Industry ho-hum about property plateau

By Andrea Milner

May sales did lift a touch the REINZ data shows, but nowhere near enough to reverse the April drop in turnover. For two months now sales have been noticeably lower than they were at the end of last year. Moreover, turnover is lower than it was in May 2006. ASB economist Nick Tuffley says the Reserve Bank may see these as tentative signs that the market is starting to cool, but notes that median days to sell remain low – “not the sign of a market that is collapsing by any means”.
 
Kieran Trass says his Internet market monitoring site Suburbwatch’s latest data is also clearly evidencing a slowdown, but that investors are unlikely to see a flood of “bargain priced properties in the near future”.

Price growth trends have been levelling off in the last nine months (apart from the recent surge since early this year) primarily as a result, says Trass, of property being relatively unaffordable, which in turn was mainly the result of value growth rates being so strong for so long.

“A crash is still highly unlikely though, but more of a plateau is expected around current value levels for a while as the market adjusts to higher prices combined now with higher interest rates,” he predicts.

Andrew King, vice president of the NZ Property Investors’ Federation, agrees that affordability is likely to be the main driver of a property plateau, along with a slowing of immigration. Most areas outside Auckland are more than 20% less affordable than they were 10 years ago “when we were arguably at about the same point in the property cycle as we are now,” says King. “Auckland is only around 5% less affordable now than 10 years ago, demonstrating that price rises have not been led by Auckland in this cycle.”

“The indication for investors is that we shouldn’t be including large market increases in house prices into our budgets in deciding on whether to purchase a property,” says King. “However a slowing market means there is likely to be fewer competitors for property and better opportunity for bargain buying.”

Garth Melville, director of structures experts Company Solutions Limited believes a softer market will be more attractive for “buy and holders”.

“I think it is a good that the market softens,” says Melville. “Better than a slide backwards which is hard to control and limit.”
 
He puts the price plateau down to a combination of factors including interest rates increases, winter, more caution from buy and hold investors experiencing continuing lower yields, and traders also not wanting to get burnt if the market slips back.

Dean Letfus of Massive Action agrees the primary cause of declining sales is nothing more sinister than the “annual micro cycle of winter”.

“Net migration always slows in winter and no one wants to go house hunting in wet, cold weather,” Letfus says. “And it would be nonsensical to assume that interest rate hikes won’t take some wind out of our sails.”

“I think higher end properties have a few less buyers and interest rates are driving uneducated investors out.”
 
However Letfus doesn’t see any slowdown in Auckland and Wellington, the two areas he is currently buying in. “I listed two properties for sale on Trademe this week and had them both unconditionally sold in under three days” he says.

Letfus says 95% of homeowners don’t have to buy or sell, so a flattening in the market will only affect people who are in an unsound financial position or unable to weather unexpected storms. “The rest of us will batten down the hatches knowing that after every slump comes a boom.”

The next boom will be driven by an ongoing housing shortage, he says, because over the next 30 years the working age population is going to increase by 7%, while the retired population is going to increase by 48%. “Who is going to look after these people and who is going to take their jobs? The answer is immigrants.”