Numbers speaking volumes

I have looked at countless properties and been to many auctions. The investors are conspicious by their absence. The only properties selling at auctions seem to be family homes selling to the owner occupier. Because of the emotion involved, some have sold at levels I did not think possible in this market.
Also there are still unrealistic vendors in the market who are still trying to sell at last year's prices.

If one is prepared to put in time and seek the really motivated or desperate vendors, bargains can be found.

I have just closed on a deal paying 13.5% before the 2006 GV and 22.6% below what the property exchanged hands for in Oct 07.

I came in after an offer [much, much higher than mine] subject to finance fell through.
so on the one hand, the falling interest rate is a big help and on the other the tightening credit criteria is makig it difficult for investors especially those already stretched with high LVR, which has been made worst by the falling value of their portfolio.

The great unknown to me is the impact of the financial crisis on the real economy ie on employment. This will dictate how the property market pans out in 2009.

A real estate agent says prices are falling fast
By Peter Ryan of Ryan Realty
At present, in New Zealand, we have price falls and rises in house sales measured by, in particular, the Real Estate Institute, using median price and Quotable Value using average price, and the result communicated to the public.
It is debatable however whether median price in particular really measures what it purports to.
If you consider the following data, you will see that median price is an extremely blunt instrument that can be readily skewered to produce inaccurate results.
Hypothetical house sales for November 2007: Median Price $360,000
$220,000
$250,000
$262,000
$280,000
$290,000
$305,000
$310,000
$320,000
$360,000
$380,000
$420,000
$440,000
$475,000
$490,000
$505,000
$560,000
$580,000
…………
$6,447,000
Hypothetical house sales November 2008: Median Price: Median Price $380,000
$200,000
$210,000
$270,000
$300,000
$350,000
$380,000
$410,000
$420,000
$470,000
$500,000
$530,000
…………
$4,040,000
In the example given, in the year from November 2007, the number of sales contracted overall more at the bottom end than the top end of the market.
The above hypothetical figures show the distortion that can occur where market forces act on the market place to produce lower volumes and prices relatively on the bottom end than the top end. And even if the prices fall similarly at the top end, if more sales occur at the top end the median price can go up, even when in actual fact the prices may be going down.
Median price does not actually show the price reductions or increases from when it was originally purchased and hence whether prices are increasing or decreasing.
However, the Real Estate Institute, using the median price method would declare that the median price in November 2007 of $360,000 has gone to $380,000 in November 2008; an increase of 5.2%, when in fact you can see that prices went down.
So, how could market forces affect median price to distort the outcomes?
This could be because the people at the lower end market may be more affected by interest rate changes than people with higher disposable incomes living in higher socio-economic areas, and many of these people are probably first home buyers who can least afford to absorb added interest costs and higher deposits.
Also there is a tendency for “Investment Properties” to be more concentrated in the lower socio-economic areas because they give a better return and because of lower home ownership rates. With many of these properties being highly leveraged, the owners could have, in many instances, been forced to top up these properties in their mortgage payments to the banks.
For instance, if you purchased a property in Manurewa for $320,000 in 2007 with a 100% loan and were paying 10% interest only on a loan you would be required to pay $32,000 in interest per annum. However, your yearly rental return would probably only be $320 per week less outgoings – say $15,640 per annum. The owner will need to top up the property $16,560 per annum. If the owner attended the “negatively geared” seminars that have occurred, he may well have purchased 5 properties. This would cause considerable pressure on some vendors to sell urgently and put large numbers of “renters” on the market and drive down the market price, which would also affect family homes in the area.
As the licensee and manager of a Real Estate Company with the experience of the past 19 years in South Auckland, I noticed in August 2007 an abnormal fall in the number of sales, accompanied by a reduction in sale price.
By November 2007 the anecdotal evidence communicated by my salespeople was that in South Auckland there had been a decrease of price of family homes in the order of 12 – 15% and a decrease in rental/investment property prices of up to 20%.
At the same time the Real Estate Institute was declaring that prices were actually rising over 5% from the previous year. Anecdotal evidence from other Real Estate agencies in South Auckland and beyond that I had spoken to convinced me that there was a strange anomaly between what the Real Estate Institute was communicating and what I could actually see on the ground.
In November 2007 I contacted the Real Estate Institute and asked to speak to the person in charge of collecting the data and putting out the figures for sale prices. I suggested to the Institute Officer concerned that the price indicators, at that stage indicating a 5% increase in prices, was wrong and it was not what we were experiencing in South Auckland and that the median price method was faulty. He replied that this could not be possible, as the number of properties sold was too large for them to show an inaccurate result.
At the moment the Real Estate Institute is suggesting a price decrease in the past year of 5.9%.
Quotable Value on the other hand, who are suggesting a 6.8% decrease in price, bases its measurement of house prices on a ratio of sale price to current rating valuations. Associate Professor of Urban Property Studies, Lincoln University, Rod Jefferies, states in a blog on interest.co.nz, November 15th 2008 “The Q.V’s indexes are better (than the Real Estate Institute median price), however these are also flawed and affected by volume – but the best N Z has got. What we need is a repeat sales index such as Standard & Poors produce in the U.S.A. – but it is very much more difficult to calculate and also suffers from volume affect and availability of non-stressed sales”.
My salespeople on the other hand are estimating a 20% decrease for family homes and up to 30% decrease for investment/rental properties. A conversation with a Real Estate salesperson in East Auckland of 20 years plus experience indicated a 20% drop in the last year in the Howick area.
The unfortunate result of this confusion is that there are vendors who are being forced by circumstances to make hard choices on whether to sell their property or not, based on the information they receive from the Real Estate Institute and Quotable Value. Probably the information vendors are being given by their local Real estate agent is different again. Who are they to believe? This confusion may lead home owners to turn down good offers or even drive them to a forced sale.
If the market is still dropping, which I believe it still is, home owners may lose thousands through relying on faulty statistics. I believe they deserve better.
The Real Estate Institute has indicated recently that “the housing market shows signs of picking up” Herald 14 March 2008. I would venture that instead the credit crunch and 20% deposits has further depressed the bottom end market, causing the median price to rise, while actually prices are still falling. It will be interesting to see who is right!
* Peter Ryan is the head of Ryan Realty Ltd in Papatoetoe. He has been a practitioner of real estate for 20 years.

Until sales volume picks up and the days to sell fall I dont believe we will see any increase in house prices, in fact I see a further decline during 2009. Investors just need to be patient, be certain of your interest cost and also take note of which direction rents are moving. In the late 90s rents actually fell and this could easily happen again if supply is greater than demand, which is appearing in some places.

Remember the housing market is subject to the same market forces as any other product, supply and demand, at the moment there is over supply and until demand exceeds supply we will not see any real price increases. The exact same senario applies to rents.