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The Residential Property Market - State of Play June 2009
3 June 2009
The property market has just experienced one of the extremes of real estate cyclic behaviour that New Zealand, or the world for that matter, has ever seen.
The real estate cycle by nature is subject to movement in prices. The property boom that NZ experienced was the result of a number of factors including high net migration in 2002 following September 11, low interest rates, shortage of housing stock for sale, loose credit criteria, baby boomers and ultimately, property investors, and speculators. The latter, as research also shows, being the last to jump into a rising market, where rents and prices are near peak level. The culmination of these factors led to the ‘sellers' market that was experienced.
The longer the boom went on, the harder it became for market commentators, property professionals, economists and real estate agents to predict when the ‘bubble', as it came to be known, was going to burst, and to what extent. Was it really going to burst? As the real estate cycle suggests, the upward trend in property values had to top out at some stage. So what is the state of play...?
What has happened?
Those who owned property prior to the period of 2002-2005 were likely the biggest winners. Participants who entered the market early to mid boom period would have made reasonable capital gains, while those who bought late in the boom, especially in the period 2005-2007, will be the first to experience the downside of the real estate cycle. Empirical sales evidence is starting to reflect the sale prices of this period. In general terms, the market has recently seen depreciation in value ‘on average' of 12-15%, or more or less in some cases.
In mid to late 2007 we started to see change. Some properties weren't selling. In 2008, the market experienced a sustained period of inactivity, with properties sitting for substantially longer periods than experienced in previous years. Vendors appeared unwilling to accept that the market was heading towards a buyer's market.
In 2009, what we are experiencing is not a bubble bursting, which would suggest a collapse in property values. Values now are reflecting a market derived adjustment as reflected by the willingness of buyers and sellers to transact. As the market is now reflecting a downward trend in values, most property owners are choosing to sit tight. But those that are being forced to accept less than what they paid, or expected, are being faced with buyers who are not willing to pay the prices previously being achieved.
Our socially responsible lending institutions are also laying bare the realities of high loan to equity borrowings, with a substantial increase in mortgagee sales as a result of the market downturn, job losses and the state of the economy. They have increased their lending criteria substantially, with some now demanding 20% deposits as security for residential homes and 25% for residential investment properties.
The market is now faced with house listing prices competing against an oversupply of properties that have already been on the market for long periods, and sometimes with multiple real estate agencies. Most buyers are waiting for the perceived bargain, mortgagee sales, or where vendors are very motivated to sell.
In the current climate, our thoughts go out to the real estate agents who are at the forefront of this market change. The year 2008 was a tough year for most, and it was no surprise when a recent media release indicated there were in excess of 4,000 less real estate agents operating in NZ today, compared with the boom times.
So what happened? What caused the market to change when it did - interest rates; recession; tightening lending policy from the banks? The residential property market is very complex with many facets that drive the market along, and these are some of the more complex economic factors that led to change. But one fairly basic influencing factor is the effect the first home buyer has on the entire market. The first home buyer is the critical link in a chain that goes from the lowest priced property to the most expensive.
The first home buyer
It became apparent a number of years ago when residential property prices were soaring, that property values would get to a level where it would become difficult for the first home buyer to enter the market. And evidently, prices did reach a level where the number of first home buyers began decreasing dramatically.
Let's consider an example involving a second home buyer.
When the second home buyer decides to buy a $300,000 house, he or she isn't the only participant in the transaction; for this transaction to occur, the purchaser of the second home for $300,000 has to sell the $200,000 ‘first home' in order to make the next move. The $200,000 home is ideally priced for the first home buyer. And the current owner of the $300,000 home also needs to sell, and so on. When credit criteria started to tighten up, there were transactions falling over that involved more than two parties. In this simplistic example, we have three participants in three different price sectors of the property market. But ultimately, if the first home buyer can't afford to enter the market, the chain begins to lose momentum as a critical link is missing.
And so it has become apparent in recent times that price pressure from buyers is seeing a drop in house value in many sectors. And first home buyers are now starting to see a small amount of light at the end of the tunnel.
Investment Properties and Baby Boomers
It is also an opportune time given the current low interest rate environment for investors to start considering their investment alternatives. Ultimately property is generally a safer long term proposition, as long as it is providing a satisfactory yield.
Currently, rental yields are almost on par with property outgoings and financing costs; this being a significant change from the 2002 to 2007 period where residential investors were ‘topping up' rental amounts from their own resources to meet financing costs. And banks were accepting this because the property asset was likely to increase in value, and their security was considered ‘safe'.
