This month there has been lots of economic news that has a knock on effect to the property market. This includes an increase in the OCR, the strength of the New Zealand dollar and continual low unemployment rates. Affordability of housing has been another key aspect with the government focusing on how to improve it through such measures as changes in tax and councils looking at zoning changes to impact on vacant land prices. As always please read, learn, enjoy ....

.... and happy investing!

 

During the first week of June the Official Cash Rate ("OCR") was increased by the Reserve Bank to 8.00% (from 7.75%). There was no mention on the possibility of further increases in the OCR - other than a mention of the need for a period of slower growth in the economy to reduce the increase in inflation. It was noted by some economists that strong incomes to dairy farmers and the continual Government spending are a couple of large factors that will add to inflationary pressure which the Reserve Bank is trying to reduce.

The move has increased interest rates (which have attracted overseas investors to deposit their funds in NZ) and also helped increase the strength of the NZ currency. The NZ Dollar is now at the highest it has been compared to the US dollar since it was floated 22 years ago. To try and protect NZ's exporters, while keeping upwards pressure on interest rates to assist in cooling the housing market, the Reserve Bank has sold some of its NZ currency to lower the exchange rate. To date it has done this twice but the exchange rate remains high. The Government and the Reserve Bank have also tried to persuade the foreign exchange markets that the exchange rate is too high by "talking down" the exchange rate.

Many economists believe there could be one more increase in the current round of increases in the OCR, but not necessarily at the next review. The next review of the OCR is late July.

At least one economist is picking fixed interest rates of 12% by the end of March 2008.

The value of building construction continues to rise. For the quarter ended 31 March 2007 the value increased 3.9% (seasonally adjusted). This compares to 2.7% for the quarter ended December 2006. When the impact of recent price increases affecting the industry is removed the value of work shows an increase of 2.5%. This increase is primarily attributed to the non-residential sector as the value of residential work fall by 0.9%.

The economy is continuing to grow at a rate of around 2%.
Unemployment is very low at around 3.7%.
Net migration figures are down. They are approximately one third of what they were at the peak in 2004.
 

Treasury is predicting that the continuing boom within the residential property sector will come to an end in the first half of 2008 with a slowdown in the market (as opposed to a "bust"). Thereafter through to 2011 they are expecting a flat or slightly declining market in New Zealand as a whole.

Factors that will contribute to the slowdown are declining immigration and Kiwisaver. This needs to off-set against other considerations such as the number of people approaching retirement age, government spending approaching election year (including government assistance to first time home buyers) and employment rates.
 

Dr Cullen has mentioned other means of cooling the market as increases on the OCR do not seem to be having the desired result. One suggestion is changes to the tax rules, in particular tax losses from rental properties - however he conceded for the changes he was after he needed to seek support from the National Party.

The concern of Dr Cullen seems to be that there was a tax advantage in that you can borrow 100% to buy a property and then claim loses against that property.

The Deputy Commissioner of IRD confirmed that there were no tax advantages to investors in housing (in fact the rules were tougher on housing) and noted that the concern appears to be the level of debt gearing that is possible in the housing market and the willingness of the banks to lend money for housing.

A capitals gains tax has been ruled out by Dr Cullen.
 

The Commerce Select committee of parliament is conducting an inquiry into housing affordability. The majority of members of the Committee (those not apart of the Labour party) believe that councils sub-division rules should be relaxed. This has been voiced before all of the submission have been heard. However whatever the findings of the Committee they can not "force" their opinion on the Government.

Budgeting services report seeing more clients that are desperate as their mortgages come up for renewal. Those most affected are those clients with 100% mortgages, and high credit card/ hire purchase debts.

In the latest from the Massey University Housing Foundation - housing affordability index it became harder to afford a house in the last three months to 31 May 2007 with affordability reduced by 4% for the quarter and 11.9% in the past year. Fluctuations between regions are starting to show with overall a couple of regions now being more affordable than the previous quarter. There are even fluctuations within regions.
 

There were a number of articles on Land-banking. Primarily about investors seeking land close to council zones where those zones may be changed in the future to allow development opportunities. What vacant land that is available in the greater Auckland area has significantly increased in value over the last three years. Auckland's councils are applying to the Auckland Regional Council to increase the urban limits to free up land on the outer limits of the current boundaries. This would realise the expectations of land bankers that had purchased land in the past. The cost of the land within the current zones is so expensive it is forcing many companies and people to look further a field for land.
 

They just keep going up. Figures both fro the Real Estate Institute of New Zealand and Quoteable Value for May show an increase. They use slightly different means of calculating their values.

REINZ (uses median for past month)

	April 07	May 07
National	$340,000	$350,000

QV (average sale price past 3 months)

	April 07	May 07
National	$366,032	$372,522