to Valu in Review for January 2006. This is a summary of news articles in the press over the last month or so.

This month is a real summary of the economic conditions of 2005 and predictions for 2006 as well as some very interesting statistics. We hope you had a great break, are feeling refreshed and that you will ….

Read, learn, enjoy, ...

... and most importantly - happy investing!
 

The anticipated slowdown predicted at the end of 2004 for 2005, and throughout 2005 for 2005, simply did not eventuate. Why?

It appears because, despite household incomes not really increasing with the increases in house prices, households have continued to spend. House prices increased 15% in 2005 compared to 13.5% in 2004.

Banks have been happy to increase loans against this “increase” in property values so the spending has been funded by increased debt levels. The money was available to lend as banks had the cash due to international investors willing to deposit in New Zealand, due to the high interest rates available compared to the rest of the world. This helped push the exchange rate higher.

The money borrowed by consumers was spent in the domestic economy leading to a buoyant local economy. This lead to the lowest unemployment rate for 20 years (and increased wage demands).

As a consequence the Government has a budget surplus ($9 billion) as less was paid in benefits (unemployment) and more collected in tax (such as PAYE and GST). Much of this has been promised back into the economy by the way of election pledges.

The result has been a lot of pain to exporters and an inflation rate that exceeds the Reserve Bank upper target of 3%.
 

The early signs for 2006 are that the economic slowdown (not recession or economic crash) will occur this year. Indicators pointing to a slowdown are as follows:

• Year ended September 2005 the growth of the economy was down from 4.2% in 2004 to 2.7% in 2005.

• Inflation at the end of the year was 3.4%. This was outside the Reserve Banks upper limit target of 3% average over the medium term. The OECD total average inflation rate was 2.6%.

• The Reserve Bank continued to increase the Official Cash Rate throughout 2005 up to and including December. There were 9 increases during the last two years.

• A substantial number of mortgages (41% of all fixed mortgages, representing $36 billion of debt, and approximately 300,000 home owners) are coming off fixed term rates this year and many of these will be faced with higher interest rates. Approximately 80% of rates are fixed, so until they mature the increases in the Official Cash Rate have no effect. The average rate of those mortgages expiring this year is 7.27%. Currently most banks are charging in excess of 8.1% for a two year mortgage.

• Business confidence results are indicating that confidence in the economy is at levels not seen since the share market crash in 1987. Expectations of businesses own activity is down.

• Consumer confidence is at levels not seen since 2000. This appears to be due to higher interest and exchange rates, increased petrol prices which in turn is leading to a slowing economy which in turn leads to a decrease in confidence.

• Consumers continue to spend more than what they earn. For every dollar earnt they spend $12 - $14 dollars. This is funded by debt.

• Balance of payments deficit is at its highest deficit for almost 20 years at 8% of gross domestic product. The deficit is $12.9 billion.

• Against this is the ASB Banks Quarterly survey of Investor Confidence which indicated an increase of 3% net from 13% net in September to 16% net in December of those that replied to the survey, expecting better returns in 2006 than 2005. The net result is the difference between those that expect to be better off and those that expect to be worse off. This is still below the net 24% reported at the end of 2004. Property was expected to give the best returns.

Economists believe that the exchange rate will be the first indicator to show signs of the slowing in the economy. Possibly a drop to $US 0.40-0.50 during 2006/07. This will have ripple effects into all aspects of the economy with a low growth and a tight monetary policy. Interest rates will remain high with long term interest rates likely to increase.
 

At the first review of the year on 27 January the rate was left unchanged at 7.25%.
 

There were a number of scams revealed over the Christmas period. The methodology differed slightly and appears to be 2 types. They were either:

- Fraudulent documentation use and/ or “doctoring” of sale and purchase agreements. The effect being that banks would issue mortgages to people who did not actually own the property provided as security over the mortgage; or

- Fraudulent inflation of property valuations above the actual valuation. The effect being that banks would loan more than what the property was worth.

Both schemes were aimed at getting funds directly from Banks but may have implicated innocent individuals in the transactions. These frauds are still under investigation

As a ‘by the by’ the Serious Fraud Office currently has 4 major cases set for trial this year where the general charge is noted as “mortgage fraud”.
 

