Who’s Counting

House sales are down 30 per cent compared with a year ago, with prices expected to fall 5 per cent this year and remain flat for the next five years.

That's the grim prediction from Westpac's economists who say residential property prices have "screeched to a halt, with essentially zero price movement in the past eight months". Prices stopped dead in April last year, they say, after rising by $8000 a month. Had it not been for New Zealand's strong economy, wage growth and a 21-year unemployment low, house prices would have fallen earlier and more aggressively.

Tony Alexander, the BNZ's chief economist, and Nick Tuffley, chief economist at the ASB, both expect price falls as opposed to the current slowing of growth in house prices.

Alexander says that for the first time in four years he is prepared to predict prices will fall probably about 1 - 2 per cent. He's not expecting anything like the 4 -5 per cent fall in house prices in 1998.

Another significant sign the housing boom is over is a comparison of the average number of days taken to sell a property. Alexander says in June last year that was 30 days and by December 2007 that figure was 39 days.

The big issue in the NZ market is affordability, Tuffley says, with house prices high relative to individual incomes. "The market won't do anything spectacular in the next five years." he says.

"If it was my kid wanting to buy a house, I'd be telling him to hold back for a few months to see what happens."

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Finance and Investment

One of the issues I address when writing a financial plan is that of diversification. And by this I mean diversification across asset classes. Of late I have had numerous conversations with worried "property" investors. Without exception diversification has not been considered at all. The narrow investment schemes (not financial plans) all share the same features;

1) All of their money is tied up in property.
2) All their property is residential.
3) All their residential properties are in the same city (and sometimes even on the same section or street!)

But wait: there is more, they have used the equity in their own home to buy these properties. This puts their own home at risk. Property is cyclical, just as other asset classes are cyclical. Why borrow money, secured against your home, to make a risky investment. Depending on who you listen to the property market will cool by 10-30%. I see more mortgagee sales on the horizon that's for sure.

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Everyday Money

I don't seem to be able to leave housing (as a topic) alone. This time it is good news for first home buyers. A recent Westpac report predicts flat prices for around 5 years. (This news is not so good for second home investors).

The number of house sales has declined by a third back to 2003 levels - an early warning sign. Westpac claims that monthly house price inflation has screeched to a halt. Rental yields are currently at around 4% and mortgages 9% plus, make the residential rental market very unattractive indeed.

The report suggests that housing affordability (defined as 25% of disposable income servicing an 80% mortgage) will eventually swing back in favour of home buyers but no t for about eight years as incomes catch up and prices stagnate.

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Everyday Money

There is a high level of concern at the affordability of property for first home buyers. One report claimed that 83% of income is needed - the home loan affordability index showed that the average New Zealand worker on a single income now cannot afford to buy an average house, even with a 20% deposit in any region in the country. The index was created by Fairfax of media fame and as we know headlines are not always what they seem (see Finance & Investments for more on this). A good discussion paper on the house price bubble is at http://www.brentwheeler.com/

I think that a tax break or some form of government financial help would be a great support for first home buyers - meddling with interest rates will not address the problem. Tax breaks or incentives will cause for less damage to the economy.

And if you are not a first home buyer but an investor the next big thing is the moon - yes folks its true - moon prices are skyrocketing; the cost of buying an acre of the moons surface has risen 40% since the 1st of January 2007. Germans are in the lead, owing most of the surface with Swedes, English and Poles next.

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