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New Zealand Not Looking Good

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Fresh data may still be a bit thin on the ground but over the past week we have come across two people with

slightly unpleasant stories regarding the strength of the housing market. One was a taxi driver. He has

been trying to sell an investment property in Devonport since October last year and although cutting the

price the place is still sitting on the market. We suggested he take it off the market for a month or so then

put it back on because it looks like it's probably become stale. He also noted that he had an apartment in

Auckland and recently sold it for $50,000 less than he paid.

Another person bought a set of flats last year for over $2 million and placed his own house on the market

hoping to get about $2 million for it but the real estate agents were only bringing forward offers of $1.5

million. He is contributing about $1000 a week over and above what he receives in rents in order to service

the mortgage on the flats and wondered whether he should sell the house now and get rid of the mortgage.

We suggested that as long as he is reasonably certain about his cash flows over the next few years he may

as well hold on to the properties and should get a capital gain further down the track. He was thinking of

selling in 2010 and we said that didn't sound too unreasonable.

Speaking of 2010, apparently one commentator in the housing market is predicting that the next cyclical

upturn in the housing market will occur in 2011. Given that that is five years away from now anything is

possible so it's hard to take a strong position for such a view or against it. But apparently one thing he is

saying is that in order to best profit from this next cyclical upturn one should at the moment buy twice as

many houses as one thinks will be needed in order to meet one's particular goals over the medium to longterm.

If a cyclical upturn is starting or if one is at what clearly appears to be a low point in the housing cycle

then adopting such a strategy could be useful as long as one is highly confident that alternative cash flows

will be available in case tenants prove hard to find or rent projections prove over-optimistic.

But we are not on the brink of a cyclical upturn, as he notes, and we are also not anywhere near the low

point for this housing cycle. It seems far wiser to wait until that low point comes along before taking a risky,

probably heavily debt financed, residential property position rather than adopting such a position at the

moment when a cyclical downturn is only just getting under way.

Rent Expectations

Speaking of rent projections some people have forwarded the view that with house prices having gained on

average 85% over the past five years while rents on average have only risen by 12% we are going to have a

period of strong rental catch-up in the next two to three years which will restore yields on residential property

back toward historical norms. The term Buckleys and none springs to mind once again. We are forecasting

below average growth in the New Zealand economy over the next three years with the unemployment rate

rising marginally while consumer confidence for much of the period is relatively weak and household income

growth also on the weak side. We expect the recent improvement in net migration flows to reverse and

deliver below average population growth in the next three years. We note that at the moment dwelling

construction is still running at above average levels.

In this sort of environment it is very difficult to imagine rents rising by all that much. Instead, if residential

property yields are to return to anywhere near where they used to be it is more likely to be through house

prices either falling or sitting flat for an extended period of time while average rents perhaps rise at the rate

of inflation. In reality we don't think average yields will return to where they were a few years ago. We

believe a structural decline in yields on assets such as commercial and residential property has occurred

with assistance from the likes of increased offshore investment in both sectors plus baby boomers getting

themselves set for retirement.

Finally, just a reminder. If you are still thinking that house prices are rising at about a 10% per annum rate

then think again. On average over the past three months the median dwelling sale price reported by REINZ

has risen by 0.8% compared with the three months to January.

This works out at an annualised house priceinflation rate of just over 3.1%. Given that inflation is running at 3.3%

one could technically say that real

house prices are already falling.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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