James Weir

House prices are grossly overvalued, by as much as $90,000 on average and prices could stay flat for five years, according to Westpac Bank economists.  The house price boom is over and a long-expected housing market downturn is under way, they say.

But a strong economy, unemployment at a 20-year low, high job security and growing wages meant there was not likely to be a big fall in house prices.  National median house prices have not moved for the past seven months, stopping dead in April after rising about $8000 a month earlier in the year.  Prices are expected to "wallow" a few points either side of zero and in five years prices will be much the same as they are today, Westpac forecasts. Prices were flat for four years till 2001.

This year the market was hit by rising fixed-term interest rates and there is no relief in sight.  Mortgage rates were expected to move even higher next year, putting even more pressure on the market.

For investors, rents are averaging just 4 per cent of a property's value while interest rates are about 9 per cent, making property less attractive.

On Westpac's "investor value" of housing measure, the average home is worth about $260,000, slumping from $328,000 at the end of last year. The investor value of property has been dragged down sharply by rising interest rates. That value is based on interest rates, marginal tax rates, rents and expected capital gains. While the value to investors has fallen sharply, the median price rose to about $350,000 earlier this year but has stagnated since then.

Westpac stressed that the investor value was not a price forecast. "We are not saying the median house price will fall to $260,000," Westpac's latest market report said.  But that value would exert slow and steady pressure on the market price, so the overvaluation could persist for many years.  The big jump in interest rates has also made housing much less affordable this year.

The cost of servicing an 80 per cent mortgage on a median home, based on a five-year fixed mortgage rate, has risen from 34 per cent of average household disposable income to 39 per cent this year. The historical average is just 25 per cent of the average household disposable income.

If house prices remained steady, it would take eight years before affordability returned to normal levels, based on incomes rising 5 per cent a year. If house prices stagnated or fell slightly, it would take four or five years for house prices to come back into line with the return from rents for investors.

The average home sold for $345,000 last month, but for an investor it should be worth only about $258,000.  That $87,000 gap in "investor value" is Westpac's estimate based on rising interest rates investors face and relatively low rental returns.

Westpac says if interest rates stay up, expect pain in the investment end of the market. They are expected to stay up for at least 18 months.  With median house prices down for two months in a row for the first time in years, according to Real Estate Institute figures, and sales volumes down sharply on last year it looks clear the boom is dead.

Falling national median prices in both June and July, down $5000, are a strong sign that the market is taking a breather.  Not surprisingly, there are already stories of investors selling up in recent months, especially with their fixed mortgages moving from an average of about 7.8 per cent to at least 9.2 per cent. About 30 per cent of fixed-rate mortgages are due to roll over in the next 12 months. Investors own about a third of the housing stock, but just how big this ripple of selling might get is anyone's guess.

A small number of heavily indebted home owners or investors will probably not be able to handle higher rates and will be forced to sell. For the majority, it should not be a big problem, with unemployment at just 3.6 per cent.  Certainly, there will be players who were enticed by get-rich-quick property seminars who will have been disappointed by speculative deals on tiny apartments in central Auckland. In Wellington too, it is the single unit, tiny student flats that often sell below council valuations and are seen as most vulnerable.  Rents may not be that flash either. One Auckland real estate agent reports average weekly rents down slightly in the past two months, and up only 4 per cent in a year.

Plenty of others have done handsomely in the bull run, and are happy to keep buying. Bigger, quality apartments in central Wellington are still in good demand, despite what seems to be another block going up every month. More $1 million-plus homes are selling than last year.

Westpac believes prices in places like Hamilton, Christchurch and Southland, will do well, with a strong dairy industry but elsewhere it looks like low single-digit rises at best.

Wellington economist Gareth Morgan is calling on the Government to clean up the fund management sector and make KiwiSaver "safe" to invest in.  "This government has to clean up the industry before it hands the heads of four million Kiwis to it on a platter," Dr Morgan said.

Savers might be seduced by tax breaks and employer levies in the form of KiwiSaver announced in last week's Budget, Dr Morgan said.  Dr Morgan called for government regulation to protect savers from fund managers contracting out of their fiduciary positions of trust and creating reserves that might be lost to some savers.

