The big news for the month was the fourth consecutive increase in the Official Cash Rate ("OCR") by the Reserve Bank. The new OCR is 8.25%. In other news items; there are signs that the housing market may be starting to slow down, there were a couple of artciles containing warnings on the New Zealand housing market from 2 overseas financial related institutions and finally the ability for people to purchase their own homes continues to decrease. As always please read, learn, enjoy ...

... and happy investing!
 

On 26 July the Official Cash Rate was increased by 0.25% to 8.25%. This was the 4th increase in 4 months. In his statement accompanying the announcement of the increase, the Reserve Bank Governor Dr Bollard, said the rate increase is likely to be the last for some time as people were showing early signs of moderating their borrowing which will have a flow on effect into inflationary effects.

Before June 2008 approximately $136 billion of mortgages are due for renewal. This represents 24% of all mortgages. There are a further 30% of mortgages due in the following year to the beginning of June 2009.

Dr Cullen believes the economy is growing too fast. Dr Cullen has stated "growing demand and growing incomes have contributed to persistent inflation, high interest rates and an over-valued exchange rate, all of which put pressure in the productive sector". To combat this growth the Government is doing three things. Firstly contributions to the New Zealand Superannuation Fund is removing demand from the economy; Secondly Kiwisaver was increasing householder savings thereby taking the pressure off monetary policy; and thirdly it was introducing measures that would allow the economy to grow at a sustainable pace without building up "pressure" in the economy. This included measures such as business tax reforms, assistance to businesses to expand into new export markets.

For the 11 months ended May 2007 the Government was operating at a surplus of $7.3 billion. This was $599 million (9.1%) higher than budgeted and was due to higher investment gains.

Unemployment levels remain very low at 3.8%.
 

This is a quarterly survey undertaken by ASB Bank. The survey found that fewer people believe it is a good time to buy a house and less than 50% of people believe that house prices will continue to increase. In summary the survey found as follows

People Believe...	Now	3 months ago
House prices will increase	47%	61%
House prices will fall	15%	6%
House prices will stay the same	33%	29%

Time to buy a house.	Now	3 months ago
A good time to buy a house	23%	25%
A bad time to buy a house	37%	28%
Neither good nor bad time to buy	33%	41%

 

The Home Loan Affordability report, published by www.interest.co.nz, for the month of June says that at least 81% of the average income is needed to service a standard mortgage on a median priced house. Five years ago it took 45% of the average income. The worst two areas are Central Lakes Otago at 105.9% and Auckland at 101.4% of the average income.

The increase in the amount of income needed to service a mortgage is a result of the increase in house prices and interest rates, which are increasing faster than the average income. In the past 12 months:
- Weekly net pay has increased $28.79
- Weekly mortgage payments (median priced property) has increased $107.12
- House prices increased 12.1%
- Benchmark interest rate increased to 9.22% (from 7.94%).

The Reserve Bank has recently made a submission to a parliamentary inquiry. In its submission the Reserve Bank noted that, in real terms, levels of house price inflation is currently running at levels not seen since the 1970's. In the 1990's house prices increased approximately 50% but since then they have doubled. Consequently affordability had fallen with average house prices increasing from 4 times the average income to 6 times the average income.
 

Moody's Investor Services in Sydney, in a report to banks, have given a warning on the NZ market and the possibility of a collapse. The report mentions the cost of household indebtedness, debt servicing costs in relation to interest rate increases, the increases in the Official Cash Rate having little effect in "cooling" the housing market, and the delayed effect in the OCR into mortgage rates due to the significant number of fixed mortgages.

If a $200,000 loan was taken out 2 years ago at 7.75% and it renewed at 9.5%, the additional amount to pay is $75 per week or $4,000 per year.

Credit Rating Agency Fitch Ratings has also issued a warning about New Zealand, saying it is the riskiest in its study of 16 countries. The study looks primarily at 2 factors. Firstly how much is housing over valued (when compared with historical norms). New Zealand ranked 4th. And secondly how stretched are households balance sheets. New Zealand ranked second.
 

Housing Minister, Chris Carter, has confirmed that he plans to introduce legislation by the end of the year that would allow territorial authorities to stipulate that developers must provide a portion of affordable housing in their developments - should the territorial authority require it.
 

Queenstown Lakes Community Housing Trust is trialling a scheme, similar to one that the Government has proposed to trial in 2008 nationwide. The government is providing $2m in funding to assist the Trust (via Housing New Zealand ("HNZ")). It is hoped the scheme will assist Queenstown residents who are fully employed and committed to the district into home ownership AND give the Government a glimpse at how such a scheme affects the housing market (particularly in a high priced housing market).

Typically the Trust and HNZ will own between 20% to 40% of the house. The Trust will act as a co-owner with the private individual. When the house is subsequently sold the Trust/ HNZ will get their share of the sale price. The scheme is expected to assist up to 35 households where the income is less than $80,000 and they will not be able to purchase a house in excess of $500,000 (the median value for the area).
 

The house price values from both QV and the REINZ organisations continue to show increases for the latest month available (June 2007). It was noted by QV that the feedback that were getting from the market place was that there were fewer buyers and a shortage of listings - however the prices that the buyers were prepared to pay was still strong. This is historically "typical" of the winter months (except for the past couple of years where volumes and values had increased in the strong housing market).

Nationally the figures were as follows:
QV median June 2007 $378,672 (up 12.2% from last year)
(based on the past three months sales settlements)

REINZ median June 2007 $347,500 (down less than 1% from previous month)
(based on unconditional sales for the month).