How High? How Low?
Thinking about the market, the current heated exciting behaviour and heady prices being achieved you have to wonder at the sustainability of it all, the fragility or otherwise of the current state of things.
If you suffered through 2008 and the immediate aftermath, confidence comes slowly, it is hard to have faith in things economic or even a future to enjoy. One fairly bright light locally has been residential real estate, in Auckland anyway. The market has contracted, it’s just a fact, the volume of sales taking place continues to be well below average; but rather than as a result of shortage of money or lack of purchaser confidence the sales reflect a shortage of property available to sell. As a result prices are high and rising; phew – imagine the woeful state of affairs if in NZ there were bucket loads of available homes and low sale numbers, prices would not be rising and people would be feeling poor.
The very thing that will tend to prevent any Govt. tampering with the home market is the wish to avoid the poverty effect, the desire to foster a sense of confidence and well being in the public at large; folk feeling poor don’t spend, eat out, change cars or hire new staff. The speed with which money spins in the economy slows and with it growth stalls – a governmental nightmare a la USA, Euro-anywhere type thing. Deflation is a far greater risk than that of inflation, deflation carries far greater negative series of consequences and Government will go to great lengths to avoid the onset of the behaviour.
Interest rates are playing a big part in the strength of the market; they are low and make home ownership relatively inexpensive. Rates are more likely to lessen than increase, particularly in the short term; if the rates did climb so would the exchange rates which would negatively affect exports. It may be a few years, possibly 4-5 in my mind, before we see rates go up significantly.
I was reading a blog by Olly Newland, property guru extraordinaire, he was commenting to the effect that in his opinion rates would stay low which supports property prices. He also identified 7 pressure points on housing stocks which are detailed below. (I lifted these points from his blog.)
“Where is the pressure coming from?
• Very little new construction of ‘affordable’ housing
• A decades worth of houses lost through leaky home crisis
• The tragic earthquake in Christchurch destroyed thousands of homes
• The huge add-on costs of building new houses, not to mention GST and council fees
• Immigrants who consider Auckland as a paradise for housing as compared to overcrowded towns and cities they come from
• Lower interest rates which allow greater borrowing
• Rising rents due to the shortage of housing and recent tax disincentives all of which act as major upward drivers of prices.
Another direct lift from Olly’s site gives you some idea why cost of new homes is unlikely to ever become ‘affordable”.
A builder friend of mine recently completed a development – a nice property, somewhat better that a group-house box, but not a mansion either.
The charges he had to meet (and pass on in the price!) included:
• Building consent $10,000
• Resource consent $5,000
• Storm water approval $2,500
• Compulsory inspections $15,000
• Crossing permit $500
• Water meter $5,000 (actual cost of meter: $400)
On top of all that, the Council decreed compulsory double glazing, stainless steal nails, extra and approximately another $20,000 in sundry charges as inspectors and engineers visited and revisited the site many times and often with overlapping and conflicting demands.
In addition, all the slab, excavations, retaining walls and bracing were inspected twice and he was double-charged and often treble-charged as a result of a new regime in the latest building code.
All these charges added at least an extra $100,000 to the building costs – to which, naturally, must be added the developer’s margin, and the ubiquitous GST impost of 15% which added many tens of thousands of dollars on top of all the rest.
My developer friend said that if the charges and taxes were set a fair and reasonable levels, the property could be sold for an estimated 25% less (!) and still have left him a fair margin for the 12 months’ arduous work he put into it. (Not to mention the risk to his capital.”
From this exercise which is repeated up and down the country, it is no wonder that developers are unable to build more affordable houses. The costs are just too great for the meager margin they can earn for their time, trouble and risk. This is the true reason building consents have slowed to a crawl, and why there are bun-fights between buyers breaking out all over the place as people try to bid against each other for existing homes – and hence drive up prices.”
So there it is, prices holding strong, rising even; volumes lower than usual, probably the status quo lasting a few years, catastrophes excepted.
All our major trading partners have slowed or are facing slowdown; the Herald on line for 24 July noted Australian economic analysts Deloitte Access Economics warning of an end to the golden weather as Chinese demand slows, its times like these that being small is good, we only produce a small quantity of product in world scale and fortunately a lot of it is protein.
Interesting times to be living through, I still believe in a great future for our ‘little land that could’ to paraphrase the children’s book.
July 31 2012 04:07 pm | Uncategorized
Simon on 01 Aug 2012 at 1:08 pm #
Excellent statement Gavin, I fully agree perhaps the single biggest issue in NZ at present is rampant regulation that is stifling every aspect of Kiwis production, especially the self employed, there appears to be a huge new regulation industry feeding off the Kiwi battlers not only making building projects unprofitable but creating conflict and stress along the way.
As global economic events unfold many people in NZ are going under, more often than not pushed over the edge by some form of regulation ( accompanied by a fee of corse) that could be minimized, simplified or removed altogether.
I see the recent wave of cheaper money being offered by the banks as the only reason many in NZ are surviving, especially in the South Island, I watch with interest house prices in the coming years, in my opinion perhaps the only people who can afford them will be wealthy escapees from overseas as Kiwis on $15 per hour can not afford to spend at a minimum $300 per week on a mortgage.
Gavin Hamilton on 01 Aug 2012 at 1:26 pm #
Hi Simon
its not just the beaurocracy of itself; the bigger problem is the misguided direction, the desire to redistribute wealth in search of a mythic ‘fairness’. A nation either grows the income or it doesn’t, taking from Peter to help Paul does nothing to advance a nation or provide for education health etc, it just gives Peter an excellent reason to leave. We have created too many rights and no responsibilities, a handout culture without limits and that was the recipe for the Greek catastrophe.
I do agree with you about the nature of homeowners in the future, I worry for our kids.