to the Valu in Review for April. Firstly an apology for not getting a March edition to you. Due to the busy time of the year and the Special offers we were running the month just disappeared. In this edition the main news is the long predicted slowing down in the economy. Inflation is up, house prices and volumes of sales are down, mortgage rates are up, confidence in the economy is down. Read on for more economic information. Other items include details on a large dispute brewing between the apartment owners and the land Leaseholder of a large development (over the land rent review) and an item on the re-write of the law concerning body corporates.

As always please read, learn, enjoy ....

.... and happy investing!
 

The economy is very much in a slow down mode with many indicators and surveys being affected by the current economic climate. Consumers are facing increased costs of essential items (food (particularly cheese, bread and butter), petrol and electricity), as well as higher interest rates on mortgages that are renewing and a slowing housing market. The slowing housing market has been caused by a number of factors. These include the subprime credit "crunch" in the USA and continued trouble in NZ with finance companies meaning funding is "tight". Other factors contributing to the economic slowdown is the drought that many farmers have faced, and the growing "negativity" about the current NZ economic conditions. Many businesses are contemplating increasing prices to retain profits as business confidence also wains.
 

In a survey conducted by Fairfax Media-Nielsen they found that 25% of New Zealanders with mortgages were either concerned or very concerned over their ability to pay their mortgage. In addition 25% of New Zealanders believe they are financially worse off than they were 12 months ago. On the positive side 42% of those polled believe things will be better in one year's time.

A further poll by Fairfax found that approximately 10% of Kiwi's are considering moving to Australia. In the year ended March 2008, almost 30,000 Kiwis have moved to Australia - the highest number to migrate since 2001.

The Government hopes that tax cuts, to be announced in the Budget due in May, will help many struggling families. However as the economy continues to slow up with increased costs and incomes not keeping up with price increases, it is believed that any tax cuts will quickly be swallowed up by the increased costs of living.

In December 2007 the ASB Bank survey of investor confidence showed a net 19% positive result about the investment environment. For the quarter ended March 2008 this was a net 1% negative sentiment about the investment environment. This is the lowest level since the end of 2001. As a result many investors are expecting lower returns and growth than in the past year. Rental property remains the top pick for the best returns in the year ahead although in terms of "confidence in the market" it lags behind term deposits/ managed funds and shares.

The unemployment rate remains low as the economy goes through the change, however it is expected that unemployment levels will increase - particularly in the second half of 2008. Currently the unemployment rate is 3.5% and if it increases to 5% (resulting in 38,000 fewer jobs) this would still be considered acceptable. However if New Zealand encounters a credit crunch like the USA it could increase to 6% - 7%.

The consumer price index, for the year ended March 2008, saw inflation at a rate of 3.4%. This was outside the band of the Reserve Banks goal of inflation between 1% and 3% on average in the medium term. With the increases in food and expected increases in power and the "passing on" of fuel prices inflation could hit 4% for the September quarter.

At the review of the Official Cash Rate on 24 April 2008 the rate was left unchanged at 8.25%. However economists noted that the "tone" of the statement had changed slightly with the Reserve Bank now acknowledging that the economy was slowing but the Bank remained concerned about the inflationary pressure in the economy. Some economists are picking a lowering of the OCR toward the end of the year but they have also warned that the lowering of the OCR may not result in lower mortgage costs due to the costs of offshore funding for local banks. The last time the OCR was cut was in July 2003. Since then there has been 13 increases in the OCR.
 

The Fairfax Home Affordability Index is at the highest in its 6 year history as at March. The report looks at the proportion of the median take home pay required to service the mortgage on a median value property. It found that it takes 83.1% of the average pay to service the mortgage. The previous high was in November 2007 (83.0%). Anything above 40% is considered unaffordable.

According to the BNZ economists, house prices are currently overvalued by 30% and they believe house prices risk falling by more than 10% this year. The Bank is warning about too much supply of new housing at the wrong time which could result in a "glut". Other economists are predicting falls in the property market as well. Some believe that the fall in prices will be in areas where there is an oversupply (such as vacant land and apartments) and in areas with second homes (such as holiday homes).

Figures from a nationwide valuation firm indicates that for the year ended March 2008 national property values have increased 6.5% (year ended February 2008 it was 7.7%). It also noted that the national average house price has dropped from $393,240 (February) to $388,894 (March).

The figures from the Real Estate Institute of New Zealand also indicate a drop in numbers. It is believed that the increase in the median sale price from February to March is caused by a low volume of actual sales skewing the result.

	March 2007	February 2008	March 2008
National Median House Price	$343,500	$337,500	$349,000
Volume of Sales	10,989	6,356	5,129
Median Days to Sell	27	50	40

 

KPMG has advised in a report on the lending industry that banks are being more cautious with their lending. The result being that some people who have been able to obtain lending in the past are not guaranteed of it in the future. This has arisen due to the global credit crunch (as a result of the sub-prime collapse in the USA there is less cash for the banks to borrow on the global markets and what cash there is to borrow is more expensive (at higher interest rates)), slowing growth in assets (for example constant or falling house price values) and an increase in the banks doubtful debts. Fewer mortgages are being written by banks as the housing market slows (particularly in relation to investment property) bank lending criteria was being "tightened" with those at the coal face of the banks operations often having little discretion to vary the banks terms of loans.

New Zealanders are now paying approximately 25% more for a mortgage now than they did in 2003. This is based on a $250,000 mortgage, fixed for 2 years. In this scenario people are paying approximately $108 more a week than in 2005 which is an increase of 26.7%. During the same period household income has only increased 10.2% to just under $68,000.
 

The Units Trust Bill is soon to be introduced into parliament. This is a re-write of the 1970's legislation and has been in consultation for 4 years. This is the legislation that Body Corporates are established under. Under the Bill body corporates are provided with more power (but must also be more transparent). Provisions include:
- The requirement for a unanimous vote in some decision making is removed - it is now a 75% agreement
- every body corporate will need to have a long term maintenance plan, and the apartment owners need to contribute to this on an annual basis.
- Disputes will firstly go to mediation or adjudication in the Tenancy Tribunal - keeping them out of the courts.
- Body corporates are to have audited accounts and these along with the body corporate rules and maintenance plan can be viewed by purchasers.
 

In many areas around New Zealand there is Leasehold Land that has been built on during the past boom. This includes one area of Auckland called the Beaumont Quarter. There, a dispute is happening between the Apartment owners, whose apartments sit on the Leasehold land, and the Leaseholder. The ground rental is currently up for renewal, at the end of its first 7 year period, for a further 7 year period. There has been a substantial increase (in excess of 400%) in the ground rent required and the parties are in a dispute over the rent. In some instances the ground rent goes from $3,900 per annum to $21,000 per annum. Under the lease for the Beaumont Quarter the rent is fixed at 7% of the underlying value of the land. It is this valuation that is in dispute and it appears it is likely to go through the formal dispute process outlined in the lease agreements. The dispute has already seen some investors selling their apartments substantially below what they paid for them a few years ago.
 

Housing New Zealand is selling 15 Auckland state houses and expects to get $12 million for the houses. All were being sold vacant and are in the Auckland inner suburbs area.