home ownership

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.

Home owners are becoming increasingly uneasy about keeping up with their mortgage repayments, a Research New Zealand survey says.
The poll found home loan interest rates were a concern for 68 per cent of those with mortgages.
The survey of social attitudes asked those with home loans if they were concerned that rising mortgage interest rates might make it difficult for them to keep up with repayments.
Research New Zealand director Emanuel Kalafatelis said 24 per cent of home owners were very concerned and 44 per cent were somewhat concerned.
"As you would expect, the level of concern decreased with rising income."
Of those earning $40,000 or less, 83 per cent said they were concerned or very concerned, compared with 62 per cent of those earning $70,000 or more a year.
Mr Kalafatelis said it appeared the Reserve Bank's monetary policy was starting to have an impact on the outlook of people with home loans.
The Reserve Bank has held the official cash rate at 8.25 per cent after four successive quarterly rises.
Mr Kalafatelis said that Reserve Bank governor Allan Bollard had told Parliament's finance and expenditure committee recently that the bank's monetary policy was effective, but it had taken longer to have an effect because of high commodity prices, the housing boom and an excess of global investment funds.
Banks have recently cut interest rates on fixed-term home loans, with KiwiBank announcing a three-year fixed rate of 8.6 per cent, half a per cent lower than its rivals.
The poll was taken between September 12 and 20. It was completed by 206 home owners with mortgages and has a maximum margin of error of 4.6 per cent.
According to the Real Estate Institute of New Zealand's latest figures, residential sales volumes have dropped to the lowest figure for August in seven years, though prices remained strong.
National sales fell to 6394 from 6660 in July. Residential sales for August last year were 8556.
Institute national president Murray Cleland said there had been an "excessive" amount of speculation on the residential property market.
The August 2007 figures had showed signs of a pause for buyers to digest interest rates, he said.
There had also been reduced sales of lifestyle blocks, with a declining median price from $445,750 in July to 430,000 in August. This contrasted with the median dwelling price, which rebounded to $350,000 after several months of decline.
The lifestyle block median sale price fall was due to lower sales volumes and increasing price volatility, the institute said.

The rate of home ownership in New Zealand has continued to slide over the past five years, but is expected to tumble over the next 10, according to the latest research.  The Centre for Housing Research, Aotearoa New Zealand (CHRANZ) today released figures based on the 2006 Census which showed young people were hardest hit when it came to the housing market.

Analysts found that the overall rate of home ownership in the 2001-2006 period was 66.9 per cent, down from 67.8 per cent from 1996-2001.  The latest figure has New Zealand roughly level-pegging with home ownership rates in Britain (68 per cent), the United States (68 per cent), and Australia (71 per cent), well ahead of Germany (40 per cent), but lagging behind Ireland's 80 per cent.

Those aged between 20 and 40 saw the greatest reduction in their share of owner-occupier tenure across both periods.  The sting in the tail of the research findings is the forecast that home ownership rates are projected to drop by a whopping 5 percentage points, to 61.9 per cent between 2006 and 2016.

Within this figure are regional variations which predict that Gisborne and Auckland will have the lowest home ownership rates, at 57 per cent and 58.3 per cent respectively, with Marlborough the highest at 70.0 per cent, in 2016.  The number of owner-occupier households is expected to increase by 43,010 and renter households by 151,890 between 2006 and 2016.

The strongest growth in both owner-occupier and renter households is expected to occur in the Auckland region.  Over the past five years, the actual number of households owning their own home has increased, but has been outpaced by the number of households renting.

Auckland, Canterbury, Bay of Plenty, and Waikato experienced the greatest growth in the number of owner-occupier households from 200-2006, echoing the 1991-2001 period.  In the latest period, the percentage growth in the number of private-renter households was greatest in Auckland, Wellington, Marlborough and Bay of Plenty.

The projected growth figures do not include second homes (such as holiday homes) which are not rented to other households.  The highest proportion of multi-unit developments will continue to be in the Auckland and Wellington regions where the pressure on land supply is greatest, researchers said.

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.

Rising interest rates and the spectre of a capital gains tax on property investments make Auckland landlord Karen Farrell shudder.  "It's all rather horrendous," says the residential investor, who provides housing accommodation for more than 20 tenants. "It's actually quite frightening."  This story starts about 10 years ago, when she and her husband, former All Black Colin Farrell, realised their children could never afford a house.  "So we began investing to give our kids a head-start. That was the first three houses. Then I realised I'd need one for our retirement."  So it went on.

