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Property Crash Evidence is Absent!

Property Crash Evidence is Absent! By Kieran Trass

New Zealand house prices in general are set to plateau over the next 12 months and not crash (*see EXCEPTIONS below). I suspect Australia and the UK will return to the days of negative equity (seen in the 1990’s in the UK) for many homeowners/investors by 2006/07. A small interest rate lift could easily magnify the coming slump and create havoc in Australia and the UK but to a much lesser degree in NZ.

Consider these facts and then tell me NZ is in for a crash like Australia, and the UK:

1) Australia is on the wrong side of a 6 year boom. The Uk is on the wrong side of a 4 year boom (which peaked with 30% growth in 2002).
NZ didn't even have 3 years of boom in this cycle.

2) Australian and UK prices have increased by over 80% in the last 5 years.
NZ prices haven't even seen a 50% increase in the last 5 years.

3) Australians have heavily over borrowed. They borrowed 10 times as much in the last 9 months as NZ'ers did! (Thats the equivalent of NZ's TOTAL mortgage debt in just the last 9 months! i.e.$90 Billion).
NZers only borrowed $9 Billion in the last 9 months. UK borrowings are increasing by around 9 Billion Pounds / month)
4) Australians now owe over $570 Billion in mortgages, thats naerly 6.5 x NZ's $90 Billion. (Aust population is only 5 x NZ's) The UK owe 800 Billion pounds.

5) Australians have been buying on yields of 2-4%. NZs yields have been more like 6-10%.


The areas which will have a significant drop in values as a result of NZ’s property slump will be:
1) Small towns (where many Australians are buying! These Australians have never seen small town NZ in tough economic times...)
2) Small inner city apartments (Oversupplied, ironically some of these have been developed by Australian developers and these apartments are being marketed to Australians as a good investment at what appear to be inflated prices ($150,000 for studios! The irony of it all! Remember the Gold Coast properties being sold to kiwis at inflated prices in the 90's...)

Answers to a few common questions at the moment:

Are we in for huge falls in values and a ‘property crash’? NO! I don’t believe it for a minute. When you consider the genuine Key Drivers of the property cycle it becomes plain to see that we have not taken values to the absurd levels for example that the Australian major cities have taken their property values to (in relation to the Key Drivers like return on investment, property vacancy rates, construction levels, population growth etc).

Whilst current levels of return on investment are low (@5-8%) they have not reached the absurdly low levels seen in the major Australian cities (@2-4%) nor do I expect them to reach those levels in this cycle, our property vacancy rates are not extreme (We don’t have lots of empty properties due to a lack of demand). I’m not discounting house price falls but simply can’t see the signs of a wholesale ‘crash’.

Will interest rates quickly crush property values? NO! Sure they will have an impact on some overextended borrowers but an increase in wholesale rates by even 1% p.a. would not immediately ‘crush’ property values. Given enough time then yes they could have a temporary influence on market values and here’s why. A third (33%) of all mortgages are on floating rates however another 30% are on a fixed term of less than 12 months. So if interest rates did spike or rise quickly it will take some time for this effect to impact on borrowers affordability.

Will the oversupply in the Auckland inner city apartment market cause the collapse of property values across Auckland? NO! I fail to see how a niche market like inner city apartments can affect the value of the average suburban home for example.

There are a total of @500,000 properties in greater Auckland and only @10,000 of these are inner city apartments (i.e. 2%) so whilst I believe there will be some decrease in rents across Auckland as a result of a ‘ripple’ effect emanating from the expected oversupply of inner city apartments I do not believe that this will impact on values to the same degree. Just think about the leaky building syndrome... Did that result in the collapse of every properties value across Auckland? NO, but it has certainly impacted on the value of those type of properties.

The same can be expected to happen with inner city apartment values. In the short term inner city apartment values will suffer a correction (especially the under 40sqm ones) as rents find their new levels but this will not collapse values across Auckland.

Doesn’t New Zealand just follow the Australian property market pattern (and therefore we are in for huge falls in values and a ‘property crash’?) NO! Some commentators would have us believe that NZ house prices always follow Australian house prices about 1 year later but my research reveals this not to be the case. New Zealand clearly does not automatically follow in the footsteps of Australia in respect of house price growth (See graph below showing NZ house price increases matched with Australian house price growth 1 year earlier).

There is clearly no correlation throughout the whole decade of the 1990’s and only very recently in the year of 2001.

Also when I considered the trend of NZ versus Australian house price growth I found that New Zealands long term growth (last 14 years) is only about a third of Australias!

The economist article shows by how much prices would need to fall to get back to their long-term average (over the last 28 years), assuming that the decline takes place over four years and that wages rise at a pace similar to that in the recent past. This is how they ascertain that house prices in NZ must fall by 15% to get back to that long-term average.

What they haven't taken account of is the financial deregulation we saw in the mid 1980's resulting in making mortgage finance more accessible for property investment and also the baby boomers investment pattern impacting on house prices due to direct property investment becoming favourable since the mid 1990's (rather than the old days of superannuation schemes).

In summary just because some other countries like Australia and the UK have heavily over-inflated house prices which will crash significantly this doesn't automatically mean that NZ will follow suit. There is a need to consider the complete makeup of the economy and the state of the fundamentals specifically driving the boom.

In my study of historic property cycles in NZ,Australia,USA and the UK I found that the stronger the growth in a boom the higher the likelihood of a correction (negative growth) in the following slump.

As Australian property market commentator Neil Jenman said to me this week "Australia has gone insane over house prices but NZ looks like it's just on the brink of going insane". Neil shares my opinion that NZ's property market will not see the same correction as Australia.


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