A sustainable market ?
There have been a few interesting articles of late about the state of the market and what we may expect to lay before us over the next few years .
A description of the market today by one of our active commentators as being at ” dismally low levels ” started me thinking and a little research into the stats indicates that although the volume is nowhere near all time highs ,its not too bad either .
Consider:
Since Jan 2000 to August 2009, the average monthly sales volume in Aucklands’ Eastern Beaches has been 245 sales/month. The highest volume was in Sepr.03 at 435 and the lowest was Jan. 1992 at 93 sales for the month. (Jan 1992 to date the figure is 231s/m.)
The figures since May 2004 give an average volume of 228 sales/month. The Last 6 months since March have given an average volume of 221.5 s/m, not indicative of a boom by any measure but hardly dismal and certainly not a slump.
Is this a sustainable level? I do think so.
I accept that unemployment is high, may go higher, and that property is unaffordable to a large section of our population, I don’t accept that will automatically result in the lowering of prices. Excepting lack of any free choice, Kiwis simply hold on to their homes and wait out the storm as they have been doing.
Mortgagee sales are, and will be, increasing given the time all the processes take but that is no surprise given the incredible excesses of the 05/07 period. There will continue to be well funded, lowly geared investors to pick up good properties, young couples who have saved a deposit in the old fashioned way, people who can obtain collateral guarantees and of course immigrants – all of whom can buy.
In the blog “The myth of affordable Housing “I detail the reasons that I believe make it impossible for there to be any meaningful drop in house prices or increase in affordability of property. In fact, as time passes, I believe a diminishing percentage of our traditional homeowners will be able to own property and that the property they will be able to aspire to will not attract them. Such property will not be located in neighbourhoods they wish to live in, will not contain the amenities considered to be necessary to support life and will not be zoned for the schools they seek to send their children to . These are the long term rental tenants of the near future and will be the engines that drive the rental investments of those that can buy.
Added to the Deaths, Divorces, Debt, Marriages, Upward and Downward mobility, immigration and the like, I see little reason to expect significant change. We have seen worldwide turmoil and plagues over time but we seem to muddle on through and enjoy good lives. Given we are working our way through a perfect storm and are not yet out of it I do not advocate recklessly increasing debt (interesting to see the Phoenix like rise of the property spruikers and their seminars) but I maintain that if residential investment is part of a well planned and budgeted retirement plan, this is not a bad time to buy.
Similarly, if you happen to be looking to a longer term and can afford to buy, do so. Interest rates will rise and fall over time; definitely they will rise from current levels, all the commentary agrees on that. Prudent rather than exuberant optimism is the order of the day and whilst it will definitely cost money and sacrifice to take part in the property market I do believe that the cost of not taking part will be far higher.
September 29 2009 01:58 pm | Uncategorized
Peter Driscoll on 29 Sep 2009 at 10:31 pm #
As always Gavin, a wonderful read with a beautiful logic attached – cheers
J.C. on 30 Sep 2009 at 12:52 am #
Actually, I don’t think the logic is so “beautiful”. Here’s why:
1. If unemployment is high and property is unaffordable, we can only point to factors such as easy credit, high expectation about future earnings, higher demand, constricted supply, and asset inflation to maintain or support prices. All these factors are obviously missing or marginal at best. In fact, it would make sense that these factors would support near to mid-term deflation (case in point, Japan in the late 80s).
2. With fewer house buyers and more renters, how this does support house prices? It doesn’t; it supports rents.
3. With regards to “world turmoil,” the world has never experienced a debt explosion of this magnitude, so how do can we make any meaning comparison about “muddling through”? It doesn’t make sense to say how an outcome will eventuate when you’ve never experienced the event!
So there’s my 2 cents. It’s not that I’m against property cheerleaders and the like, but I don’t think you can weave a story that tickles the ears and comforts private fears. It doesn’t make for sound investment decisions.
Gavin Hamilton on 30 Sep 2009 at 12:52 pm #
Hi JC
thanks for your considered response , excellent we see things so differently .
1 I don’t think unemployment per.se. is high or will be . Currently at 6% rising to maybe 7% it is nowhere near the 11% we reached at one stage in the period I quoted ;even if 8% is reached it still means 92% is in employ . Of that portion that is employed I assume that 50% will continue to be able to buy a home – less than the current levels of ownership . Combined with the slowdown in construction , immigration and natural growth I think demand will continue to be strong . It will surely continue to cost more money to buy a new house particularly as the tax quotient of the purchase price continues to rise ,sure as eggs the cost of established homes will follow ; that is evident from the figures since 1992 . We did have financial crises in that time , 2 recessions ,low and exorbitant interest rates etc. yet we still saw prices increase versus wages, rents go up and sales average 228 per month. There is nothing new in the mix beyond scale . A large part of the size of the losses was a direct result of the huge ,falsely based increases
2 I believe fewer homes will be built for some time until new financing protocols are established and new spec builders enter the fray . Demand for accommodation will increase and, whether owner occupied or rented, all must be owned by someone . I believe demand will in one form or another underpin the prices .
3 We have had debt explosions before and financial turmoil .The defaults by the south American economies to the world bank was predicted to bring about the end of the financial world as we knew it , as was the Asian crisis , but they didn’t . We muddled through and I believe we will do so in similar fashion .
In retrospect ,you and I may both be right or wrong,it will be interesting to compare notes in 2011 or 2012 . I know the world will come to an end , I just think it is unlikely to be today or tomorrow .
Forgive me for sounding like a property cheerleader , it is not without limitation and risk as an investment vehicle . My observation is that people are easily dissuaded from sacrifice and investment , particularly toward provision for their latter years . I simply contend that an investment in residential housing as part of a prudent and aware process is not to be feared , if you are in it for the long haul this is a perfectly good time to be acting . Those dissuaded from investment in any form by fears of the unknown future will, in my view,probably suffer the larger penalty .
Thanks again for your thoughts
Gavin