The couple bought properties around the Te Atatu South area where they live, but have since branched out: a Henderson site drew them for its river appeal, so they had the house removed and plan to build two rental houses there.  They have also bought land further north at Mangawhai. They hope to carve up the existing four-section lot into eight lots and develop houses.  Already, they have a substantial investment portfolio: seven houses and the sections.

But like many landlords, Karen Farrell is beginning to feel the heat. Reserve Bank Governor Alan Bollard's official cash-rate rises are biting hard into her wallet.  Her biggest worry is a $500,000 mortgage she took out at an interest rate of 6.25 per cent in 2003.  She fixed it for five years and has enjoyed the benefits of repayments below the floating market rates since.  Soon, all that could change. The loan used to buy houses could well cost her double in interest payments when she has to renew next year.  "I've heard forecasts interest rates will be 12 per cent next year," she said.

That means a debt costing about $30,000 to service could cost her nearer $60,000 by this time next year.  Add to that the spectre of a capital gains tax and the loss of tax deductions and Karen Farrell and her ilk are being hit in the pocket.

This is precisely where the Reserve Bank, the Treasury and Finance Minister Michael Cullen are aiming.  Investors are their target in the war to dampen the superheated housing market. Landlords are being widely blamed for ramping up the sector and driving first-home buyers out.  The banks have acknowledged the influence of landlords.

ASB said this year that lending to existing homeowners had risen by a third in the past three years. Baby boomers aged 40 to 60 already have a family house and are buying "renters" as a means of saving for retirement.  They load that second property up with 100 per cent finance to claim the maximum tax deductions against their wages or salaries, clawing back large chunks of money.

Even with a mortgage at 10 per cent interest, the payback is huge: they reap the rental income plus the unrealised capital gain and can sell in a couple of years with a good profit - just as long as the market keeps rising.  But people are beginning to question this, saying a landlord bail-out from the sector could swamp the market with properties and force prices down.

Karen Farrell is planning to avoid that scenario. She wants to pass interest-rate rises on to her tenants, just as she has passed rates rises on. And she reckons she has prepared for this scenario already.  "I keep my rents just below par because I like long-term tenants." She hopes the deliberate strategy of under-renting will give her flexibility to push up rents if her costs rise fast.  But if push comes to shove, she admits, she might have to cash up. "That's the last resort. I hate selling. We're always acquiring more. We only sell as long as it allows us to do more, like subdivide."

Long-term property investors like Olly Newland - author of Climbing the Property Ladder and The Day the Bubble Bursts which predicts the demise of real estate's good fortunes - says he and others have accumulated vulture funds for landlords and others forced to sell. They are planning to pick up cheap houses in a crash that they feel certain is just around the corner.  Mike Pero, founder and a director of Mike Pero Mortgages, predicted this month that rising interest rates could force home owners - not just landlords - to sell because they would be unable to afford the price of borrowing.

Landlords are a somewhat unloved bunch.  A study by consultants DTZ for the Centre for Housing Research two years ago reached dim conclusions: a fifth were in the business a year or less; they expected significant capital gains but made little use of business structures to own or manage properties; they rarely used systematic property management systems and discriminated against some people in favour of others.

Andrew King, Property Investor Federation vice-president, was in Wellington this week to meet politicians and put the landlords' case.  He fears a capital gains tax (recommended in a Reserve Bank paper prepared for the parliamentary commerce committee's inquiry into housing affordability) and axing landlord tax breaks - which was suggested by Cullen on Tuesday - could damage his sector and push up rents by 40 per cent over two years.  "This would make a huge difference," King says. "People would sell. Definitely. It's already hard to make property work because the yields are so low."  Landlords would quit medium- to high-priced houses rather than cheaper places, he predicts.  Cheaper properties often have a higher return, allowing landlords to almost cover debt and costs.

But houses in the $300,000 to $500,000 band would be more likely to go on the market, King says. Landlords borrow so much to buy these places that any changes are more likely to force sales.  Tax breaks have helped landlords to cover their expenses, King says. He cites the example of a wage-earner getting $70,000 a year and entering the 39 per cent tax bracket. Buying a rental property and incurring a $10,000 annual loss (the difference between mortgage payments and rental income) could reduce that person's taxable income to $60,000, giving a $3900 tax break.  "But they're still making a loss of $6100, and it's costing them."  King says landlords are making little money because rents are so low.

