Next stop Naseby - NZ house market still on the up and up

By NZPA

Friday 24th January 2003

With house prices now exploding in the tiny Otago borough of Naseby, New Zealand's latest gold rush appears to have reached most corners of the country.

Depending on who you talk to, house prices are on the up because of wealthy foreigners fleeing geopolitical tension and buying dirt cheap land; the arrival of superstars like Tom Cruise and Gwyneth Paltrow; or a booming domestic economy.

In Naseby, near Ranfurly, it could be the Otago Central Rail Trail and Grahame Sydney's paintings of the area's wide open spaces that have helped shunt house prices up 75 percent in the past year.

Massey University senior lecturer in real estate Graham Crews said the housing market in recent years has staged "quite an astounding turnaround, because it came from behind -- particularly in Auckland".

But the question is, will the Reserve Bank allow the boom times to continue, and will the relevant factors remain in play this year?

The Reserve Bank hinted yesterday at a possible cut in interest rates if the New Zealand dollar continues to climb, which would further stimulate the housing market.

Average house mortgage interest rates are about 7.8 percent, compared with 11.25 percent in 1998.

In its decision to leave the key interest rate unchanged at 5.75 percent, the Reserve Bank had to balance the deflationary impact of the strong currency against inflationary pressures from the robust domestic economy, led by the housing market and consumer spending.

Many economists are picking a cut of at least 25 points by June, but some have said an increase in rates is also possible, which would dampen the housing market.

The housing market first fired as a result of the recovery in the rural sector, gathering pace when the domestic economy picked up last year, and underpinned by a return to net migration.

"There are an awful lot of New Zealanders returning and fewer New Zealanders going, as well as an amazing number of new New Zealanders arriving," Mr Crews said recently.

Although immigration is expected to tail off from last year's record 40,000 because of tighter regulations, house prices are forecast to keep climbing and houses will continue to be built.

Home building typically lags an increase in immigration by as much as 15 months.

Economists have predicted annual migration flows would slow to between 20,000 to 30,000 this year, considered still strong enough to underpin housing and retailing.

The Green Party has called for a halt to foreign ownership of land, which it says is a key factor in the rise of land and house prices.

However, the party is distancing itself from NZ First's call for a general slowdown in immigration to curb house prices.

Green Party co-leader Rod Donald acknowledged that another big factor was the number of young New Zealanders coming home cashed-up from their overseas experience and ready to settle down.

"The Green Party has no problem with New Zealanders returning home, and no problem with people moving to New Zealand and making this country their home," Mr Donald says.

"But we do have a real problem with foreigners being able to buy up our land and we want to change the Overseas Investment Act.

"The implications of increasing foreign ownership aren't just related to the urban environment where house prices are going up, or the pressure on the coastline and inappropriate coastal development.

"It's also having a major impact on the viability of farming ..."

Some of those foreign owners argue there is no difference to a wealthy Kiwi owning the land because it can not be physically removed. However, Mr Donald disagrees.

"Many of the people who are buying land here come from countries where we wouldn't be allowed to buy land, so I have no problems with us applying those rules to our own country.

"The foreign owners are pushing up the prices simply because the prices being asked are cheap in comparison with what it would cost at home," Mr Donald says.

"The guy who bought Young Nick's Head, probably his apartment in New York would be the same price ($NZ4 million)."

Overseas Investment Commission secretary Stephen Dawe says the commission's research uncovered little evidence that foreign purchasers of land were driving up prices.

Offshore purchasers were involved in one-in-20 rural property transactions, and the commission had also dealt with very few applications to purchase coastal land.

New Zealand was about the middle of the pack in how strict its regulations were allowing foreign purchase of land, Mr Dawe said.

The current housing market is more sustainable than the debt-propelled boom in the 1990s, which was driven by residential investors raising mortgages against the equity of an existing house, Mr Crews says.

"That was severely affected when confidence dropped and we had job losses, and people were trying to deal with high mortgages at a time when they had lifting vacancy rates and lowering rents.

"That's all turned around now. This particular market is being driven by much stronger underlying fundamentals -- a strong domestic economy, a turnaround in immigration, wages are starting to rise, unemployment levels are at lows, and confidence is high."

The market was likely to correct itself if the middle of the market rose out of reach of the average mortgage-paying or renting Kiwi.

However, ownership levels are dropping and New Zealanders are beginning to buy their first house later.

"The other thing is that people have been used to hearing about Auckland booms while they stand back -- but this has been a much more national phenomenon," Mr Crews said.

"Few other communities participated (in the mid-90s boom) - it was predominantly an Auckland phenomenon. I just say this is a robust market recovery that's being shared by much of the country."

Figures out this week showed house prices dipped slightly in December, but optimism and demand is holding up.

At the same time, the dream of owning a home is getting further out of reach for first home buyers.

The AMP Home Affordability Index for the December quarter showed homes were nearly 25 percent less affordable than a year ago, with ownership least affordable in Nelson/Marlborough (29 percent less affordable) and Auckland (28.9 percent).

There were almost a record 100,000 houses sold last year and the median dwelling price rose 5.4 percent to $195,000 over the December quarter.

ASB Bank's housing survey out this week revealed an increasing majority of people expect house prices to rise, but at the same time more people are coming to doubt that now is a good time to buy a house.

While a mixed result, ASB chief economist Anthony Byett said such caution would ward off a boom and bust cycle in the market.

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