to the Valu in Review for August. In the past month there has not been a lot of economic data released. What has been released has generally been in line with the expectations of the market. There has been comment on the housing market in particular with affordability. A government select committee has released the results of its investigation and there has been comment on negative equity from a couple of different sources. It is now officially Spring so what will happen in the property market?

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

.... and happy investing.
 

Figures released on the Retail Sales for the quarter ended 30 June provided no surprises for economists. Spending was down as the higher cost of items considered necessities meant people had less to spend on other items.

The next review of the Official Cash Rate by the Reserve Bank is on 11 September. Most economists are predicting a further 0.25% reduction in the rate (to 7.75%).

The New Zealand Treasury advised at the start of August that with indications it was receiving from July data, it considered New Zealand was in a recession. Treasury expects the economy to pick up by the end of the year. This improvement would be from the result of a number of decreases in the Official Cash Rate, tax cuts taking effect in October, a weaker New Zealand Dollar, and recovery of primary industry from the drought in the first part of the year.

A number of economists have indicated that they believe the recession will be shallow and short, with the economy starting to grow again at the beginning of 2009. This is in contrast to the Current Minster of Finance who believes that NZ is facing "the most complex and challenging economic forces since the global stock market crash of 1987". The New Zealand Institute of Economic Research believes that the bottom of the cycle has been reached and is predicting economic growth of approximately 4% in 2010/ 2011.
 

Figures provided by a national valuation firm showed a drop in house values of 2.2% for the year ended July 2008. The figures are calculated using an average of sales for three consecutive months. This is the first drop in house values since 2001 using this method. The average house price stayed consistent at $393,370, compared to the previous month.

The market is traditionally slow over winter. However a combination of vendors trying to hold the value in their property, high mortgage interest rates, declining sales volume, bargain hunting buyers and few purchasers with bank pre-approval were making for tough market conditions. The first half of 2008 has seen the volume of sales substantially lower when compared to the long term average sales volume. Figures from the Real Estate Institute of New Zealand reflect this with just 4,305 sales in July 2008 (July 2007 = 7,474). Many real estate agents have commented that they have plenty of cashed-up buyers but there is not enough or the right type of property for sale.

Commentators on the property market are expecting an increase in mortgagee sales. Particularly as falling house values, increased job losses, tight credit conditions, alternative lenders (finance companies/ non bank mortgages) disappear, and high interest rates all take effect.
 

The Banks are tightening their lending criteria. A mortgage of 110% is now considered a thing of the past by many banks. With the falling house prices, many banks may not lend past 90% of the value of a property. While these loans (over 90% of the value of the property) are considered high risk by the banks they are still obtainable if lenders meet the banks stringent criteria.
 

A professor at Lincoln University believes that if people purchased property between mid 2006 to the end of 2007, had a deposit of 15% (or less) on the value of the property, they are likely to be in negative equity. The professor believes that many more "Mums and Dads" are being affected by negative equity in this downturn than previous downturns due to the increased numbers owning investment properties. Many property investors are believed to have negative equity due to borrowing to purchase investment properties with 100% finance and using the family home as security. The negative equity has then increased as the types of property that investors have often purchased (inner city apartments and developments purchased off of plans that are now settling) are having the biggest drop in value. Moving forward he believes:

- Negative equity will only have an impact when mortgage payments are not being met and the banks decide to collect on the outstanding loan;

- Banks requiring a minimum deposit, possibly 20%, on investment property (even if you have security in another property;

- Difficulty in renewing fixed term mortgages on investment properties with current or alternative lenders as the lenders will require mortgage valuations prior to renewing the loan which may expose the negative equity (tighter credit);

- As more people are depositing their funds in banks (as opposed to finance companies) the banks will have more money to lend without having to obtain it from more expensive overseas borrowing. This will help minimise any increase in fixed interest rates.
 

The Government select committee looking into ways of approving housing affordability, released its report in mid-August. There were 10 key findings that can be summarised into three main area of focus. These being: free up land; streamline processes and plan for the future.

With the fall in mortgage rates and house prices it means that it is now more affordable to buy a home according to the Wizard Home Loans Affordability report. This trend looks set to continue through to the end of 2008 with tax cuts and likely cuts in mortgage rates. The report reviews what proportion of the median after tax income is needed to service a mortgage of 80% on the median house price. In July it was 77.4% (June = 78.3%) of the median take home pay.
 

According to the latest ASB Bank Housing Confidence Survey (for the quarter ended July), 55% of those surveyed believe now is a good time to buy (previous quarter 34%). ASB believes that this will reflect a weaker housing market for the rest of 2008 and that the balance has swung in favour of buyers. Those having to sell would have to accept lower prices.