Economists do not believe harder times with rising interest rates will cause any major fallout. Most landlords won't sell up and instead will push rents up first. Rents have been historically low and far beneath house prices rises, economists say.  Darren Gibbs, Deutsche Bank's chief economist, doubts a swag of landlords would stage any "wholesale bailout". Instead, they would be far more likely to hike rents, in turn fuelling inflation, having precisely the reverse effect to that intended.  Cameron Bagrie, ANZ economist, is picking rents to rise and thinks this will put pressure on households already hit by high petrol, electricity, rates and food bills.  "A lot of this economic cycle is built on debt and is unsustainable so there will be some pain," he said.

As for Karen Farrell, she's counting on the general population appreciating landlords a little more and wants the political blow-torch taken away from the sector's head.  Her final point: "Where would people be without us?"

For several years now the housing market has defied predictions of a downturn. Several periods of moderating sales and price growth have been followed by waves of renewed strength, thereby creating an aura of invincibility.

Real estate agents have a vested interest in nurturing that impression.  It is wrong, though, to conclude that, because the adjustment has not happened so far, it will not occur at all. Even though the timing may be uncertain, the reality is that a downturn is inevitable.

The housing boom has relied to a great extent on households' increased appetite for debt and it is the fast-growing cost of debt servicing that will ultimately force the long- awaited correction in housing demand.

The rise in household debt has exceeded income growth in every year since the early 1990s. The ratio of debt to disposable income stood at around 60 per cent in 1990 and reached 110 per cent in late 2001.

Since then that upward trend has accelerated as strong economic growth and falling unemployment have increased household optimism about future earnings.  Mortgage rates that were low by historical standards and high house price inflation reinforced the increased willingness to borrow.

The debt to income ratio now stands at more than 160 per cent. Not only is that level the highest among developed economies, New Zealand borrowers are facing significantly higher interest rates than elsewhere. As a result, a comparatively large portion of aggregate household income is required for debt servicing.

The ratio of debt servicing to disposable income, which averaged around 8.5 per cent during the 1990s, has increased to 13.5 per cent since then.  In the United States, Canada and Britain that figure is only about 8 to 9 per cent, while it is 11.5 per cent in Australia. A 13.5 per cent income share may not appear very high, but it has to be remembered that this is an average across all households. A large share of households has no mortgage at all. Taking that and rental income on investment properties into account, the average debt servicing ratio for households with mortgages is probably close to 25 per cent.

More important than averages, however, is the distribution of debt, with an increasing number of highly geared borrowers now struggling to make ends meet.

Households added nearly $19 billion to their liabilities during the past year, an increase of 13.7 per cent. If that pace were maintained, the already high cost of debt servicing would continue to rise at twice the rate of income growth. That trend is clearly unsustainable.

Bringing the rise in debt servicing cost into line with income growth would require the additional annual borrowing to fall from $19 billion to around $10 billion, a considerable adjustment that would impose a major constraint on growth in household demand.

THE OUTLOOK for consumer spending in both the Treasury and Reserve Bank economic forecasts is based on the scenario of a slowing debt uptake. The Treasury expects consumption growth to ease to 1.6 per cent per annum over the next few years, while the Reserve Bank is more pessimistic in projecting it to trend down to zero over the same period.

Similar dips in consumer spending growth in 1998 and 2000 led to brief periods of falling house prices. Taking history as a guide, a more protracted slowdown, as is forecast for the next few years, is likely to lead to a more substantial correction.  Moreover, having supported the housing market on the way up, the increased share of investment properties may be a factor that reinforces the slowdown.

In many cases those investments are not profitable without ongoing capital gains. The prospect of a multi-year period of falling or stagnant prices may cause investors to put those properties back on the market sooner than originally envisaged.

Even though residential property may be a safe and high-yielding asset over the long term, it is not a good idea to enter the market ahead of a multi-year downward correction.

While it remains uncertain when the tipping point will be reached, the debt fundamentals suggest that the housing boom is living on borrowed time.

# Ulf Schoefisch is an independent economic consultant.

Economists are warning that KiwiSaver could pump up the already soaring housing market when employees start withdrawing money for their first home.

From July 2010, KiwiSaver members will be able to put their and their employers' contributions toward a first-home deposit. At the same time, they will be eligible for a Government subsidy of $1000 a year, capped at $5000.

Experts are warning that the scheme could cause a flood of money into the property market, boosting already high prices.

BNZ chief economist Tony Alexander said any subsidy such as KiwiSaver would put upward pressure on house prices, though the extent of this was impossible to predict.

Westpac economist Donna Purdue agreed. "Any kind of subsidy to housing is obviously going to push up house prices."

