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

We have had a break for a couple of months during our busy season but we are back! Thanks for the support to those of you that contacted us wondering where your copy of Valu in Review was.

The biggest piece of news is that we have had some direction from the IRD. See the articles in the right hand column for more.

Read, learn, enjoy, ...

.... and most importantly - happy investing!

 

The Reserve Bank predicts that inflation will increase to 3.9% by the end of September 2006 and does not see it back below the upper limit of the desired band of 1-3% over the medium term, until the second half of 2007. The recent increase in inflation has been credited to the increased cost of oil and a quicker than expected fall in the exchange rate. This has been offset slightly by the growth in the economy being lower than expected.

At the last review (6 June 2006) of the Official Cash Rate ("OCR") the Reserve Bank left the rate unchanged at 7.25%. Economists are now indicating that they do not see a cut in the OCR by the end of this year. The wholesale interest rates market believes the chances of a rate reduction in the first quarter of 2007 is reducing and is now factoring it in, to occur about June 2007.

Recent economic data indicates that the economy will not head into an economic recession but rather have the "soft landing" that economists had been hoping for.

With the recent fall in value of the NZ Dollar the Reserve Bank is more comfortable and believes that it will help support the economic growth that will assist with the soft landing - if they can control inflation.

 

New Zealand was included in a research paper undertaken by the Organisation for Economic Co-operation and Development ("OECD"). The paper, "Are House Prices Nearing a Peak?" considered 17 OECD countries to determine the probability of a peak in the prices of houses (and the subsequent downturn in house prices) if interest rates were to increase.

Since the 1970's New Zealand has had 4 peaks in prices. This is more than any other country in the study.

Based on the house price increase in 2005, if interest rates increased what was the chance of a peak in house prices? The report believes the higher the chance of a peak in house prices the more likely there will be a serious price correction.

1 % increase in interest rate	Chance of Peak in house price
Denmark	95.1%
New Zealand	83.9%
France	62.4%
United States	44.1%
Spain	41.6%
Ireland	34.5%
United Kingdom	5.4%
Australia	2.2%
Japan	0%

2% increase in interest rate	Chance of Peak in house price
New Zealand	87.1%
Australia	2.2%
Japan	0%

The only country higher in both cases was Denmark. The Government of NZ is aware of the likelihood of a decrease in house prices and has been actively managing it.

Most commentators on the property market found the findings of the report "interesting" but did not put any weight on them.
 

The Reserve Bank's comment of the above OECD report was they are expecting house prices to start falling by the end of this year - primarily due to higher interest rates.

This is starting to be seen in the figures from the Real Estate Institute of New Zealand with the volume of house sales down 17% between May 2003 and May 2006.
 

The national median house price, at $305,000, was the same as for April. REINZ has 12 regions across the country and 5 of these had an increase in the median house price from the previous month. 1 region was static and the other 5 regions had a drop in their median sales price.

The volume of sales was 9,642. This was up by about 400 sales from May 2004. May 2005 was the second highest May sales volume in the past 10 years. The biggest May was 2003 with 11,336 sales.

The average time to sell a house has crept up from 34 days in April to 38 days in May (29 days in May 2005). . The average figure, in the last 10 years for May, has been 40 days.

Overall the figures are an indication that the market is relatively flat and slowing down.