He is offering his own KiwiSaver scheme and has pointed out that money in KiwiSaver schemes is not government-guaranteed.  "There is no guarantee as to the safety of your money, no undertakings whatsoever as to the returns you can expect, and it is delivering you holus-bolus into the arms of the long-term savings sector."

Finance Minister Michael Cullen confirmed last week that KiwiSaver would not be government-guaranteed, and a spokesman pointed out yesterday that there was no government guarantee in Australia either.

The spokesman for Dr Cullen said no one was being forced to save.  "If you have a guarantee, that would surely reduce the incentives for the fund managers to perform."

The Government had added requirements that KiwiSaver schemes be registered with the government actuary, and have certain disclosure and reporting conditions consistent with international standards.

Dr Morgan said if KiwiSaver underperformed, lost people's money or even took it, then that was "tough - buyer beware".

Fund managers have rejected Dr Morgan's recent criticism of the sector, saying KiwiSaver would be governed by strict regulations putting considerable onus on fund managers to operate in the best interests of investors.

KiwiSaver schemes were reviewed by the government actuary before approval, to ensure all fees and charges were fully disclosed and were not unreasonable.  The six default providers (AMP, AXA, ASB, ING, Mercers and Tower) have been reviewed by an independent, government-appointed panel.

The KiwiSaver Act contains provision for the government actuary to apply for cancellation of registration of a KiwiSaver scheme that fails to operate in an acceptable manner.

KiwiSaver products will be managed in accordance with a trust deed.  Several fund managers said recently that any suggestion that the sector would not be working in the best interests of investors and consumers or that it offered KiwiSaver products and service that were not best practice did not stand up to scrutiny.

Dr Morgan said yesterday that the Government had to make KiwiSaver safe to invest in, but that did not involve a government guarantee.

The life insurance sector should be forced to accept a fiduciary duty to its investors through KiwiSaver and should not be allowed to contract out of that through trust deeds.  The companies should not create reserves from savers' money that savers would never see again if they left the scheme or changed provider.

The current account deficit is "still too high" at $14.4 billion, according to the Government, while profits for foreign owners of Kiwi companies, such as banks, keep growing, and were up $385 million in just three months.

The Green Party called on the Government to slow down lending by foreign-owned banks into an over-cooked housing market.

The lending was making the current deficit worse and making housing unaffordable for many, the Greens said.

A report this week showed it was almost impossible for an average wage earner to buy an average home, a mortgage taking about 75 per cent of the average wage in Wellington.

The shortfall between what New Zealand earns and spends overseas was $3.9 billion in the December quarter, Statistics New Zealand reported yesterday. This was slightly better than most forecasts.

The New Zealand dollar rose to US71.08 cents from US70.94c just before the announcement and ended the day just above US71c.

The deficit figures showed profits earned by foreign investors in New Zealand rose $385 million in the December quarter, mainly because Australian-owned banks were making higher profits.

Borrowing overseas has increased by about $24 billion in the past year, much of it household debt.

Foreign investors were also getting better returns from dividends and rising interest payments.

The deficit figures came ahead of growth figures due to be made public today, adding to expectations that the economy expanded about 1 per cent in the December quarter, or perhaps slightly more.

Finance Minister Michael Cullen said the deficit was still too high.

"The worry is that the international investment balance, including the cost of borrow overseas, is still rising because we as a nation are still willing to take on more debt, much of it in the household sector," Dr Cullen said.

Households had been borrowing to spend, while the Government had been saving. "New Zealanders need to think harder about saving."

Green Party co-leader Russel Norman said the $329 million increase in the current account deficit was mainly because of rising profits for foreign-owned companies, especially the big banks.

"These banks are making a fortune by borrowing money overseas and lending it into the over-cooked housing market, then sending the profits back to their Australia owners," Mr Norman said.

He called on Dr Cullen to "encourage" the Reserve Bank to increase the amount of capital banks have to hold, limit the sale of land to citizens and permanent residents in New Zealand, bring in a capital gains tax exempting the family home, and tighten up the tax breaks on investment property.