to the Valu in Review for September. In the past month there has been two large pieces of news. The first is the meltdown in the American economy which is flowing through into New Zeeland (and the rest of the world). The second was the reduction in the Official Cash Rate by 0.5% by the Reserve Bank (most economists had been predicting a 0.25% reduction in the cash rate). Much of the talk is still of doom and gloom and that technically New Zealand is in a recession. But very much the key factor throughout the month is the credit crunch - which seems to over shadow everything. We are now in Spring so what will happen in the property market leading up to Christmas?

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

.... and happy investing.
 

The Reserve Bank of New Zealand reviewed the Official Cash Rate ("OCR") on 11 September. The rate was dropped from 8.0% to 7.5% which was a bigger reduction than the majority of commentators had been expecting. The substantial drop was a reflection of the economy slowing up a lot quicker than predicted. The slowdown has been led primarily by the household sector (less spending and fewer residential house sales as consumers experience high mortgage interest rates, as well as increasing food and petrol prices). The business sector in NZ is also under pressure from rising costs (petrol, wages, and the cost of imported goods) at a time when demand is decreasing. The worsening world wide financial turmoil arising from the credit crunch in the USA is also of concern to the Reserve Bank

A number of key statistics on the economy have been negative in recent months (house prices/ volume of sales, falling construction activity, rising unemployment, falling retail sales) which has led to 2 quarters of the economy shrinking (a technical recession with two quarters of negative growth). Economic growth is expected to be slow in the medium term as personal tax cuts (effective 1 October), increased rural incomes (from the Fonterra payout to farmers) and government spending provide some stimulus to the economy.

Inflation is expected to now peak at 5% for the quarter ended 30 September 2008 before reducing. Next year inflation is still expected to be above the Reserve Banks target range of 1 - 3% in the medium term as wage demands, food prices and the decreasing value of the kiwi dollar are expected to keep inflation up around 4%.

The size and timing of the next reduction in the OCR will depend on inflation continuing to drop and what the exchange rate does. Economists are recommending to fix mortgages for a short period (one year or less) as many believe the OCR will be around 6.5% by the end of the year and possible further cuts in 2009. One other factor that may also need to be factored in is the fall-out from the credit crunch as the worlds banking institutions struggle to stay afloat and governments around the world look to "support" their local economy.
 

The volume of residential property sales in August was the lowest for 26 years, with 4,220 houses being sold according to the Real Estate Institute of New Zealand. It is also taking 56 days on average to sell a property. The national median house price is $330,000 which is down 5.7% when compared to August 2007.
 

Falling interest rates and reduced house sale prices are having a positive effect on house affordability according to the report from Wizard Home loans. The report looks at the percentage of the median take-home pay it takes to service a mortgage of 80% on the median house price. The report found the amount has dropped to 74.2% of the take home median income for August (77.4% in July).

In more recent times the last time the figure was this low was January 2007. Between 2002 and 2004 it took between 40% and 50% of take home income to service the mortgage of 80% of the median house price.
 

In August the median rent in Wellington for a three bedroom house was higher than the equivalent in Auckland for the first time ever. Figures from the Department of Housing and Building showed that in Wellington the rent is $440 a week (May 08 = $380 pw). While is Auckland it is $430 per week (May 08 = $420 pw).

There is a flux of what is being termed "accidental landlords" entering the rental market. These are landlords that cannot sell a house so instead decide to rent it. The effect is the rental market is being swamped with rental properties - particularly in Auckland. Landlords have had to drop rent, advertise the properties in multiple locations, present the property in the best possible light and sometimes negotiate over conditions with prospective tenants to get the property rented quickly - otherwise it could take 4 - 6 weeks or longer. One survey of median rents saw rents drop by 1 - 22% during August in "popular or posh" Auckland suburbs.
 

There are a substantial number of bonds lodged with Tenancy Services (now Department of Building and Housing), that have not been claimed at the end of a tenancy. Over the past 19 years the unclaimed bonds have been accumulating and the Department has over $5.7m of unclaimed bonds.

Currently the money is invested and the interest earned off of the funds is used to fund other tenancy related initiatives (both for tenants and landlords) within the Department.

Based on three weeks rent at $350, three weeks rent as a bond, this equates to just over 5,400 tenancies where the bond has not been collected.
 

At the beginning of September a new Real Estate Agents Act was passed through Parliament. The new law does not take effect for 13 months. Features include
* Ability to claim up to $100,000 in compensation against a real estate company (currently $5,000), and $40,000 against an agent (currently $750)

* No compulsory membership to the Real Estate Institute of New Zealand by agents.

* There is a new real estate authority (a crown agency) and disciplinary tribunal.

* The authority will be able to investigate agents - even without a formal complaint being laid against them.

* A public register of agents/ sales people will be established to record the breaches of any part of the Act.

* Agents will be required to disclose any possible conflicts of interest.
 

Britain's Economist magazine undertakes a survey annually on global house price growth. At the time of the survey, New Zealand house price growth, in the last year, was 6.5% which ranked us 8 out of the 20 countries surveyed. Leading the list was Singapore (29.8%), Hong Kong (28.2%), and Australia (13.8%). The USA was ranked last with a fall in house prices of 8.9%.

The magazine placed a note of the survey saying that it expected many of the countries on the list to experience negative house price growth. Both NZ and Australia had a special mention as vulnerable markets.
 

With the credit crunch NZ lenders are tightening their lending criteria. This includes higher interest rates for riskier borrowers and/ or not offering longer term loans, or reduction in the loan to value ratio limits. Other conditions can include total confirmation of income (including loc-doc loans where no proof of income was required) and requirement of insurance on some mortgages. It was also noted that 100% loans are now non-existent and it is getting harder to get 90-95% loans. In some instances lenders are simply no longer offering mortgages on some fixed terms or floating as they cannot acquire funds to lend.
 

Housing New Zealand ("HNZ") is taking a test case to court - and is suing 6 people for $180,000. The 6 have already been convicted for the manufacture of P. The case concerns a rental property that was used for the manufacture of P. The damage to the house was so significant that HNZ had to demolish the house and re-build. HNZ had already obtained an order of damages against the tenants and believed that they had grounds to sue others involved in the drug ring and hold them liable as they all contributed to the condition of the house. In the 5 years ended June 2007 HNZ had 16 houses found with P labs in them. Two of the houses had to be demolished. If HNZ wins it will open the gateway for other landlords to sue over the damage to their houses - not just the tenants but other people that contributed to the damage.