Nationwide house prices are overvalued by up to 10%, according to ANZ economists, but rather than prices falling, they suggest this overvaluation will slowly but surely be gobbled up by inflation.
ANZ economists make these comments in their September Property Focus report, which features the bank's annual survey of property investors.
"Based on some crude metrics, we’ve calculated that New Zealand house prices remain overvalued by up to 10% at the nationwide level," ANZ says.
"Rather than house prices falling from their current levels, we expect that the overvaluation will gradually be eroded by inflation."
"Further down the track demand for housing will eventually rise. This will be in conjunction with improving employment prospects and an improvement in the New Zealand’s economic growth story. The property market will continue to be an avenue for investors, but landlords will have to make the rental income sums work, rather then rely on capital appreciation as the foundation of their investment portfolios," the economists add.
Asked what the "crude metrics" used to determine the 10% overvaluation were, ANZ chief economist Cameron Bagrie said: "A combination of Tobin's Q, a composite model that uses income and borrowing costs and the implied rate of return."
Tobin's Q, developed by Yale University's James Tobin, a Nobel laureate in economics, is calculated by dividing the market value of an asset by its replacement value. See more here and here.
The last Real Estate Institute of New Zealand (REINZ) figures show sales volumes rose 21.1% to 5,192 in August from the same month a year earlier, while the median price was NZ$355,00 up NZ$5,000 or 1.4%. Meanwhile, the latest realestate.co.nz property report shows asking prices for new listings jumping NZ$10,000, more than the usual winter/spring jump, in September from August.
For the year to June the Consumer Price Index was 5.3%, including a 2.3% rise in the December quarter when GST was hiked to 15% from 12.5%. The Reserve Bank's latest inflation expectations survey has respondents expecting inflation to be below 3% in both one and two years' time. The central bank has a 1% to 3% - on average over the medium term - target range for inflation.
'Most property investors expecting or hoping for a return to the heady, pre-crisis days'
Meanwhile, ANZ says its survey of property investors shows investors expect more short-term growth in their property value than they did last year.
"The largest proportion of respondents (36%) thought house prices would rise between 0- 2.4% over the next year," ANZ says. "To put this in context, back in 2007, the largest proportion expected 5%."
"Looking out over the next five years, most respondents (32%) thought house prices would increase between 6 and 10%. Back in 2007 this figure was 7½ %. This isn’t too dissimilar and suggests that most investors are expecting (or hoping for) a return to the heady, pre-Global Financial Crisis days. Almost nine out of ten investors intend to hold onto their properties for the longer term. There was also an increase in the number of long-term investors planning to renovate or develop their property. On the flip-side, fewer investors are intending to purchase another property."
As for rents, ANZ says an increasing proportion of property investors expect rents to rise faster next year. It says 80% expect growth in rents over the current year, up from 75% last year.
"Increasing rental growth is expected for the survey horizon of five years. The average rate investors expect rents to increase by in the next five years is 6-10%."
The annual ANZ survey of property investors is done in conjunction with the NZ Property Investors’ Federation. It involved an online survey of 1,806 interviews with New Zealand property investors during three weeks in July.
'Floating mortgages better than fixed'
As for home loan borrowers, the ANZ economists suggest floating remains a better option than fixing. See all the banks' advertised home loan rates here.
"Mortgage rates have held stable for almost six months. With global uncertainty likely to delay the timing of Reserve Bank Official Cash Rate increases until well into 2012, it is difficult to argue that there is a strong case for fixing, at least from a cost perspective. Floating remains the cheapest rate. As such, we favour remaining on floating. Although the OCR is set to rise in time, this depends crucially on global financial markets stabilising, and on the fallout here in New Zealand being limited. This is a high hurdle. Meanwhile, time is on the borrower’s side."
The OCR is currently 2.5%.
17 Comments
"..ANZ says its survey of property investors expect more short-term growth .." You're kidding? You mean property 'investors' expect their descision making to be right? Which amongst them would have made their choice based on the view"..I reckon this puppy is gonna fall in value...I'd better buy it..."
