to the Valu in Review for October. By far the most dominating news for the month has been the flow on effect of the credit crunch in the United States and how it is now affecting the economies of countries around the world. While a lot of the news has been doom and gloom there is some upsides of what has been happening. These include opportunities for cashed up buyers, mortgage rates dropping, more "cash" in people's pockets and tradesmen are more readily available. As always please read, learn, enjoy ...

... and happy investing.
 

The Reserve Bank of New Zealand reviewed the Official Cash Rate ("OCR") on 23 October and dropped it by 100 points (or 1%). Such a substantial change at the regular review of the OCR, while expected by economist and other commentators on the economy, was previously unheard of since the introduction of the OCR in 1999. Previously there had only been two reductions in the OCR bigger that .25% (these were both .50% following 11 September 2001). This change was in line with a drop in the Australian central bank interest rate and other central banks around the world. The OCR is now 6.5% and is expected to fall further prior to Christmas and into next year as the worlds economies continue to shrink and head into a recession. However further reductions in NZ's OCR will depend on "evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out".

Economists are uncertain how much of this drop in the OCR will actually flow into fixed term mortgages with the full cut expected to flow into floating rates. This is due to the fact that the cost (interest rate) of the retail banks borrowing money from overseas to lend as fixed mortgages in New Zealand is increasing as the lending of funds between the banks themselves reduces and becomes more expensive.
 

The New Zealand dollar has decreased in value by a third this year compared to the US Dollar. A significant amount of this devaluation has occurred in the second half of October. What started as a credit crunch in the USA on second tier lending on mortgages and the financial products associated with the market - has spread around the world affecting most types of investments including share markets, property and oil to name a few.

New Zealand has already had two consecutive quarters (March and June) where the economy has contracted (a technical recession). At the start of October the New Zealand Institute of Economic Research was predicting at least a third and forth consecutive quarters as New Zealand households constrict spending and businesses are faced with restricted credit (ability to raise cash) and rising costs with inflation remaining high.

Inflation remains high and this is a frustration to the Reserve Bank in trying to control the economy. Economists believe inflation could be as high as 5% for the quarter ended September. If it is, this will be the highest it has been in 18 years. Those sectors that are causing concern to the RB are electricity, local authority rates, wages and construction costs. However, economists expect inflation to be already falling due to the turmoil in the financial markets and as petrol and food costs fall.

As we are in a recession it is expected that unemployment will increase with one economist predicting 40,000 workers will loose their jobs in the short term.

Some good news for homeowners is that they are expected to be $60 per week better off on average as a result of tax cuts, reduction in mortgage interest rates and as the price of petrol falls below $2.00 per litre.
 

Treasury released its pre-election report at the start of October. In the report Treasury predicts:
- Nominal house prices to reduce just over 11% by March 2009 from the peak of the boom in December 2007.
- Once the market bottoms out house prices are expected to remain flat for 2 years until the end of 2010.
- A worse case scenario with the economies of the USA and European countries in a longer slowdown could see nominal house prices fall by 25%.

Commentators towards the end of October believe there are some positives of the current market. These include:
- The number of people owning houses is expected to increase as houses become more affordable
- Those with current mortgages to save on approximately $7,000 a year (based on mortgages rolling over and the interest rate dropping from 10% to 7%).
- While prices on houses had "eased" in NZ there was no mad panic like the USA where there was a substantial number of mortgage default foreclosures.
- The market is expected to level out in the short term meaning it is now or will shortly be a good time to buy for investors and the first time home buyer. The challenge is in picking when the market has reached its lowest point!
 

Figures released for the month of September by a national valuation firm indicate that house values fell by 5.8%. The average sale house price for September was $379,854. The fall in prices has been attributed to three factors; the significant deposit required by first time buyers to enter the market/ tightening of credit criteria by banks (see Bank Lending below), uncertainty over the global economy due to the fall out arising from the credit crunch and the usual lack of activity prior to an election.

It is also taking a longer period to sell houses. Figures from the Real Estate Institute of New Zealand show that in September 2007 it took on average 32 days to sell a house. This September it was 52 days (August 2008 was 55).
 

As the credit crunch has got worse and the banks funds for lending as mortgages have reduced substantially the retail banks have been reviewing their lending criteria. As a result those people that would have had finance approved at the start of the year may not be able to obtain it now. It is affecting all sorts of people including those with a clean credit record but no proof of income, do not have a 20% deposit, or do not have full documentation ( for example registered valuations, evidence of servicing ability etc.).

Banks are focusing very much on the loan to value ratio of mortgages (what percentage of the value of the property are you looking to borrow) as they look to ration the funds they have available for lending and take on quality mortgages.

The rationing of credit is expected to effect property investors with multiple properties where they are highly geared (the rent is not covering the interest payments on the loan). Commentators believe it is these people that will need to sell properties, incurring losses, and face tighter credit controls from their lenders. The commentators suggest talking to lenders sooner rather than later when a credit facility is renewing.

With the drop in property prices a number of borrowers (homeowners) are in a negative equity situation (the outstanding portion of the loan is higher than the actual value of the property). It is predicted that as many as 130,000 homeowners are in this situation. As long as the home owner is paying the mortgage on time and the mortgage is not up for renewal, then lenders are generally not concerned. At least one bank has a special unit dedicated to monitoring mortgages where the mortgage is greater than 80% of the value of the property to ensure any default is dealt to quickly. Where the negative equity situation is of concern is where the homeowner is forced to sell and the negative equity position is actually realised. Banks are unlikely to force a sale on a homeowner solely on the fact of negative equity.
 

As house prices have fallen and the volume of sales has reduced significantly it has become easier to get a tradesmen!

The number of new dwellings (including apartments) being built has been steadily falling since mid 2007 - and is down 42% since then. In August home building approvals were the lowest they have been for 22 years.

This means there is less new work for tradesmen, and for existing dwellings the focus has moved from major renovations on dwellings to small renovations.

As some property developers continue to have financing issues and a number have become insolvent a lot of tradesmen have lost money and are now shying away from the big work for developers in favour of the these smaller renovations.
 

September was the second month in a row where it became more affordable to buy a house and this is expected to continue through the rest of 2008 according to the Wizard Home Loans Affordability report. Factors contributing to this are tax cuts in October, (expected) falling interest rates and an (expected) falling average house price.

Before the latest housing boom begun in 2002/2004 it took between 40 and 50% of the median wage to service the mortgage on the median valued house. In September 2006 it was 69.2%, in August 2008 it was 73.6%, and September 2008 it was 71.4%.
 

Both of the main political parties in early October released details of their policies to help low income earners.

The first to release their policy was National. Under their policy home owners would have the right to build a house on publicly owned land and they would be allowed 10 years free use of that public land after which the home owner would have the first right to buy the land.

Under Labours policy - aimed at income earners between $44,000 and $55,000 about 1,500 sites on public land would be made available over 4 years and the land would always remain in public ownership to ensure that the home remained affordable if it was on-sold.