Monday, April 16, 2012

House Prices in New Zealand - Some Thoughts

The thinking that housing is a fantastic investment is far from dead.

Apparently, when you get to the 'top' of a market cycle, you hear the phrase, "buy now, the market is slow, prices are soon to rise" quite often. It can be merely a desperate attempt to get the last suckers in.

I think we need to ponder about what is really going on. Looking at other aspects of the figures and try to clear the fog of the property spruikers.

Remember, there is always a hidden motive for spin (and admittedly, precious metals salesmen can be good at this also). Property needs people coming in at the bottom in order for those at the top to flourish. In this sense it has the many hallmarks of a ponsi scheme. But then most markets in the speculative category probably do.

Firstly, interest rates may well be about to break its shackles. The low interest rates in the US, Japan, the UK or Europe are the results of money printing by central banks caused by wild drunken debt orgies of the same governments. Italy, Spain and Greece are telling us the result of too much debt is higher interest rates. While the NZ Government has done much to reduce debt levels, it is now beyond impossible for them to create enough wealth to pay it back. The costs of money for NZ will rise. And the cost of money is called interest.

If interest rates rise, then more investors will be squeezed out of the market with higher costs causing supply to outpace demand and prices to fall. This cost of borrowing money overseas, strickly for housing, increases the total indebtedness of the country and hence the credit risk. The resulting interest rate spikes will put a knife to the heart of the housing market, killing off any semblance of equity value mum an dad investors thought they had. The empty foreclosure ghettos of Detroit may be coming to a NZ city near you.

Renting is often classed as dead-money by property sales people. If interest rates rise and equity falls, renting may look quite good for the short term.

However, a positive for the costs of overseas bank borrowing, is the likelihood of the NZD moving to the 90c level against the USD this year (see ASB forecasts). Money could be cheaper. Mind you, will these costs of borrowing will be passed on to the money consumer?

So why is it we buy houses? Primarily to live in, but lately to invest in. The mantra that prices always go up is simply a bet on the future. It has no real basis in history. Sure, 'prices' have increased since the late 80s, but value has not. The only real way to look at an investment house is as an income creation facility, not a price appreciation investment. Put you money to work in an affordable house to create positive income from rents, not for the motivation to create expenses to keep taxes down. If you invest for the wrong reason and if house prices move against you, you will suffer.

Anyway, the tax system related to housing is not good for this country. It skews where capital is best used for investment. However, if the government were to reform housing tax breaks, then house prices would likely drop considerably. That is not good for getting re-elected.

There of course may be a case for higher house prices and to argue that all will be the same as before. The latest figures from the Real Estate Institute below, may point to there being a slight uptick in housing value right now. But I don't see this being a long term trend. March is often followed by seasonal downtrends.

Now is the time to sit and wait and be safe. The time to move with new opportunity will come.

NZ House Prices v Gold Ounces as at March 2012


Gold in New Zealand dollars: $2015.92 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $38.29 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)
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