 in good order but now looks like a tough buy at $230,000. The bank want their $148,000 mortgage back from the mortgagee sale as a first mortgage, leaving the government with the balance after fees of $76,000. Now that does not look to be such a smart investment by our government! Oh and by the way that was our collective $54,000 that was just lost, let alone the loss of interest opportunity on the original second mortgage over the 3 years.

This is an election year and the lolly scramble has started in earnest, just let’s hope that the majority of the population have the intelligence to see beyond the smart spin!


Will 2008 see house prices rise or fall?

Posted on: February 2nd, 2008 | Filed in Money Matters, Real Estate Industry

This has got to be the key question being asked of real estate agents across the country this weekend as the country gets back into normal gear with the school year starting and families considering the pros and cons of finding their next home.

At this time we seem to be clearly in a buyers market, sales of property slowed significantly through the second half of 2007 and the feedback being whispered within the real estate industry is of a very quiet start to 2008. We will need to wait another 2 weeks probably until with see the REINZ statistics for January. Maybe the excuse of the prolonged summer period can rightly be blamed for slow sales – we will have to wait to see how people explain the situation.

However to look for the signs of what we should expect to see in terms of future house prices you need look no further than good factual statistics, because whilst the purchase of property is a very emotional act it is en-mass driven by the very clear principles of economics – supply and demand.

People are attracted to NZ for a better quality of lifeNew Zealand is a country that continues to attract immigrants, this is a country that people want to come to for a better quality of life. In the year to November 2007 a total of 82,600 people chose to make this country home. Now set against this is the fact that 76,000 people chose to leave the country. On the face of it this means that NZ needed to meet the housing needs of only just over 6,000 new residents. However deeper in the numbers is the fact that many of the departing kiwis are young people setting off on the great OE – this component of the outflow has little effect on the housings stock as these young people rent or live at home. However a larger proportion of the new kiwis are older with families and money looking to settle and buy property – this is the constant and growing demand side of the housing market.

If you look at the last 5 years and examine the population growth of NZ you see a very clear factor in property price increases. We are growing our population faster than we are building new homes. Today’s population is 4.256 million up over 68,000 people in a year, this growing population needs places to live (appreciated they don’t all buy). The fact is that despite the peak year of new builds in 2004 at over 32,000 the shortfall of house starts to population growth currently runs at around a shortfall of 1,500 homes per year. Now as reported this week the consents for building starts for 2007 have fallen to just 24,500 for the year – this will leave an even larger shortfall.

An ever growing demand for property fueled by immigration and a strong economy matched with a slowing new build programme supported by a very liquid credit market could potentially lead to a squeeze on prices which could well see the right property in the right area appreciate in 2008 – maybe not by 10% but certainly well ahead of the 3% inflation. Add to this the current sluggish real estate market and a glut of homes looking for buyers. All indicators that the median price of property may well continue it steady rise again this year, so it might well be a pretty attractive time to buy.

So this could yet turn out to be a very busy weekend for real estate agents. Not a story the Reserve Bank Governor wants to hear, bit unfortunately his remit does not stretch to such areas as immigration. We need to face the fact that we live; and choose to live in this global economy with all the ensuing benefits of consumerism and rising living standards, to participate is to lash ourselves to the other boats around us and rise on the incoming tide rather than anchor us to the bedrock of the past and suffer the ensuing flood-waters.


NZ Property – the least affordable in the world?

Posted on: January 22nd, 2008 | Filed in Media commmentary, Money Matters

There is nothing like an alarmist headline to sell newspapers! – and this one today was certainly right on the money, shoving Sir Edmund off the stage.

So is it true that we live in the world’s most expensive country where we pay the largest percentage of our income on property as the headline would make you think?


I decided to have a read of this report – 4th Annual Demographia International Housing Affordability Survey – 52 pages of detailed analysis and statistics; and as we all know those damned statistics can be portrayed to paint many a varied picture.

So image my surprise when I discovered the following facts of this report:

1. It is not a report of 6 countries property markets as the headlines claim – it is a report on 227 individual property markets, which in scale terms are mostly as big as or bigger than the whole of NZ

2. NZ is not the least affordable country (or aggregate of collective markets) – it is equal with Australia at a multiple of 6.3 times median price to median income, UK is 5.5, Ireland 4.7, US at 3.6 and Canada at 3.1

3. Using this multiple scale of median price to median income across these 227 markets, the report sets out the markets in ranked order with Los Angeles the most unaffordable (so much easier than saying “the most least affordable”!) you then step down through 5 US cities including San Francisco and San Diego before you get to the first non-US city – coming in at #6 Mandurah in Western Australia at a multiple of 9.5! Then descend through markets in the UK, Australia, Canada and more of the US until you get to 20th place at a multiple of 7.5 – Tauranga. Auckland comes in at 31st place on 6.9, Christchurch 34th place at 6.6 and Wellington 46th place at 6.1.

