Population Growth and Growth in Property Values

[rmbbrave]

Thinking of moving to Oz? Think again
Sunday Star Times | Sunday, 28 January 2007

Homes are even less affordable in many parts of Australia, reports Greg Ninness.

Kiwis considering moving to Australia may need to think twice if their plans include owning their own home.

Because while rising house prices are making home ownership increasingly less affordable in this country, the situation is even worse in many parts of Australia.

The Demographia Survey of Housing Affordability released last week shows the median dwelling price in Auckland was 6.9 times the median household income in the region (as at the September quarter last year).

Home buyers in Wellington and Christchurch fare slightly better, where median prices are 5.4 times and six times median household incomes.

But people thinking they may improve their chances of owning their own home by jumping across the ditch to Australia may be disappointed.

About 34,000 New Zealanders move to Australia on a permanent or long-term basis each year, many attracted by what they see as better career and lifestyle opportunities.

The UK is the second biggest destination, attracting about 12,000 a year.

But if they are heading for the bright lights of Sydney, long a mecca for young Kiwis, they could be in for a rude awakening.

Sydney has one of the most expensive housing markets in the world, with median prices being 8.5 times median incomes, making the city marginally more expensive than London, according to the Demographia survey.

And the problem is not confined to Australia's largest city.

Western Australia's mining boom has made Perth, once one of the most affordable Australian cities, the second least affordable after Sydney - and most other Australian cities are catching up fast.

The trend was confirmed last week when Australia's Housing industry Association released its Housing Affordability Index figures for the December quarter of last year.

The index breaks out figures for first home buyers. These showed a first home became 5.5% less affordable in the December quarter and and was 15.5% less affordable than it was a year before.

The study blamed a double whammy of rising prices and rising mortgage interest rates for pushing affordability to its lowest level since the index was launched in 1984.

Some believe the cost of housing in the big cities is so high it is starting to affect middle income earners as well as first home buyers.

Australia's opposition housing spokeswoman Tanya Plibersek said cities such as Sydney and Perth could face shortages of key workers such as teachers, nurses and police, because they could not afford the housing costs.

"They'll find it almost impossible to afford to live within commuting distance of their work," she said.

http://www.stuff.co.nz/3942757a13.html

[rmbbrave]

Home equity loans rise as Kiwis spend
By ALAN WOOD and SUE ALLEN - The Dominion Post | Monday, 29 January 2007

Reverse mortgage company Sentinel says it remains on a growth trajectory after Kiwi retirees taking home equity loans helped it to double its loan book to $179 million in 2006.


The number of loans increased by 94 per cent, to 3493 by the end 2006.

Sentinel's New Zealand loan book rose from $89 million in 2005, as older people became more willing to draw down against the value of their homes, managing director Richard Coon said.

Sentinel is considering a share market listing, possibly next year, to increase access to new capital, to underpin the brand and to make it easier for existing shareholders to sell shares.

In Wellington, the Kapiti Coast and Upper and Lower Hutt the number of loans increased from 152 taken out in 2004 and 2005 to 282 last year.

Mr Coon said the company was also expanding its presence worldwide, with its products to be launched in several countries in 2007.

Sentinel is already in Australia, Spain, South Africa and Ireland, and has 80 staff worldwide.

"Worldwide we've done over $500 million of loans including New Zealand," he said.

"In the calendar 2007 year we're expecting as a group worldwide to do around $1 billion."

In the financial year to March 2007, it was hoping to grow its New Zealand business, with Kiwis of an average age of 72 using the products to borrow lump sums against the value of their house.

Sentinel launched in March 2004, wrote about $35 million of New Zealand business in its first year, $70 million in the second year and was on target for $100 million in the year to March 2007.

Sentinel still has 80 per cent to 90 per cent of the New Zealand market, but with an increasing number of competitors, including the recent launch of Bluestone, he would expect that high share to drop, Mr Coon said.

Sentinel's research showed that older people were borrowing against homes responsibly and conservatively.

The average lump sum initially drawn down typically represented about 13 per cent of the value of the property, Mr Coon said.

In central Wellington, the average initial amount drawn down by a borrower was $48,442, compared with $39,708 nationally. The average property value of a borrower in Wellington was $341,475, compared with $307,705 nationally.

In Wellington, 78 per cent of borrowers used the money for home improvements.

People on the Kapiti Coast borrowed an average of $40,278 against an average house value of $297,000; those in Upper and Lower Hutt borrow $33,627 against homes valued on average at $255,414.

East Auckland had among the highest property values borrowed against in 2006, with an average of $513,753.

Mr Coon said New Zealand was quickly catching up with Australia in terms of people taking to home equity release packages, and these were becoming increasingly sophisticated.

http://www.stuff.co.nz/3942997a13.html

[rmbbrave]

Another reason not to move to OZ - unless you actually want to drink "treated sewage".

Queensland Premier Peter Beattie scrapped plans for a A$10 ($11.24) million referendum on the issue, saying record-low inflows to dams had left him with no choice but to introduce treated sewage in the drinking supply.

http://www.nzherald.co.nz/section/2/...ectid=10421395

[rmbbrave]

Property bubble must burst
The Dominion Post | Tuesday, 30 January 2007

By DAVID MCEWEN

What's the difference between investment and speculation? One of the best descriptions of the chasm that separates them comes from billionaire investor Warren Buffett.


He says speculators tend to act like Cinderella at the ball. "They know that overstaying the festivities – that is, continuing to speculate in assets that have gigantic valuations relative to the cash they are likely to generate in the future – will eventually bring on pumpkins and mice.