So in the current low interest rate environment, we could see the first push for desirable residential investment properties come from baby boomers, who have probably now recovered from the 1987 share market crash.
Most baby boomers should also know by now that there is no return on bare land! To buy bare land with the hope of short term capital gain is speculation. And phew.....did we see some sections sell during the boom times - greater Taupo area, Wanaka, Queenstown, Northland, Bay of Plenty, Hawkes Bay just to name a few! Wouldn't it be interesting to drive through some of these developments to see if there are buildings on the sections? Kinloch saw massive speculation from ‘mum and dad' buyers. But will they learn. Baby boomers will most likely be the most cautious and not risk their life savings on speculative short term gains. But they will be looking for retirement income that provides a better return than money in the bank. And property in the long term acts as a hedge against inflation.
The state of play
We recently experienced a spike in sales activity through February - March 2009. The result was a boost in confidence after a somewhat dismal 2008. This was great for the economy and saw consumer confidence surveys balance out for the first time in over twelve months. This however does not indicate that the market has bottomed out. Or for that matter, house values.
So what is the state of play...?
We are experiencing a buyer's market. However, from all the listings in the real estate supplements, there actually isn't a lot of good housing stock, and a lot of it is considered overpriced, or stale from being on the market for too long at unrealistic price levels. Buyers are being particularly prudent about their purchase decisions, knowing full well that the residential market is still susceptible to downward movement, even though some are saying the market has already bottomed out.
What should you do?
Sellers
Firstly, your property is not worth x% less than your Rating Valuation. This is incorrect assumption of how to value your property, and is a manifestation of a truly false market. Your real estate consultant would be expected to know all recent sales in the location and advise you accordingly.
Secondly, when you decide to sell your property, obtain appraisals from at least 3 to 4 agencies, listen to what they have to say, look at their marketing strategies, and above all else....do they appear motivated to sell your property. If they say anything that makes you uneasy, be it how your home is presented, the location, the neighbors, then chances are your relationship with that agent is not going to be everlasting. A real estate agent who sells $1,000,000 houses should also be able to sell a $200,000 house with ease. Your home is your castle, no matter what price bracket it falls into.
Thirdly, don't be sold a listing price. Sure you may sell the property at that level on a good day, but in many cases you may also end up selling it for less.
There are many sectors of the market, and they have all moved at different rates. So don't be sold on averages. Seek advice.
And finally, don't overprice your property when you initially list it for sale. It has to be priced right. When your property is listed for sale, you as the seller are telling the buyer that the value of your property is $X. The buyer will negotiate a price, and whatever that property sells for will be its market value, by definition.
A house on the market for three or more months risks becoming stale, and is likely to be over-priced. No one wants to look at it. It is also likely that after your first open home you will told that you have over estimated the value of your property and that you should drop the value by $5,000. This price drop represents a commission loss on average of $200 to the agent. Three months later the property may sell for $25,000 less than the original listing price. You are not to blame for this. Get the price right at the outset.
Buyers
You need to do the research or seek your own independent advice. Be informed. To be in the strongest position, you need to know more than the seller. Unless you are totally familiar with the market in which you are buying into, the perfect scenario from a seller's perspective is to have a buyer unfamiliar with the market! This happens often.
Research for information, more information, and more information - this is imperative to ensuring you are comfortable with your purchase decision. Although the ‘average' home buyer may do the research, average only implies that a large portion of purchasers aren't actually doing any research and are relying on what everyone else is thinking/doing. This is a perfect scenario from the agent's point of view, as it makes their job inherently easier. However, if you are properly informed then you should be in a strong position to negotiate a good price. The agent ultimately wants a sale. See the example above...a $200 drop in real estate commission resulting from negotiating a price $5,000 less than the asking price equates to an interest saving at 7.5% over 25 years of around $6,200 plus the $5,000 initial capital saving!
Summary
It is difficult to say when the residential property market will reach the bottom of the real estate cycle. Some say it has already happened, while others are saying there is still pressure on prices. There will be a point however when all the stars will align. Will it be 2011, the year many baby boomers begin to retire, or will it be earlier or later? The market will decide. No individual or government department will have any say in this matter.
From both a buyers and sellers perspective, be prudent. Seek advice from independent property advisors so that you can make an informed decision when buying or selling your home. Your decision to purchase a home is a decision on where you want to live, the size of house you want to live in, the number of bedrooms, views, or whether you want to buy a cheaper house to do up, or a house that has already been done up. But ultimately, it is your home. It is where you will raise your family; bring your friends to, and something to be proud of. It is your castle.
Andrew White
This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.