Now does this really point to us living in the most expensive country in the world?

So what does this report tell us really (as opposed to what the newspapers want to tell you). Well first off this report has an agenda which to be fair they do not hide. The authors actively and passionately believe that restrictions on land use on fringe land adjacent to cities should be freed up to allow for the ever growing expansion of cities. This theme is neatly segued by the former reserve bank governor and former leader of the National Party Don Brash who writes the forward to the report – naturally bringing the government to task for putting blocks in the way of such needed progress.

On a less political point of view the report really tells you what you already knew – the laws of supply and demand. If you create demand through economic growth in a market, this sucks in companies which suck in workers, this demand puts pressure on housing stocks and if you apply constraints on new supply of land and property then the solution is increased prices. If income wealth distribution does not significantly change then the median income does not budge and property looks to be more and more unaffordable.

Where is the evidence of this? – look no further than the top 10 of most unaffordable markets – West Australia (mining explosion), San Francisco (tech explosion), Bournemouth / Brighton (tech explosion and London exodus).
Equally look at the top 10 most affordable markets in the survey and low and behold you see the former rust belt of the US and the remotest parts of Canada (Canada has an Invercargill as well!) – places where either people are leaving in droves or people never came.

Can anything be done about this unaffordability in NZ? – simply put no, we live in a more and more global world market for property where talent moves to where the opportunities to work and enjoy life are rich and plentiful. With this migration of people follows money and companies, with this comes the pressures and demands on property, especially as in absolute terms NZ property prices are still cheap when compared to main global centers such as London, New York, San Francisco, Sydney, Singapore, Hong Kong etc.

This was the strategy espoused by Professor Richard Florida in his book “The Rise of the Creative Class” – basically you cannot stand against a tide of change, for NZ the skill is in harnessing the talent and wealth that comes with our natural attraction for this new immigration and build a lasting and vibrant economy and community in our unique part of the world.


Are house prices falling?

Posted on: January 16th, 2008 | Filed in Money Matters

The figures for December are in and it is important to strip away emotion and look at the facts when it comes to housing statistics especially as the media continues its insatiable desire to create alarmist headlines:

Cheaper houses may be on the way as market tanks
Property prices slowing
House sales, prices fall in December

The fact is that sales have slowed – the Real Estate Institute (REINZ) report a total of 92,101 properties sold in 2007. This compares with 102,042 in 2006 – that’s a 10% decline. In the month of December sales slowed to just 5,597 – the lowest single month since September 2001. It is clear then that property is not being bought as fast as it has been in the past few years.

Are house prices falling?

The key question then is how long does it take to sell a property? For December a reported 36 days – the average for the whole year was 32, the average for 2006 was 34! – so does that mean properties are selling about as fast as normal and there are just less properties being offered for sale?

The slightly misleading figure is this “median number of days to sell a property” – it is not an indication of how long on average it should take to sell a property, it just the median number of days to sell those properties that sold. A truer representation of the pace of sale of the market can be seen from statistics on the website. Currently there are 92,067 listings on the site of which 55,331 are residential properties for sale. Now 12 months ago when the market was considerably more active and monthly sales were averaging around 8,500 per month the number of listings of residential property on the site was over 52,000. So it is very clear that property is backing up and inventories are rising. The big question then is, is this leading to falling prices and are bargain hunters out on mass?

The median selling price for December was $345,000 this was down 2% compared to November. A trend or a one-off? Looking back over the 2007 year shows some interesting volatility of prices. Prices were down 0.4% in Oct as compared to Sep, July prices were down 0.7% as compared to June and that month was down 0.7% compared to May. It is important to remember that median prices are always more volatile when sales quantities fall. So it is not clear if we are seeing a true trend or a seasonal adjustment. Either way you look at it the fact is that 12 months ago the median selling price was $327,000; in December it was $345,000 a 5.5% increase in a year.

The last point on pricing, and a very important one not highlighted in the REINZ press release – the total value of all property sales reported in 2007 was $37.8 billion. That represents the highest year ever on record, 1.1% higher than 2006. That total value was made on a much quieter sales volume as cited earlier of 92,067 – so that means that the average selling price of all properties sold in 2007 was $411,196 – representing a 12% increase in the average price. Now normally median prices are quoted in monthly stats, but taking a year of data the average provides some relevant information and clearly 12% increase is significant.

