TelferYoung (Nelson) Limited

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Nelson Newsletter - May-June 2009

17 June 2009

Welcome to our May-June 2009 edition of the TelferYoung Nelson Newsletter. In this issue we look at the economy's effect on Residential and Rural markets.

Residential Recovery??

The local, national and international economies have been through a particularly turbulent 6-12 months.  Terms such as "recession" and even "depression" have been frequently used in all type of media.  How has this affected our Nelson property market?

"Recession" is described in the Oxford Dictionary as "a difficult time for the economy of a country, when there is less trade and industrial activity than usual and more people are unemployed".  "Depression" is defined as "a period where there is little economic activity and many people are poor or without jobs".  Depression is, therefore by definition, an escalation or worsening of conditions than experienced in a recession.

There is no doubt that worldwide, nationally and in Nelson, we are in a recessionary cycle.  This has affected confidence in the residential and lifestyle property markets on a number of levels.

Property value is built on confidence and surety.  The worldwide "financial meltdown" had a sudden and graphic impact on our property market.  We have experienced significantly reduced sales volumes and in some sectors, sizeable downward value shifts.

Debt servicing ability is a key component of affordability.  It is a factor of the size of the mortgage, interest rate at the time and amount of individual or combined income to service that loan.  Two of these three factors are uncertain.  Over the past 2 to 3 years income levels have increased but there is, at present, pressure on businesses to cut costs and trim unnecessary non core expenditure.  This can result in reduced levels, or even loss, of employment.  Unemployment levels are increasing and forecast to increase significantly.

The third factor in this affordability equation is the interest rate levels.  These are at relatively low levels in relation to 5 and 10 year averages.  Mortgage levels are, however relatively high.

A recent Reserve Bank bulletin discussed the financial vulnerability of mortgage indebted households in New Zealand.  The Bulletin compared data from the UK, US, Australia and New Zealand.  Data was over a period from 2001 to 2008.  Through that period New Zealand rose to be ranked second for debt compared to disposable income.  New Zealand also had the highest growth in real house prices over the four.  Our average household debt more than doubled between 2001 and 2008.

The study stated that a relatively small proportion of households were in a stressed position at the start of 2008.  It concluded that further reduction in house prices, or significant increases in unemployment rates and interest rates individually, would not result in a large proportion of further indebted households becoming vulnerable.  However, a combination of these factors could have a more serious effect.  In late 2008 and 2009 we have seen continued value level decreases and increased unemployment.

There has been significant market adjustment in certain sectors over the last 6 to 12 months.  There are opportunities for cashed up purchasers to acquire property at reasonable levels.  Interest rates are lower than they have been for several years.  Those two factors would suggest affordability of housing for first home purchasers and purchasers in the low to medium value bracket has improved. 

The dampening factor in this equation is one of job security and therefore ability to service a mortgage.  There appears to have been increased activity in low to medium value residential property from investors.  Low returns from bank deposit and share market investment has seen the historically modest returns of residential investment, appear more attractive in comparison.  Most Real Estate Agents approached commented that listings up to the $350,000 to $400,000 range were hard to obtain and readily saleable.

The main drivers of value, in an economic sense, are demand and supply.  Recent national migration figures show a considerable growth in net gain in population.  National figures for March showed an increase of approximately 60% over the same period last year.  Locally there has been an increase in property enquiry from Europeans, British immigrants and ex-pat Kiwis returning.

On the supply side of the equation, Building Consent figures for new homes have hit record lows.  Vacant residential sections and vacant lifestyle blocks are selling particularly slowly.  No spec houses or new homes are being built to satisfy the potential increased demand.

Internationally there appears to be increasing confidence of recovery of the housing markets.  A recent article in the Washington Post quoted several property and building sector executives with comments such as "The Armageddon is behind us", "We have fixed the credit crisis", "Now we can go back and focus on the things that led us into this to begin with", "In recent weeks we have seen consumer confidence improve", "Housing turnover shows signs of a bottom in certain markets" and "Home prices slow their decline".  This is fairly bullish sentiment. 

In New Zealand the market is influenced by fairly conservative fiscal control.  Dr Bollard has kept a reasonably tight rein on the OCR and dampened thoughts of rapid recovery with public comments such as "recovery can be a long and rocky road".

The rate of unemployment and therefore perception of job security by individuals is seen as the main factor influencing recovery or stimulation of residential markets in the short to medium period. 

Our outlook for the residential and lifestyle market place in the Nelson and Tasman regions is positive with a recent uplift in the volume of sales activity in the market up to $400,000 underlining the positive attributes of our region.  Other sectors that have been particularly quiet may take slightly longer to show signs of recovery.  We believe there are significant opportunities for residential property investment.

Rural Retrenchment??

The rural market is driven by similar economic factors in terms of macro economics.  Demand and supply is also the key.  The difference being the rural market is also influenced by profitability.  Product prices, returns and costs of production have a major effect on value levels.  The number of farm sales nationally has dropped dramatically from comparable levels 12 months ago.  The reduction in dairy payout has had a significant effect on the number of dairy farm sales and sale of dairy supply land. 

The Nelson and Tasman market is slightly quieter but levels being achieved are holding.  With a lack of sales it is difficult to quantify the degree of value change but anecdotal economic evidence combined with lack of demand would lead us to believe land prices have eased.

Although the dairy sector payouts have reduced significantly and, therefore the demand for additional runoff blocks or extension of milking platforms has ceased, other forms of pastoral farming have seen positive returns.  Record levels for lamb, mutton and increasing confidence in the beef market fuel confidence in this sector.

This confidence in pastoral returns is tempered by the increase in the NZD affecting our ability to compete on the international markets.

Historically rural property prices never drop to their true economic or productive worth.  This is due to off-farm investors, syndicates and large scale operators, who appreciate the cyclic nature of property investment and begin to enter the market when they perceive it has bottomed out.

There has been some readjustment in levels on a national basis with recent reports of 20-25% reductions.  We are yet to see this type of decline in the Nelson rural market.

Our outlook for the rural property market is that there may well be opportunities in the near future for investment.  With mortgage interest rates at low levels, if funding can be sourced, affordability is reasonably good compared with recent past history. 

This is still very dependent upon a perception of stability in world commodity prices and general economic indicators.

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

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