The Unconditional Blog

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20

NZ property market may well see a brighter outlook sooner

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

Some of the best debates on this bog have come as a result of discussions centered around the prognosis of the future of the property market in NZ. I have for the past few days been listening to podcasts and reading news article from international sources to endeavour to get a read on the longer term outlook for the NZ economy in general and NZ property market in particular. I have deliberately been avoiding the local media.

My take on what I have read and heard leads me to a belief that we have become far too introverted and are in danger of becoming the victims of a self fulfilling prophesy. The analogy I would draw is to an amusing incident that I recall was reported in the UK many years ago. At the time BMW had just introduced their econometer on the dashboard – a driver was stopped having brought a major highway to a grinding halt as he had become so fixated on this gauge, measuring his mpg; in an effort to maximise his economy that he forgotten that the consequence was he was driving at around 15kmph!!

Let’s examine some key facts – the health of the NZ property market is a function of the health of the NZ economy and affordability of housing is a function of the price of property and the salary levels of those looking to buy property. The “recession” or pseudo recession that is afflicting the US is a function of over exuberance, it is placing major constraints on the credit market. The sufferers of this are largely the consumer and not business. As I have heard business globally is performing exceedingly well making significant profits and in the case of US companies exceedingly good profits as so many of these companies are now significant exporters who will reap huge benefits from the low dollar.

The other major economies of China and India as well as Russia are all performing well; less so from export (although for Russia the oil and other commodities is their golden goose) as from significant domestic consumption which in the case of China is actually sucking in imports helping to balance their trade imbalance. The estimate for the growth of China is 9.4% and India 8% – both down on prior years but on the scale of their economies these growth rates equate to enormous growth in absolute dollars.

So what of the NZ economy in all of this. Well if you look at our trading partners you only need to look at the focus of the NZ business community who are in China this week to not only celebrate the signing of the FTA but to cement their already well established trading relations. Australia, our biggest trading partner is according to this economist report from the IMF predicted to continue to grow at a rate of 3.2% in 2008 and 3.1% in 2009, not far off the 3.3% average of the past decade. If our key trading partners are growing at these rates and we have the products from our agrarian economy to meet their need we should be able to tick along nicely for the next few years.

And let us not forget that we are not a solely agrarian economy – look for example at the super yacht industry, whilst it may not amount to more than a $100m a year industry to NZ it is globally riding high – this article in Time magazine highlighted how the $25 billion industry is being driven by the super rich of not the US but emerging markets. The statistic that grabbed my attention – there are over 85,000 people nowadays who have over US$25 million or more in liquid assets! – and this group is growing. To this elite group a super yacht from Alloy yachts is exactly the way to celebrate global success, and for NZ another demonstration of the skills of our yacht builders.

So what of the NCIER survey? Well to me it feels very much like the traditional survey response – when asked in the context of the global credit crisis and a protracted and severe economic downturn in the US – people focus on the econometer and take the foot off the gas pedal and before long there is a long line of gloom merchants stuck in the middle of the road!!

Now this greater confidence in the NZ economy to withstand these global shocks and continue to grow exports bodes well for business. That in its self will not solve the issues of affordability which does drive the property market. We will see the expected stagnant property market, off at least 50% in sales and coupled with this highly volatile prices. Considering all of that I would not be at all surprised that as we head into 2009 we will not be pleasantly surprised by our balance of payments and our companies strong profitability; which coupled with tax cuts borne of greater tax receipts from continued high employment and corporate earnings may well be significantly bolstering the take home pay of most of NZ thereby beginning to reduce the affordability gap.

Anyway just my take – as ever your thoughts would be of interest to debate the issue.

Article Discussion

  1. Having heard the news at 9am this morning regarding the mindless intervention of the government in the Auckland Airport – blocking the bid from the Canadians, I now feel somewhat less optimistic.

    This act of lunacy will send the worst of all possible signals to the word; and worst of all plays so badly off the Winston Peters gaff this week in regard to the FTA – to the outside world we must be seen as a bunch of amateurs!!

    Another plane load of kiwis off to Australia this week with the numbers only likely to grow with this government’s consistent ability to look amateurish and foolish. November cannot come a day too soon!

  2. Louise says:

    It is with relief I see some more balance brought to this debate. Some of the more extreme claims being made about the NZ property market – by reporters who have graduated into claiming status as commentators and who no longer feel it is enough to report the news and have gone on to ‘become the news’ – are too single-minded in the justification of their crystal ball gazing.

  3. chris says:

    Prices up this month (reinz). Now that is a surprise.

    Apparently it is because there were less cheaper homes sold.

    What does AIA have to do with house prices?