So that all provides some different perspective on the market statistics – as to what it means for the coming year, I would be interested in your views.


House prices up or down – who to believe QV or REINZ?

Posted on: December 11th, 2007 | Filed in Media commmentary, Money Matters

We seem to have opposing views as to the state of the housing market and all eyes are on the Reserve Bank Governor as to his take on this twist in the property soap opera.

In the left corner representing the state owned enterprise QV we hear that the average price in November was $393,198 with prices now having fallen for the 3rd straight month.

In the right corner representing the Real Estate industry we have REINZ who states that prices have actually increased with a median price in November of $352,000 up from $350,000. This on the back of an increase in sales volumes of around a thousand from October.The key in this tussle is not the motives of the reporting agencies but the principle of where the data comes from and how it is reported. As the old saying goes – there are lies, damned lies and statistics!

The reported statistics from the Real Estate Institute are the easiest to explain. They collect reported unconditional sales data from licensed real estate agents around the country every month – in November there were 7,837 house sales and in the month of November the median price was $352,000. Now a key here is the statistical metric of median price – not average price. Median is the center point of a range in this case the 3,918th sales price when you line up the 7,837 sales from highest to lowest.

QV data is not as easy to explain. Their source of data is the local councils. This data comes in to them slowly over the months following legal settlement of sale that is why they report a figure for data collected for a 3 months. It is likely that the make up of data will cover sales going unconditional up to 2 to 4 months ago, which has trickled into the local authority stats in the past 3 months. Additionally they report average sale price – a very different statistic.

I hope this sheds some light onto why there are differences in the absolute numbers as well as the trends.

As ever with statistics, you will find as many people in favour of one presentation of data as you will another (average price vs.median price), however I firmly believe that timeliness of data should always be championed in reporting.


So what price is that property on the site?

Posted on: December 9th, 2007 | Filed in Buying / Selling a home, Money Matters, Online marketing, Website news

It is the question that ever visitor to our site asks – if not directly to us by email, then at least to the screen in front of them?

If I could do one thing for this site it would be to make sure that every property featured had a price.

Homes for sale are not like cars, where there is no question that a 4 year old Honda Accord is worth $20,000. Every house on the other hand is unique and therefore only the classic market forces of supply and demand will establish a price. We want to work to improve the transparency of pricing on all of the listings on the website to help you more effectively search.

To start with a useful piece of information for you to know. Every agent posting a listed on the site is required to provide us with either a stated price (which we display) or if it is being sold as a tender or auction or is just POA or Negotiation (or other acronym) , the listing agent must supply a price range. Armed with this information we deliver results for searches that you make on the site.

So if you search for homes for sale in Paraparumu priced between $400,000 and $500,000 you will see a selection (based on today) of 39 homes, only a third of which have a price, the rest are marked as “offers” or “negotiation”. All of these listings however were provided to us by agents who told us that the price range fell between $400,000 and $500,000. We do not, and would never try to be clever and add properties to individual priced searches for which we know the price range fell outside the range you selected.

Having explained this part of the site mechanics, it is clear that some agents select ranges that are just too broad. This is something we do not condone and we are constantly communicating with the industry to try and get them to price more openly all properties to help you – the buying public.


Affordable housing – can we please learn from others!

I am not sure if I am more amazed by this proposed bill being introduced by the Housing Minister to provide for affordable housing or by the only reaction that the media could find to report – that being the Property Council’s view that the outcome of the bill will result in higher building costs as developers, forced to take a lower margin on “affordable” housing pass on this “cost” to regular buyers.

Is everyone missing the point here?

This proposal is unworkable, how would it ever be possible to demarcate a property as “affordable” – it is a house, indistinguishable from any other house. I shudder at the thought of a highly expensive bureaucratic team established to monitor these new “affordable” houses so that some “unscrupulous” owner did not try and sell such a house on the open market and land a sizable profit.IKEA BoKlok House - affordable housing for the UK

The housing market is a private sector open-market economic model driven by supply and demand – for the government to try to intervene is naive at best. Sure there are issues with affordability of homes for young people, but trying to create an artificial market for a designated house is impossible – surely we have some intelligent advisers in our government who could look to see what they can learn from others.

Overseas there are very workable models of assistance in the area of finance to help young people buy a home (of their choosing – not some select group of properties our government want us to buy).

Additionally why not let the market demand encourage developers find new ways to build more efficient modular houses – try looking at the IKEA housing model in the UK. We are not alone in this world in having social and economic problems – how do we let politicians come up with such half baked ideas!

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