House valuation model developed

Hayden Griffiths, a quantitative analyst at Goldman Sachs JBWere (NZ) Limited puts the recent acceleration of residential property appreciation down to more investors with high levels of debt buying houses – rather than the traditional predominance of owner-occupiers.

Speculative investors have caused houses to be overvalued by 32% since late 2005, Griffiths says.

Highly geared investors’ expectations of continued strong house price appreciation have to be factored in to justify house prices after late 2005, he says, and the valuation model does not allow for anticipated future house price appreciation.

A period of flat house prices after one of strong price appreciation has historically resulted in large real losses after inflation, Griffiths warns, and houses account for 65% of net worth in New Zealand.

Of the view that New Zealanders should practice greater asset diversification, Griffiths nevertheless acknowledges this is realistically feasible only when there is significant equity in a house that can be borrowed against while maintaining a manageable level of total debt.