to the Valu in Review for December 2007. This is a summary of news articles in the press over the last month. Being December the newsletter has been sent prior to the Christmas break period.

The Official Cash Rate remained unchanged at the beginning of the month. There remains inflationary pressure in the economy, despite further indications that the property market is cooling. There are a couple of articles about the IRD and property investors and where the IRD will bring some focus in the near future. One report released also predicts further increases in rents. There is also a warning about taking photos of an investment property where it is tenanted. Plus more in the articles below.

The team at Valuit wish you and your family a very Merry Christmas and a New Year full of successful property investing decisions. As always please read, learn, enjoy ....

.... and happy investing
 

Dr Bollard of the Reserve Bank ("RB") reviewed the Official Cash Rate ("OCR") at the beginning of December. There was no increase in the rate and it remains at 8.25%. At the press release he signalled that interest rates could stay higher for longer than previously thought due to concerns over inflationary pressure. The last increase in the OCR was in June 2007.

While Dr Bollard concedes that the housing market and house prices are levelling off, there are now other factors contributing to the inflationary pressure in the economy. These include the large payout to dairy farmers, tax cuts recently announced by the Government, unknown effects of the Governments energy strategy to reduce carbon emissions (but expected to include an increase in the price of both petrol and power), continued high oil prices, wage growth, low unemployment levels, increases in food prices, an expected increase in Government spending with an election year pending and the strongest external economic conditions that NZ has experienced for some considerable time. Consequently the RB expects to be in breach of its inflation target with inflation in the first half of 2008 to be around 3% and in the second half around 3.4% (the RB's goal is to have inflation between 0%and 3% in the medium term). With so many factors contributing, or likely to contribute to inflation, most economists seems to agree that there is a lot of upward pressure - with one describing it as "an inflationary jam - and we are not sure how to get out of the jam".

Some economists are currently predicting two increases in the OCR in 2008 - with possibly a rate cut very late in 2008 or in 2009.

Economic growth is forecasted to be 3.1% for the year ended March 2008 falling to 2.6% in the following year.

For the quarter ended September 2007 the employment rate fell to 3.5%.
 

There is continual evidence that the housing market is slowing down.

The figures from the Real Estate Institute of New Zealand for November indicate a national median sale price of $352,000 ($330,000 in November 2006). This was up from $350,000 in October 2007. The median days to sell were 40. It has not taken this long to sell since the beginning of 2002.

There are more houses being advertised on Trade Me at below current market valuation.

One of Auckland's largest real estate agencies has commented that its stock levels were the highest they have been in the past 5 years and buyers have plenty of properties to select from.
 

In early December Westpac Bank released its predictions on the rental market in New Zealand.

In the past four years rents have increased by 2.2% per annum.

It sees rents as increasing by 6% per annum over the next 5 years and adding inflationary pressure to the economy. The reasons behind the predicted increase in rents are:
- High interest rates (current low rental yields, little prospect of capital gains as house price values level off and mortgage rates above 9%) there are a number of effects. Firstly landlords are not making a profit, secondly as landlords are not making a profit they are not investing in more rental accommodation and finally more people need to rent as they cannot afford a mortgage, so this drives up demand for rental property.
- Rental market factors - Housing New Zealand rents are increasing, overall median rent levels in many areas are increasing, increase in wages (Meaning renters in theory can afford increased rents)
- The slowdown in the housing market (and increased mortgage rates) means that people have less equity in their houses- so they will offset this by extending the period of their mortgage or downsizing (putting upward pressure on house prices at the lower end of the property market).
 

IRD has announced that it is going to investigate the top 1,000 property profiteers. The IRD has not disclosed how it will identify the top profiteers - but it will involve people with an extremely high volume of property transactions. IRD staff have been visiting real estate agencies throughout the country advising that if requested they must disclose details about sale and purchase agreements. In the budget earlier this earlier the IRD obtained an additional $14m to investigate tax evasion in the property market. It is hoped that people will make voluntary disclosures to the IRD.

Another area the IRD will be looking at closely is that of the Loss Attributing Qualifying Company ("LAQC"). The IRD has advised that it considers it as tax avoidance where people place their own homes into a LAQC and continue to live in the property and claim tax losses, and that they are likely to be breaking the tax rules. The IRD has advised that some cases along these lines have already gone through their adjudication process and it was likely that some would be taken to court as a test of the law.
 

A tenant has taken their property manager to the Tenancy Tribunal complaining that many of the photos were of the tenant's possessions and not the condition of the property.

The property manager had inserted a clause into the rental agreement that they were the landlord and that they were also entitled to take photos for the owner of the property.

The adjudicator ruled that:
- the property manager, acting as the landlord, inspecting the premises directly they did not need to take photos
- the owner of the property had no right to require photo's
- the photos breached the tenants' privacy or entitlement to quiet enjoyment
- that the photos were intrusive
- fined the property manager $150
 

Fairfax media released a report in mid December that is a home loan affordability index. The report shows that "an average New Zealand worker on a single income now cannot afford to buy an average house, even with a 20% deposit, in any region in the country". What has caused this is the doubling of house process in the past 5 years, and the increase in interest rates. As a consequence mortgage repayments have gone from being 44% of the average take home pay in 2002 to 83% as at November 2007.

Based on the average worker and their income
Queenstown lakes has a ratio of 110%
Auckland has a ratio of 99%
Wellington has a ration of 86.9%