Mr Alexander said there was a school of thought that once people saw their savings grow, the desire to own a house would subside - but warned that had not happened in Australia, which had compulsory superannuation.

Finance Minister Michael Cullen said Inland Revenue would get $14.6 million to get tough on property speculators, ensuring they are paying tax in a bid to dampen their effect on the property market.

Property speculators who are reaping millions of dollars from the super-heated housing market are about to feel the heat from a tough new tax crackdown.

Finance Minister Michael Cullen said Inland Revenue would get an extra $14.6 million over the next three years to strengthen property transaction audits. Speculative activity was driving up house prices and household debt levels, he said. So giving IRD more money would help it enforce the law.

Property auditing gathered $100 million between 2004 and 2006, he said and it was important for IRD to have the resources it needed.  Of the country's 1.4 million houses, around 400,000 are owned by investors. If a landlord buys with the intention of selling, tax must be paid on any financial windfalls.

Sharon Cuzens from Inland Revenue in Wellington yesterday welcomed the boost.  "It will enable us to pursue further, in-depth investigations and education on a risk area we have been actively targeting for some years," she said.

IRD would improve information so people were more aware of their liability, monitor major developments to ensure accurate return of sales or profits, boost research and analysis of risk areas and increase audit activity in areas of identified risk, she said.

One housing investment expert also welcomed the Budget package. Andrew King, Property Investors' Federation vice-president, said speculators who evaded tax were taking high risks. He encouraged those people who were eligible to come clean, declare their profits and pay tax.  "It's like playing Russian roulette if you don't," Mr King said. But he also criticised existing tax law, saying it had too many grey areas.

Matthew Gilligan, an Auckland chartered accountant and specialist tax and legal structures consultant, also welcomed the package, saying IRD was too poor to do its job properly and the money would help.  "They're grossly under-resourced," he said, citing long waiting lists for taxpayers seeking rulings and waiting for investigations to be concluded.

Mr Gilligan, whose firm has 4500 property clients investing in residential housing, called for clearer rules on housing investment tax liability. Many IRD staff were excellent but it was not uncommon for staff to change so fast that some taxpayers were dealing with three IRD staff members over one issue, he said.  "That's not uncommon on an audit." Nor was it unusual for a taxpayer to be given conflicting advice by various IRD staff members, Mr Gilligan said.

Greg Haddon, a Deloitte tax partner, said the $14.6 million was not nearly enough to tackle the issue.  "This extra money won't make a big impact," he said, and failed to address the reasons for so many people investing in housing, because they regarded it as a surer bet than other forms of investment.

IRD has already announced the success of previous crackdowns.  Two years ago, it netted just under $11 million from a campaign in the Queenstown/Otago region. Its concentrated audit blitz on developers and speculators started in March 2004 and by November 2005, it had 120 cases either under investigation or heading for prosecution.

Auckland was also a target two years ago, when IRD said it was increasing resources to hunt down speculators and developers who had kept their profits a secret.  Senior Auckland department official Richard Philp said in January 2005 that an extra $106.6 million was gathered nationally within two years on property transactions, including $52.9 million from Auckland.

The rules

• If you invest for the long term, there is no tax on money when you sell the rental property.
• But if you buy with the main aim of selling for a profit, any money you make is taxable.

First-home buyers wait for Government handout.

Prospective first-home buyers hoping for help through a Government-run shared-equity scheme will have to wait a little longer.  Housing Minister Chris Carter said $1.4 million had been allocated in the Budget for work on the potential design of a such a scheme, but a pilot would not be funded until at least next year.

Mr Carter has said the most likely location for a pilot scheme is Auckland and it could involve the Government paying for a 25 per cent or 30 per cent stake in a house, effectively reducing the purchase price of a $400,000 property to about $300,000.

If the house was sold, the Government would take back its percentage share. The scheme is expected to be aimed at the lowest quartile of the housing market.

Mr Carter said the Government was keen to explore how much demand there was for a shared-equity scheme.  If the scheme "flew", it would be introduced as part of a suite of new measures including a possible Housing Affordability Bill. "Shared equity will also be introduced at the same time as the Government seeks to increase the number of houses in the price bracket affordable to first-home buyers."

Mr Carter yesterday also announced $43.6 million over four years for other housing initiatives.  That included $23.8 million to increase the life of the Healthy Housing programme and extend it into the Wellington region for the first time.

The programme targets overcrowded households and assists them into more appropriate housing.  The Housing Innovation Fund, which provides government assistance to local authorities and community groups to develop affordable housing, would also receive a boost of $19.8 million.- NZPA