|Investment Research Group|
This tends to back up information that has come out of vested interests such as the real estate industry that the property markets are showing a bit more life.
Certainly with interest rates being slashed, the ability to service a mortgage has improved for many people. Those who can stand the pain of facing break costs on their mortgages are in some cases halving their monthly repayments.
However, this does not necessarily mean a sustained recovery in property prices.
Valuations are a leading indicator of increased interest in property but it is possible many are reflecting the banks' demands for current valuations in a declining market when raising or refinancing a loan.
Refinancing doesn't do anything to support the property market and neither do mortgagee sales, which seem to be everywhere. Terralink, a division of NZ Post, reports there were 1,303 mortgagee sales in 2008 compared with just 475 in the previous year.
The number of houses currently up for sale using the word 'mortgagee' is at a multi-year high of 450 according to a real estate website.
One reason why we cannot expect residential properties to appreciate in value for a while yet is that they remain unaffordable. One affordability index I have seen says the costs of paying off a typical first home stands at around 47% of a typical household income after tax.
This is well down on the 80% of last year but still well above the 40% considered sustainable. This suggests the market has to fall further, even if there are further interest cuts, before there can be a sustained increase in home sales.
Buying homes for many people has become further complicated by the banks tightening of their credit policies. Where once 90% or 95% mortgages and sometimes even 100% mortgages were granted, the main banks will only lend 80% at best now.
For a young couple looking to buy their first home, that amounts to tens of thousands of dollars. This is going to be difficult for many people, especially those who have fallen into the easy debt traps that have been put in their path over the past couple of decades. As a result, demand for houses is going to be muted.
Another limiting factor is confidence. If people are worried about losing their jobs, a fear which is becoming more real as our economy slows, they are not going to stick their necks out to take on large mortgages.
This leads to another consideration - is it cheaper to buy a house or rent it? During the property bubble houses were selling at 3% - 4% yield based on the rents they generated. This was at a time when mortgage rates were 8% - 10%.
Now that mortgage rates are 6% - 7%, and yields have improved (because property prices have fallen) to an estimated 4% - 5%, the gap is narrowing. However, the gap is still there and money-conscious tenants and investors are not going to buy properties at a loss if there is little chance of capital gain.
Putting all these factors into the mix, I would not be surprised if property prices come down another 10% (with more interest rate cuts) or 20% (without cuts).