TelferYoung (Nelson) Limited

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Nelson Newsletter - Winter 2008

22 July 2008

Welcome to our Winter 2008 edition of the TelferYoung Nelson Newsletter. In this issue we look at the current state of play in our Residential and Lifestyle/Rural markets.

Residential

Commentators are suggesting that residential property markets the length and breadth of the country are in free-fall.  Is the Nelson/Tasman property market any different?

Nelson/Tasman has in its favour the following attributes:  A small overall market place with limited housing stock.  A growing population centre with natural attractions and benefits to which people are consistently drawn.  A strong make-up of older population numbers which will continue to grow as baby boomers head into retirement.

We consider the mid-range residential market will hold its value in the present economic environment.  There will be exceptions such as those transferring out of the region, suffering from financial pressures or suffering relationship breakups.  They will fall into a somewhat forced situation.  They will seek to sell within a shorter time frame and may have to reduce prices to meet the market.  By and large, most will "sit out" a perceived down turn and wait for the resurgence.

There is downward market pressure on the bottom end of the market.  We anticipate investors borrowing costs may force some to sell.  New investors are not entering the market at this time to take up the available stock.  First home buyers can not afford to buy into this market.  Prices remain high as do current interest rate levels and increasing living costs including higher rents, food and fuel.  New arrivals in the region are not generally buying in this lower price bracket.  Recent assistance announced by the Government in the more expensive regions of the country, including Nelson, are not expected to significantly ease the burden of home ownership funding.

Properties previously considered suitable investments i.e. showing a 5%-6% gross return and annual capital gains of 5%-10%, will now have to meet the fundamental requirements of an investment property.  The investor will require a return on capital that matches the risks, both real and perceived.  Those returns should fall in the range between 8.0% and 9.0% gross, for single entity residential investments.  Capital gains for such properties are likely to be negligible over the next two years.

At the other end of the spectrum, higher priced residential properties have experienced some softening in values and low levels of market enquiry.  There are low numbers of potential buyers active in this sector.  Lower migration numbers are contributing.  There remains some degree of "hangover" from the highs in the market through to the end of 2003 when the region experienced unprecedented levels of capital gain.  In some locations pricing today lags behind those levels.  "Location" remains the key attribute for selling higher priced property.

The graphs below illustrate the reduced levels of activity now occurring in our residential market.  Days to sell are trending upward toward 45 but are below the peak for Richmond of 2005 of 60, but are well above the 18-20 days to sell recorded through 2003 when the market peaked.  Volumes are also well down, indicating approximately 350 sales for Nelson, year to date, compared with the 2003 peak of 650.  Richmond is trending down a very similar pathway.

We are in a slower period of the market.  Vendors not having to sell are withdrawing properties from sale.  Some vendors in the position of having to sell are accepting lower prices or having to adjust their expectations.  There is no evidence of a market in free-fall in this region.

Lifestyle Property

The current market for lifestyle property is waivering due to a number of factors.  Demand appears to be diminishing due to economic uncertainity and rising costs.  Increasing fuel costs are a factor being considered by purchasers.  The volume of sales in outlying areas such as the Motueka River, Dovedale, Wai-iti and Eighty Eight Valley have dropped off.      Sale numbers of vacant lifestyle and rural-residential sections have declined.

During 2006 there were 89 sales of vacant lifestyle properties throughout Nelson-Tasman.  In 2007 this increased to 116 sales.  This increase was mainly due to the availability of rural-residential sections within the coastal area of Redwood Valley, most associated with two major subdivisions in that vicinity. To date in 2008 there have been only 15 sales.

The increase in supply of such property, especially the coastal rural-residential sections, will influence this market.  There are continuing stages of both the Appleby Hills and Galeo Estates subdivisions together with land being developed in Research Orchard Road and additional land, which is prime for development.  These blocks alone yield a further 95 - 100 sections.  This land is zoned Rural 3 and situated reasonably close to Richmond.  The Rural 3 land has potential to yield lifestyle blocks to satisfy demand for the next 20 years.

The average price for a vacant lifestyle block in 2006 was $326,000 whereas the average in 2007 was $302,000 and the average to date in 2008 is $301,000.  Given the significant drop off in sales volume for 2008, in tandem with the increased supply, there is likely to be downward pressure on pricing.  The unique coastal blocks and elevated sites with coastal views should retain premium levels.  Other vacant lifestyle property may experience a tough year or two ahead.

Historically, quality residential property in the Port Hills and Cathedral or college areas of Nelson city have been at similar value levels as good quality lifestyle properties.  The choice of which to buy is a personal decision rather than a financial consideration.  We have analysed sale volumes of the prime residential market and lifestyle market for sales in excess of $1,000,000 over the past 3 years to determine whether there has been any change in relativity.  Within Nelson and Richmond during 2006 there were 12 residential property sales in excess of $1,000,000 and 20 sales in 2007 above that level.  In 2008 to date there have been 6 recorded bonafide sales.  This is at similar volumes to 2006 and approximately 40% down on 2007. 

The comparison for lifestyle property shows a more graphic decline.  During 2006 there were 25 sales in excess of $1,000,000 and 27 in 2007.  To date in 2008 there have been 3 recorded sales.  It is fair to say that this market place has been affected by fuel pricing, a high exchange rate and other economic factors.  Many of these properties have historically been purchased by Americans, Europeans and British.  The American and European buyers are not active in the market place at this time.

Our observation is that both the vacant lifestyle and quality improved lifestyle markets have peaked and falling sales volumes will continue to place increasing pressure on vendors to re-assess expectations.  There may be potential over the next 6 to 12 months for cashed up purchasers to make good strategic acquisitions.

Back issues of the newsletter can be obtained from TelferYoung (Nelson) Ltd
Phone (03) 546-9600
Fax (03) 546-9186
www.telferyoung.com
email: telferyoung@nelson.telferyoung.com