"But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: they are dancing in a room in which the clocks have no hands."

Speculators buy with the express intention of selling, preferably in as short a time as possible, at a whopping profit. The flaw in this plan is that they require someone equally as greedy and presumably less intelligent to buy from them at the inflated price.

Such buyers are not hard to find when a market is raging and prices are rising steadily. However, they are extremely hard to locate when the market dips.

Many people are aware that the market has gone wild during a bubble, but most wrongly think they have got enough talent to know when a crash is coming and get out before that happens. I am concerned that the property market in this country is a bubble. Recent articles that quote research showing that New Zealand has among the most unaffordable property markets in the world underpins this view.

Essentially, during very long periods, property price growth struggles to run away from the inflation rate. It can do so for extended periods, only to fall back below the inflation rate.

The reason is that our salaries are tied to the inflation rate – in fact, our salaries are a big component of the inflation rate – so if property is rising much faster than inflation, eventually nobody will be able to buy property, and the property market will have to stagnate for as long as it takes for inflation linked wages to catch up.

By adjusting the long-term rise in property prices by inflation, you get the real growth in values. Robert J Shiller, professor of economics at Yale University and a leading authority on markets, set out to do long- term research on property values adjusted for the distortion of inflation.

Professor Shiller searched the globe to find the most reliable property statistics over the longest period on record. He found this in the central suburb of Amsterdam, the Herengracht, where reliable statistics date from 1600.

Professor Shiller then produced what must be the longest range graph of property prices ever recorded, covering 350 years, starting at 1628.

The prices were adjusted to remove inflation and showed an extraordinary thing – the price of a house in Herengracht, adjusted for inflation, had barely moved in 300 years.

But the graph also showed extraordinary cycles where property outpaced inflation for up to 20 years, only to fall below inflation for the next 20.

The notion that after a decade of booming prices in New Zealand, the property market will now settle for a steady growth rate still well above inflation, seems to me to be deeply flawed.

[patsy]

The previous McEwin article is very interesting because it raises an important issue that flies in the face of those that argue that as long as immigration is positive, then property values will keep on rising. If houses were bought 100% cash, then the law of supply and demand would apply - if demand outstrips supply, then the asset price increases.

However, because houses are mortgaged (that is, bought with future cash flows coming from salaries and wages), then the McEwin argument applies. This means that regardless of immigration levels, there is going to be a point when house price increases would drive debt levels that could not be serviced with future cash flows. Again, irrespective of immigration levels, as long as immigrants do not pay 100% cash.

[Jess9]

Another thought...after another 6-10 years a new round of unmortgaged and high salaried property buyers arise to enter the property market. They see the market has been in the doldrums for years, and being smart also see that by using there newly acquired leverage to buy stagnent, inflation eroded nominal 2007 priced property once again stacks up with rental return and likely overdue cap. growth, and the cycle starts to turn once more.

[Halebop]

quote:Originally posted by Jess9

Another thought...after another 6-10 years a new round of unmortgaged and high salaried property buyers arise to enter the property market. They see the market has been in the doldrums for years, and being smart also see that by using there newly acquired leverage to buy stagnent, inflation eroded nominal 2007 priced property once again stacks up with rental return and likely overdue cap. growth, and the cycle starts to turn once more.

That could happen but we'd need some big changes to birth rates and/or immigration first. Based on average projections for fertility, mortality and migration, in pretty much exactly 10 years time we will experience our first drop in projected labour force size. Additionally, the key 1st home buying demographic of under 39 year olds is already reducing in size and will take about 13 or 14 years to recover to current levels*, where it will begin gently rising again for 10 years and then drop again for another 20+ (And that includes some "success" assumptions surrounding the recent government sponsored "family friendly" breeding policies).

* ...Coupled with a subtle demographic shift in attitudes by under 39 years old "Gen X'ers" against buying a first home.

[Hommel]

I have been thinking for a long time that the past few years boom in residential property has been fueled mainly on debt, not real wealth, and that once everyone is "mortgaged to the hilt" the main driver of the boom will not be there. Against that building prices have and will increase significantly and that, and immigration, will underpin house prices to some extent. Just waiting for beach property to drop a bit (hopefully) !!

[patsy]

[quote]quote:Originally posted by Halebop

Based on average projections for fertility, mortality and migration, in pretty much exactly 10 years time we will experience our first drop in projected labour force size. Additionally, the key 1st home buying demographic of under 39 year olds is already reducing in size and will take about 13 or 14 years to recover to current levels*, where it will begin gently rising again for 10 years and then drop again for another 20+ (And that includes some "success" assumptions surrounding the recent government sponsored "family friendly" breeding policies).

I agree entirely. In fact, the Japanese have gone through the cycle you're mentioning some 10 years earlier than the West. The stagnant Japanese economy can be explained by demographic factors, and by a sort of early baby boomer generation that the Japanese had. The Japanese also had a similar Kiwi mentality in that property buying was used as a means of savings. As such generation grew older, they had to unlock their savings thus driving the sector (and the economy, overall) down.

It is not unrealistic to expect that the West would follow a similar cycle. On top of this, in the particular case of NZ, the tremendous liquidity injected by a low interest rate policy plus unrestrained government spend will catch up with us in that income from assets is not commensurate with asset pricing. Not a pretty picture for NZ property if a Japanese-style cycle coincides roughly with the timing of an imbalance of investment return given by cheap money.

[Jess9]

Regarding my last comment...and thinking on following comments...it is still likely a factor, for high growth cities, e.g. Auckland, Nelson, Blenheim, Queenstown, Tauranga to name the top few.