Property: ride it out or leap?

After a white-knuckle year on the housing rollercoaster watching values plummet, homeowners and prospective buyers want to know which way to jump.

Are values seriously on the up, giving owners hope and buyers reason to act fast? Or will they fall further, meaning everyone who can should hold tight?

Commentators are divided between those such as BNZ chief economist Tony Alexander who believe prices will not fall any more, and others like property cycle expert Kieran Trass who say we are in for a long slump and parts of the market will crash further.

The Herald on Sunday put Alexander and Trass head to head.

TONY ALEXANDER:

The case for hope

Quotable Value statistics show values nationally are now 8.5 per cent below their peak level, but Alexander says the market is rising again, and will continue to do so.

He says those who have been preaching doom in the housing market have been wrong, slating "silly forecasts from wayward pundits" that prices would fall more dramatically.

He told the Herald on Sunday he was not referring to Trass.

Alexander's optimism is based on four economic fundamentals: unusually low interest rates attracting buyers into the market; an under-supply of houses; a dearth of new home construction and a burgeoning population.

However he does not think we are facing another boom.

Lending criteria are tighter and the rate of lending to the housing market is still weak, only growing about 0.2 per cent a month.

Prices have only risen 2.2 per cent in the past three months after falling a long way, and he says there is still too much uncertainty to predict how much they will rise in the next three years.

And he says there is an oversupply in certain market segments: seaside property, regions dependent on dairying and tourism and Queenstown apartments.

KIERAN TRASS:

We're still falling

Even though prices have been climbing, the increase is a false start, says Trass. He maintains values will fall up to 25 per cent in some suburbs during a slump he says will last until at least 2011.

Trass is so certain the market is still going to crash, he suggests buyers offer 10 per cent less than a property's valuation.

Buyers need to pay a price that takes into account the market being volatile for quite some time, he says. If the vendor will not accept it, move on. "People often fall in love with a property," Trass says. "But there are thousands of properties you can fall in love with - it's just that you haven't met them yet."

It's silly for people to race into the market now because they are scared of missing out, he says. This is the same fear that set people up to lose money at the end of the last boom when they believed that if they did not buy then, they would never be able to afford to.

"Smart people wait for the recovery to be established to the point where there is no doubt there is a recovery," says Trass. "It's not going to take much longer and this market is going to stop in its tracks."

The purpose of a slump is to take prices back closer to their fundamental values, Trass says, but property remains unaffordable by historic standards.

While the boom lasted five years, we are only two years into this slump, and Trass says: "I can't find another market that's come out of a slump in half the time of the preceding boom. The property cycle has its own gravity."

Pros and cons

BNZ's chief economist Tony Alexander says these things will underpin the New Zealand housing market:

1 Floating interest rates have hit a 40-year low that will drag extra buyers into the market.

2 New Zealand entered the recession with an under-supply of housing.

3 The country has the lowest level of housing construction since the 1960s. We need 23,000 built each year for a growing population, but fewer than 14,000 are being built annually.

4 We have accelerating population growth. The net migration gain in the year to July is 14,500 and is headed for 25,000. The average for the past 10 years has been 11,000.

Property cycle expert Kieran Trass says the market is not over the worst because:

1 Next year interest rates are going to rise some economists are saying by 3 per cent. Buyers who could not absorb this should bide their time and save.

2 There is no uniform under-supply of housing. There's a shortage in the better locations of main urban areas and over-supply in others.

3 We haven't been building many houses because it is too costly. The market adjusts through more people living in each household.

4 Migration looks positive - but it cannot be looked at in isolation.