According to the Real Estate Institute of New Zealand at the start of January 2006 the market in 2005 was fairly steady and the slump predicted by many did not actually eventuate. Instead towards the end of the year house prices generally tended to level off and consolidate.

It is believed that lifestyle locations of Nelson and Hawkes Bay have seen their peaks in prices but areas such as Hamilton, Wellington and Christchurch may still see some growth.

The current average time to sell a property is currently 4 weeks (historic average is 40 days). The Institute does not expect this to increase much.

This is supported by the figures released by QV which, for year ended December 2005, noted 15.8% annual growth in house sales values. Average sale value of a home in December 2005 nationally was $315,249 (based on sales values for the previous three months).

It was not just the main cites that had the growth. Whangarei average property increase was 31.4% and Gisborne had a 26.8% growth.

A snapshot of QV’s annual property increases to December 2005 and average sale price:

Rodney District Council	9.9%	$443,445
NorthShore City	13.7%	$481,894
Auckland City	7.9%	$498,337
Waitakere City	12.1%	$350,981
Manukau City	13.9%	$357,471
Hamilton	26.9%	$295,630
Rotorua	29.3%	$218,724
New Plymouth	25.6%	$280,262
Wellington	12.9%	$344,389
Christchurch	20.2%	$301,764
Dunedin	12.2%	$250,239

The REINZ figures released mid January for the December 2005 showed a decrease in the median house sales figure from $300,000 in November to $295,000 in December (slightly different method used from QV). The volume of houses changing hands dropped substantially with 6906 houses changing hands (down 19% on December 2004 and down 26% from 9357 in November 2005). The decrease in volume from November to December could be explained by a short selling month in December but with the December to December comparison it is hard to explain the drop.

Average days to sell were 29 days
 

NZ’s population has reached 4.12 million as at the end of 2005. Some key indications are:
- Over half of the female population is over 36. The median age over the last 10 years has increased 3.1 years.
- Over half of the males are over 35. The median age over the last 10 years has increased 2.8 years.

Other 10 year figures of interest are:
- The number of children (0-14 years) grew 1.6% to make up 21.3% of the population (to 876,000).
- Working Age (15 – 65) now made up 66.5% (2,738,000) of the population – up 313,000. The median age was 38.7 (36.2 in 1995).
- The 65 plus age group grew by 18.6% (79,200) to over 505,000. The median age was 74.2 (73.3 in 1995).

In other research released at the start of January, 30% of New Zealanders live in Auckland. This compares to 9% in both Wellington and Christchurch, 5% in Hamilton. Dunedin, Tauranga and Napier/ Hastings have 3% each of the population.

Aucklander's on average earn $22/ hour. This compares to Wellington at $21.50, $19 in Christchurch, $18 in most other cities. The average hourly rate in rural areas is $17.
 

Massey University has released their results of the AMP House Affordability index for the quarter ended December 2005. The index looks at the relationship between salaries, interest rates and houses prices. The results show the ability for people to afford their own home has decreased. The drop in affordability has been credited to the continual increase in (median) house prices. The only regions where it became more affordable were Taranaki and Southland.
 

Since August 2005, members of The Real Estate Institute of New Zealand have been establishing a database from its members of tenants – both good and bad. The list is only available to its members and is based on people’s opinions. Tenants wanting details of their details need to contact the REINZ head office

The Department of Building and Housing and the Ministry of Justice are also launching a new website in July. People will be able to search for names to identify bad tenants and landlords with all tenancy tribunal decisions being available. In 2005 45,000 tenancy disputes were lodged. These were primarily for rent disputes or property damage.
 

Non residential properties had a 121% increase in land value and a 66% increase in their capital value in Auckland City Council over the last three years.

Houses have faired well with 48% as the average capital value increase (compared to NorthShore 62%, Manukau 40%). This has seen the average home value increase from $349,000 to $503,000. – according to the councils valuers. The valuations were completed as at 1 July 2005.

Due to the demand for land a 77% increase was recorded for residential land value due to the high demand for sections (NorthShore 110%, Manukau 100%).

There is 144,000 residential properties in Auckland City and a further 19,000 non residential properties.

Both NorthShore and Manukau City Councils also had their values reviewed in 2005. Both of these councils base their rates on Land Value which is different to Auckland City Council which bases its rates on the higher of either 5% of the capital value or estimated gross rental less 20%.