  4. Kate says:

    The media reporting fuelled it up on the way up – and will now do the same on the way down. There already are many “victims of a self-fulfilling prophesy” arising from the upside media hype around property – ask BlueChip investors. These were not the average persons who would put a bet on the family home. The BlueChip sales machine closed the deals, often in an underhand way – but these folks wouldn’t have even considered this type of investment had there been no ‘Location, Location, Location’ and the myriad of other similar media fodder convincing them that the property market only goes in one direction – up. Simple fact of the matter is, there is currently an over-supply, largely due to the fact that too many people over-committed in an unaffordable market. The media reporting be it up-beat or otherwise, isn’t going to make any difference to the massive correction that is occurring worldwide.

  5. ian says:

    Is it me,but there are certain posts on the various blogs on this website,that there are still estate agents that are obviously still with there heads in the sand!Most NZ houses are overvalued for various reasons,mainly theres no longer the cheap credit conditions for the average couple to get a start on the housing ladder-therefore the buying and selling stops.As the previous letter states look around the world,its happening everywhere!And whos stupid enough,or can afford to pay $800 a week for the median priced house nowadays?

  6. Ian says some estate agents have their heads in the sand. He says houses are over-valued. That’s a statement that may or may not prove correct as 2008 unfolds. Ian, by saying we have our heads in the sand, do you mean “us agents” are pricing houses too high?

  7. The expression “over-valued” interests me. If we step back 12 or 18 months were house prices over-valued then? The fact is the same house bought at that time being sold now may be described as over-valued, but when someone bought it then they did not think that. It is the circumstances at the time drive this categorisation.

    The reality is that when consumers judge something to be overvalued they tend to look for other options – do not buy or they buy a substitute item – this is true of real estate.

    If you cannot buy the house you want you either postpone or seek an alternative that you as the consumer judge to be “appropriately valued”. Therefore there is actually no such thing as an overvalued house – just individual prospective buyers for whom the house does not represent the right buy at this time. Houses are not a perishable commodity nor a fashion accessory.

    Property rises and falls in price based on supply and demand and statistics track this movement, but each granular component of those statistics are the result of individuals making individual decisions.

  8. Kate says:

    I have in the past raised concern about agents ‘buying’ listings (i.e. providing overly optimistic price range expectations) in order to secure exclusive listings. Even if only one agent did this, then others would have to follow suit to compete for the listing – and in the buoyant market it didn’t matter all that much because often those inflated expectations were met. However, in a downturn, it is a very unfortunate practice. No sense in “sewing up” a homeowner in an exclusive contract at an unrealistic price expectation – it simply slows the market down – and we are probably seeing some of the effect of that slowdown now.

  9. Kate,

    You certainly raise an interesting subject, one that may attract the comments of some professional real estate agents.

    Whilst I am, and have never been an agent, I have spent enough time in this industry to be able to share the experiences of people I have spoken to.

    Certainly “buying listings” has been a practice in the past as with a buoyant market the desire is always for an agent to “win” a listing. Their income and livelihood is reliant on this and often it is the newer agents will little experience that will migrate to this approach, knowing as you rightly point that in a rising market any over ambitious pricing will be met by the rising prices – eventually.

    However with sales screeching to a halt and a large number of agents leaving the industry this is highly unlikely to be happening today. The professional agents know the consequence of buying listings and are far more likely to be managing realistic expectations of vendors – conditioning them in some case to come to the reality of the market as it is often the vendors who in many ways encourage this trait of inflated price expectation.

    I have heard recently that with the number of listings on the market there are far more situations of agents declining listings where the vendors expectations are unrealistic – fast becoming a situation of agents interviewing vendors to assess opportunities rather than the other way around!

  10. Good points Kate and you’re spot on Alistair. I often say that “pricing” is the bane of my existence. I really don’t enjoy the process unless it is for a vendor who hands complete responsibility to me and requires a sale at the best price available – that is when I can shine.

    Unfortunately, a high percentage of the vendors all agents deal with are more “price” sensitive than “I want the best result” sensitive. As they approach the time to put their property on the market they form pricing opinions from a variety of sources – neighbouring sales, neighbouring listings, previous agent appraisals, what the neighbours think, what they need for their next purchase, what they “know” it’s worth, their bottom line, etc etc.

    When I’m competing with another professional agent for a listing and the potential vendor is mainly price sensitive, from my experience, I know that that vendor listens closely to both agents for clues about “what the agent really thinks” about price. If they’re intending to list with one agent, they need to eliminate one.

    What most vendors don’t realise is that if both agents are equally professional, they’ll both be explaining that the market will determine the price. Neither agent will say “I think your house is worth x”. The key decision then should be “which agent is likely to do the best job and get the best result (more money)?” ie: which agent is a better negotiator/marketer.

    If one agent is unprofessional, they will play on the vendors desire to hear a high price, or a price that fits with their expectations. If either agent mentions a price that’s below the price swimming around in the vendor’s head – they’re usually toast, game over, even if they’re right.

    In a falling market, more than ever, keen sellers need to get smart about pricing and even smarter about the agent they choose to help them. Not-so-keen-sellers shouldn’t be on the market at all.

