to the Valu in Review for November. As per last month the dominating news is the current financial situation facing New Zealand and the world. The financial situation seems to change on a day by day basis and there is a wide degree of views from commentators as to how long and how hard the financial downturn will be. The news for investors is both good and bad. For example as banks have tightened lending criteria people are likely to rent for longer but there is also increased property for rent as home owners who cannot sell look to rent their homes instead. This downturn will see those who pick the bottom of the downturn riding the wave and being the next batch of people who make their money in property. As always please read, learn, enjoy ...

... and happy investing.
 

The Reserve Bank of New Zealand reviewed the Official Cash Rate ("OCR") on 4 December reducing it by a further 150 points (or 1.5%). This follows on from the last review on 22 October that was an historic 'largest reduction' of 1%. Many of the lending banks have already reduced mortgage rates in anticipation of the reduction in the OCR. The instructions from the Reserve Bank were for lenders to pass on the reduction in interest rates. The OCR is now 5% - the lowest it has been since December 2003. The next scheduled review of the OCR is on 29 January 2009.

Economist's predictions for next year seem to change regularly. These comments were published prior to the review of the OCR on 4 December. Some are picking that the recession will be at the bottom around June/ July 2009. With the OCR expected to be down to 3.5%. Economic growth in 2008 is projected to be 0.3% increasing to 1% in 2009. Treasury in its forecast for the economy, to be released just prior to Christmas, is likely to forecast economic growth close to 0%, and the expectations for the unemployment rate will increase.

While this doom and gloom is happening it appears that the underlying fundamentals are getting sorted out and that the "base" to move forward with is being built. Households are not over spending, petrol prices and other goods such as dairy are dropping in price, house prices are dropping, the Reserve Bank is managing the economy, and the value of the NZ dollar is falling. There are still may factors that can apply or change, such as how long the recession will last, how bad it will be (for example what will the unemployment rate increase to), but the things that many economists said need to happen appear to be slowly happening.

Annual inflation as at the end of September was 5.1% (well outside the target range of 1 - 3% in the medium term). This is the highest inflation has been in 18 years. A survey undertaken by the Reserve Bank on business managers sees the business manager's expectation of inflation decreasing. The Consumer Price Index is expected to be at 2.8% on average this time in 2009. Those surveyed also expect unemployment to be at 5.5% in September 2009 increasing to 5.7% in 2010. The current unemployment rate is 4.2%.
 

A summary of various events:-
- A real estate agency closed all 8 of its branches on the North Shore in Auckland.
- It is estimated that 100 real estate agencies have closed this year.
- At the peek of the boom there were approximately 100,000 house sales per annum. This is expected to drop to 60,000 (as at the end of October there were 47,547 sales - 40% down on 2007).
- the national median and average house prices will fall on average 5 - 8% from where they are now, is being predicted - although some believe the drop could be 15 - 20%.
 

Figures release by Infometrics showed that the volume of sales for the first 6 months of 2008 were down 44.3% compared to the first half of 2007. The biggest previous drop was for the second half of the year in 1976 when the drop was 39.4%. Infometrics believe that the annual growth in house prices across the country could be down to -10% as early as the first half of 2009, with house prices expected to fall by 5.8% by June 2009.

In August rental yields were the highest they have been at 4.7% (up from 4.3% in May 2008).

An index, based on property listings on websites, had an increase of 7.7% for rental listings. This is the highest rental listings have been and is believed to be as a result of the end of year for many university students giving up their flats, slow sales so many owners deciding to rent their properties instead. Mortgagee sales also past 500 listings for the first time, with this category of sales making up 0.46% of all listings (up 25% on the previous month and it has doubled since March 2008). It is suspected the increase in mortgagee sales may be related to the receivers of failed finance companies calling in mortgages and that most mortgages are related to property investors or developers.
 

According to a national valuation firm residential property prices continue to fall. In October prices were down 1% - taking the annual decline in house prices to 6.8%. The national average sale price in October was $379,290.

There has been comments from at least two commentators that there are some "cheeky" offers being made and accepted on property as people look to off-load property with some investors obtaining bargains. It has been noted that in the last cycle those that made their money got in early before the market began rising and the current cycle is possibly the best time in the last 40 years to buy - if you have the courage.

The volume of sales remains historically low. Figures from REINZ show there were 4,469 properties sold in October - traditionally one of the busiest months.
 

Housing New Zealand ("HNZ") owns or manages approximately 68,000 houses. Approximately 3,000 of these homes are owned by private investors who lease them to HNZ typically for a 5 year period (and up to 10 in a new property), and the rent is guaranteed for 52 weeks a year. Many state houses are now spread amongst privately owned dwellings in suburbs. The ideal mix being 20% state owned housing and 80% privately owned in an area. At the end of a private lease the property is returned to the private investor in its original condition less "fair" wear and tear over the period of the lease. Currently HNZ is looking to acquire 380 more properties in the current financial year and a further 360 in the next financial year.
 

Property related issues on the National party's agenda include streamlining building consent processes, upgrade of existing Housing New Zealand houses, allowing state tenants to buy their homes, assistance for people with leaky homes, reviewing the Building Act and the Resource Management Act (both of which add costs and time delays to developments), and to free-up land for building on.

The Government will keep retain the new Real Estate Agents Act.
 

The number of new building consents issued is at a 16 year low. 1,174 consents were issued in October, the lowest number since January 1992. The number of consents is down 22% when compared to October 2007.

A survey undertaken of architects, who traditionally work 6 - 9 months ahead of builders and the consent process, found that only 10% had work 12 months or more in advance. This is a significant change from the expectation of what the numbers were at this time last year (most architects would have had 6 - 18 months work in advance). 70% of the architects that responded believe the industry situation will worsen in 2009.
 

Lenders are looking very closely at applications for mortgages. The key is 'information' as they look closely at the ability of people to service their mortgages - comfortably. As the economy worsens, costs increase and overtime hours and bonus's are cut the banks will focus on regular income as well as previous credit history. You may need a larger deposit and need to prove the worth of the property you are looking to purchase. New Zealand's largest lender (ANZ/ National with approximately a third of all loans) has advised that home buyers will need a 20% minimum deposit (previously 10%). This means that many first time home buyers will need to rent for longer or find additional ways of raising the necessary deposit. Many of the lending institutions that had been offering "no deposit home loans" are no longer offering them.

Property investors will be expected to pay a deposit when purchasing new property - instead of equity in the existing portfolio. Lenders will also look closely at the financial information provided by landlords and the risks associated with a portfolio, such as empty properties.
 

Affordability of houses, as measured by the Wizard Home Loan Affordability report continues, as it has done most of the year, to improve (if you are a purchaser). Changes in October to tax rates, reduction in mortgage rates and higher wages resulted in one of the biggest monthly moves of the index. The index is now 68.2% as at October (71.2% in September). This is till higher than the 45% recorded in 2003 before the boom.
 

The Energy Efficiency and Conservation Authority estimates that there are 900,000 homes in New Zealand that have no or inadequate insulation. Often in winter, the inside temperature within these homes, falls below the World Health Organisation recommend minimum warmth. The Authority is offering a subsidy to get a third off the cost of insulation and other measures - and is capped at a maximum of $1,125. It appears the subsidy is aimed at homeowners, as one of the qualifying conditions appears to be household income.