KEY POINTS:
The latest residential property statistics show that house prices are falling and there is unlikely to be any improvement in the short term.
A sustained downturn in the housing sector, which has been one of the main drivers behind the strong economy in recent years, will impact on consumer confidence, retail spending and domestic growth.
February sales data has been released by three organisations: Barfoot & Thompson, Quotable Value New Zealand and the Real Estate Institute of New Zealand (REINZ).
Auckland real estate agent Barfoot & Thompson reported settled sales of only 603 properties last month, compared with 989 properties in February last year, with the average sales price dropping from $504,079 to $495,272.
Managing director Peter Thompson said it was a buyers' market and volume had declined because sellers had been slow to adapt to the changing market conditions.
Quotable Value (QV), which produces national data on a rolling three-monthly basis, said the average sale price in the period from December to last month was $393,240 compared with an all-time high of $406,176 in the three months ended last October.
QV spokesman Bruce Hancock said: "Clearly the market is slowing down and taking a breather, and we expect this will continue given current market conditions. It looks like we may be in for a sustained period of less activity in the property market."
Finally REINZ, which produces the most comprehensive data, said the national median sale price was $337,500 last month compared with $340,000 in January and $335,000 in February last year.
As demonstrated by the REINZ figures in the first table, New Zealand house prices have risen sharply over the past six years. In the six years to last month the median price increased by 81.5 per cent from $186,000 to $337,500 while the stock exchange's NZX-50 Gross Index strengthened by 78.6 per cent over the same period.
The property market showed clear signs of peaking in mid-2007 when the median price reached $351,500 and last month's figure was 4 per cent below this all-time high. The sales volume figures in the second table give a clearer picture of market conditions over the past few months.
Volumes remained strong through the first few months of last year but began to fall, on a year-on-year basis, from mid-year onwards. The decline has accelerated in recent months with sales volume for the past six months 28.4 per cent down on the same period in 2006-07.
House price falls tend to lag volume declines and this trend is expected to continue over the next few months. It would not be surprising to see the median sale price fall to around $320,000 in the second half of this year, representing a decline of between 7 and 9 per cent compared with the second half of last year.
Auckland and Northland are the weakest markets in terms of price and volume. Auckland's February volume was down 42.6 per cent compared with February last year, while the median price fell 0.7 per cent.
The next few months will give a clearer indication of the state of the market as there is usually a strong bout of activity in the March to May period before the advent of the quieter winter months.
It is now a buyers' market but most vendors remain unwilling to drop their prices to achieve a sale. This is reflected in the number of days it takes to sell a house which has shot up from 32 days in February last year to 50 days last month.
Real estate agents will have to convince sellers to drop their price if they want to sell their property.
Several items affect the housing market including external migration, bank lending, interest rates and the employment situation.
External migration has fallen sharply from 34,906 in the 2003 calendar year to only 4799 in the 12 months ended in January this year. Based on recent trends there is a strong possibility that the country's annual immigration figures will turn negative by mid-year. This would have a damaging impact on the residential property market.
Aggressive lending by the trading banks has played a major role in the housing boom. Between January 2002 and this January bank mortgage lending surged by 115.2 per cent, from $68.6 billion to $147.6 billion. This has been encouraged by bank capital adequacy rules that allow banks to lend twice as much on residential property for any given amount of capital compared with most other types of loans.
For example, banks have been able to lend $200 million on residential mortgages for every $8 million of capital but only $100 million to businesses for the same amount of capital. This has encouraged the Australian-owned banks to focus on housing loans in NZ because it minimises the amount of capital they have had to commit to this country.
The trading banks have been given more flexibility under new capital adequacy rules introduced this year but they are unlikely to maintain their aggressive mortgage lending policies because of the downturn in values.
Individuals will also approach borrowing more cautiously because the floating interest rate is now 10.62 per cent compared with 9.63 per cent 12 months ago and the five-year fixed rate has risen from 8.04 per cent to 9.24 per cent over the same period.
A major positive feature for housing is the tight labour and low unemployment rate as individuals are much more likely to borrow and move to a better home when their employment outlook is secure. The unemployment rate dropped to just 3.4 per cent in the December quarter, well below 3.8 per cent in the December 2006 quarter, and the employment market continues to remain tight although it is normally a lagging indicator.
The housing market has a huge impact on the New Zealand economy because in terms of the total housing values/share market capitalisation ratio and total housing values/GDP ratio we are far more dependent on residential property than any other western country.
There has been a great deal of comment and analysis about the wealth effect of sharemarket falls on the United States economy but we should be much more concerned about the wealth impact of a decline in house prices on retail spending and the New Zealand economy.
Statistics released on Thursday indicate the retail sector is performing relatively well in this country compared with the US. Seasonally adjusted sales for last month rose by 0.3 per cent in New Zealand compared with January but declined by 0.6 per cent in the US over the same period.
Petrol prices continue to have a big impact on spending patterns as NZ petrol station sales rose 29 per cent last month compared with February 2007 and were 20.2 per cent up in the US.
Seasonally adjusted retail sales, excluding petrol, were 3.5 per cent higher in New Zealand compared with February last year while they increased by just 0.9 per cent in the US.
Retail sales will continue to be a major bellwether for the domestic economy but residential housing will be the most critical factor.
The best way to assess the state of the economy is to keep a close eye on the number of For Sale signs in your neighbourhood.
* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management