  11. Kate says:

    Yep, agree with both points above – hard to compete against a vendor’s idea of what their property is worth – and what I find characteristic of late is vendor’s trotting out private valuations that are 6 or so months old. I do feel very sorry for them as the market really turned so quickly. There is another practice which really annoys me – that of an agent saying this property was passed in at auction for “x” amount. What they fail to say is that in most cases “x” amount was a vendor bid put on by the auctioneer. I reckon heaps of less saavy buyers pay above this quoted price simply becuase they think someone else was prepared to pay “x” and therefore “x” must be near to the properties market value. I believe after auction protocol should requrie an agent to declare whether “x” was a vendor bid or not.

  12. Agree Kate that vendor bids should be exposed. At Barfoot & Thompson we don’t allow vendor bids. If nothing happens at our auctions, nothing happens. A reflection of the true market.

  13. Kate says:

    Yes, Steve, I’ve watched the manner in which your company conducts auctions on the LLL TV series. FAR more professional, open and transparent than some of your industry counterparts. I don’t know how many auctions I’ve attended where although the auctioneer is supposed to state clearly that the bid is a vendor bid – the manner in which this is done (i.e. “I’ll take that one” and then moving up to the next advance, followed by “and that bid is here” etc.) really ‘walks a thin line’ in my opinion. I had previously thought a vendor bid couldn’t advance on their own vendor bid, but obviously that’s not so! Good on B&T for providing a more credible process.

  14. Alistair, the public may be interested in a separate debate on this issue. What does vendor bidding achieve? My early career involved plenty of it, but I couldn’t go back to it. I don’t think they do it in Australia any more; not sure. I wonder if a pro-vendor bid auctioneer would join a blog debate on the subject? Would realestate.co.nz fear stirring the pot too much?

  15. Steve,

    A very good suggestion which I will craft into a post – so if you have an opinion / experience please hold a moment.

    Certainly I do not consider there is any issue of relevance to real estate in general that I would not consider suitable for this blog – a healthy open discussion is valuable for all – readers and contributors alike!

    Some might well say the pot certainly needs vigorously stirring – I’m all for it!

  16. Stefan Martin says:

    Some good points, some not so good. I see the media propaganda has started to take effect – keep telling people prices are falling and hey presto…..
    What also seems to be happening though is that agents are now undervaluing property – is this to get a listing and then a quick sale at a time when it is obviously more difficult to sell property than it was even 6 months ago? A drop of $50k in a house price is an awful lot to most vendors but usually about $900 to the agents commission – a small portion of their $20k.

  17. Stefan

    Thanks for your comments.I am interested in your view that agents are undervaluing properties. I am sure agents reading this add there comments, mine however would be that in today’s world with a more informed consumer with ready access to statistics it is less likely that the seller will rely on the agent to “value” the property. Agents at the moment are not short of listings, they are short of buyers. What they need is realistic sellers – if that takes a price that is below what the seller judges is the market than the decision will rest with the seller.

    The key fact of real estate is there is no sample group or research panel, every house is unique and to say that property sold for less than it is worth; or contrarily a house sold for more than it is worth is false – a property sells at the value it is – its true value is marked at the moment of sale.

  18. Ross says:

    Stefan – we have homes priced for sale at $50,000 to $100,000 below what they could have sold for this time last year, yet despite this nobody is interested in even looking at them, so nothing to do with agents undepricing, more to do with a market that is in a very sorry state. It would be more irresponsible for agents to continue to price at late 2007 levels when prices in many cases are now back to 2006 levels.

    Quite incredible that there were less sales in March than January – January is usually the lowest volume month and March is usually the highest, however this March was the worst REINZ result since they started collating the data back in the 1980’s. With over 80,000 homes for sale in NZ and only 5,000 per month selling and the slow winter months ahead it looks like it will be a buyers market for a very long time.

    Agents are now truly earning their commissions in this climate and only those who have worked in a declining market will survive this one.

  19. Ross says:

    Also you forget that the media were equally positive in the other direction when the market was booming. In fact it could be argued that the media helped inflate the bubble with headlines like “house prices rise $500 per day”, House prices defy predictions with huge leap last month”, etc, etc

  20. Ross says:

    We loved the media back during the boom eh!

    Here’s a classic example from good old AG:

    Homeowners riding a $500-a-day rocket
    12:00AM Wednesday October 09, 2002
    By Anne Gibson

    Homes in the superheated Auckland property market have been rising in price by nearly $500 a day.

    Prices rose on average by $483 every day last month, according to monthly statistics from the city’s largest real estate agency.Barfoot & Thompson director Peter Thompson said the average Auckland house price shot from $325,831 in August to $340,329 in September, according to statistics gathered from deals his agents had done.

    This means that houses in the country’s hottest housing market rose $14,498 in the 30 days in September – one of the largest price jumps on record. The price surge suggests a house selling for $300,000 at the start of September could be worth $358,926 by the end of the year.

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