Nice to read they agree with me about the erosion in the value of the dollar. All part of the govt plan to erode away the private debts.....
Why are journalists too scared to corner English and Bollard on this issue?
The damage comes from the failure to improve long term savings and the encouragement it gives to the debt based splurging behaviour.
John Campbell (love him or hate him) was on Nat Radio a few weeks ago venting his frustration at pollies and others who won't front. He gave examples of where his researchers had done weeks of research and hounding for an interview to the point it became an issue on both channels and print media. However, the individuals chose to front on Close-Up where they were able to miminise the plot - purely becase Close-up did not have the dirty facts that Campbell was holding.
However, the public apetite was fed and satisfied.
He explained that by asking the hard questions and getting a name for it, means these people will choose to front elsewhere. Therein lies the problem.
And have you will noticed how the pollies continue to seek publicity (eg smile and wave, and of course the 'make the pollie work mokumentary) but they do it in situations where they can be protrayed as great guys/average good guy kiwis.
Not sure how you combat this with a brain dead puiblic.
So "Inflation will take care of the problem ..... ", we always knew suspected this .
But , at what cost over the next few years ?
Inflation is the most insidious form of " TAXATION ", where the State or monetray authorities deliberately allow the purchasing power on money to fall over time .
This is done through either money being printed , credit extension, or increasing "G" in the monetray equation ( Where G= Government spending)
Inflation rewards borrowers and speculators , and will further widen the gap between rich and poor, which seems to be a topical issue right now.
Inflation damages pensions and savings.
Worst of all , once it takes root it becomes like something we all dont want in this country
As an anology , inflation is a bit like trying to bring a venomous snake or rabid dog into New Zealand, something MAF would arrest you for.
"it takes root" the worst "flation" of all is deflation, unless you are a holder of cash. Small inflation is an insurance against deflation because once that has taken root prices drop year after year its a death spiral you dont want to see. Poor, an inflation rate of about 3% keeps a lid on increasing un-employment.....so hit them with some loss of earnings or slam them with a job loss....the latter is far far worse.
Becareful what you wish for.....there is way worse than to 2~3.5% inflation we have today.
regards
Auckland-wide Council latest revaluations are now complete and ready:
http://www.nbr.co.nz/article/auckland-wide-real-estate-revaluation-complete-council-ne-101841
What if infaltion is impossible
The following extract makes for a different insight: link
Yes during the expansion phase...You need to power inflation greater than previous inflation...
It gets tricky understanding inflation.
inflation requires a measurment between two points to figure out what it is doing...oh it's inflating...but how.
there are generally two kinds...inflation greater than previous inflation and inflation less than previous inflation.
Inflation greater than previous inflation to maximum potential is the one you all generally call inflation...it's the one that everyone loves...because it's positive.
Then there is inflation less than previous inflation...a term called deflation was invented to describe the observation of this form of inflation...it's the one everyone fears because it's negative.
Of course depending upon what is deflating...The deflation of the witch at the end of the wizard of OZ...that's and example of deflation that people that fear witches love.
Now losing money.
in a credit system...a consumer uses their current income which is previously created out of thin air money or an asset inflated in value by previously created out of thin air money as collateral backing their request for a commercial bank to create new money out of thin air.
basically due to the attachment of interest, a yield or growth rate to money...It generally inflates greater than previous inflation to maximum potential...attachment of a demand to grow will generally cause something that is capable of growing...to grow.
when a consumer requests money to be created out of thin air and loaned to them...they are making money...but when a consumer pays the loan back they are causing money to return to where it came from...and they are losing money.
So during the inflation greater than previous inflation to maximum potential phase of the cycle it's he that obtains the most money that wins the game.
but once maximum potential is reached and it becomes impossible to sustain inflation greater than previous inflation any longer...
inflation greater than previous inflation transforms into inflation less than previous inflation to maximum potential.
or deflation.
then it becomes he who loses the least money that wins the game.
And since the positive phase has been sustained so long you all generally have zero concept of how the fantasy you all call reality will operate past the point where inflation to maximum potential transforms into deflation to maximum potential.
The further past the point we travel the harder it will become to make money the way you have during the roaring 6 decades.
Many people that could have lived died because they didn't chop off their leg when they should have.
In the inflationary phase consumers are basically forced to request more and more and more new money to be created out of thin air but once the maximum potential is reached...consumers are forced to request less and less and less new money to be created out of thin air.
Yield rates were rising until the early 1980's...consumers were basically forced to request ever greater amounts of new money creation...until maximum potential was reached and they were then forced to request less and less until now.
Which causes a greater demand for growth of 100 Dollars...a 20% yield rate or a 1%?
OMG...The past 30 years you all thought something different was happening.
Well now growth rates are so low that there isn't enough inflation greater than previous inflation to keep the system from inflating less than previous inflation...or collapsing.
The top lives off the yield from the bottom...the roof or top of the structure is supported by the bottom or foundation of the structure.
If the bottom can't support the top...the structure collapses.
Oh I get it you all think you support those below...
You think the top or roof supports the foundation of the structure...well I guess in your mind where LAW that governs the Universe does not apply you could imagine such.
The bottom produces everything and the top monetizes it...They then mark up everything and sell it back to the bottom to get their money back.
the top owns the money system...it and all the money belongs to them...it's their money that monetizes the wholesale production operation...not yours...all the money in circulation does not belong to any of you...You just think it does.
The difference between the wholesale cost and the retail price is the yield the top lives off of...well then how does the bottom make up the difference?
by supplying the top with more than the top gives...forever...
Until the bottom can't supply the top with the yield they demand.
Then poof...The goose that lays the golden eggs...dies
So then when the top inputs money to the bottom and the output by the bottom is less than the input.
the top has to stop doing that or they will not make any money...they will just continue to lose money.
What you think? the FED is going to print money forever?
The bottom produces everything and the top prints money to buy it wholesale and then marks it up and sells it to the bottom retail...and it's up to the bottom to pay the difference between the wholesale cost and the retail price to supply the top with the yield they demand.
and if you all can't.
Then you are going to have to be fired and replaced with more productive workers.
You were fired over the past few decades and chinese workers were hired...but now they can't even support the top supports the bottom delusion you all depend upon.
I have no idea when the real yucky mindblowing soul destrying stuff is going to begin having an impact...but as long as you have a few years of existance left...you will see the day.
As far as I can tell we are a long ways from the actual bottom where the milking operation reaches it's maximum potential and the shorting method of extraction of yield from the dying USA an world system is still an effective way to make money.
If that is what turns your crank.
"I have no idea when the real yucky mindblowing soul destrying stuff is going to begin having an impact...but as long as you have a few years of existance left...you will see the day."
Very true.....if some of the ppl I read are right this is going to be as bad as or worse than the Great Depression.
I dont think its two years away myself....but then I thought 15months ago when I sold up my shares that it was very due to blow, I didnt think xmas......12months later it has not and Ive spent the last 3 or 4 months wondering if I'll wake up to financial armagedon....a 9/11 for the banking world.....somehow not yet....
regards
Just wondering when did Kieran Trass walked the " Length of the country". He is the guy loves to prodict house price. I remember he said on TV 25%, 20%, etc.. the house price fall confidently.
BH is the guy love to talk about the house price, but he never said he will do some thing id his predict is proved wrong.
http://www.telegraph.co.uk/finance/financialcrisis/8802846/Banking-cris…
Well, Gloom, the fat lady hasn't finished her song yet.
Don't worry muzza, it will all be ok. Nothing of course going on in the wider world can possibly impact us.
I'm no doom-monger, but anyone who thinks the current events be they fiancial or military are simply part of a boom bust cycle which will turn around as per previous, well lets just say the old IQ might need to be evaluated eh!
So, Gavin, : You reckon it's not important what the lenders to our property market think? Are they going to keep lending if they don't think the security is up to scrutiny? It doesn't matter what you or I think....it only matters what they, the lenders, think ? If you need a mortgage, that is :)
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