Market Considerations
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July economic market and property market conditions and their flow-on implications to the residential property sector across both Dunedin and New Zealand.
Economic Overview
The economic overview herein is based on data which we have gathered from relevant government sources. Below is a table showing some key economic indicators. The most notable change in these indicators is the recently well publicised increase in the Official Cash Rate (OCR).
Table 1
It has been widely advertised that the country has recently felt the effects of a deep economic recession. Although the country and the economy are now nowhere near back to the heights of 2006/2007, the business sector is beginning to realise that we escaped relatively unscathed in comparison to the USA and Britain. The concern, however, is the possibility of a double-dip recession. Also evident is the continuing hard times that are currently being felt by retailers as consumers continue to reduce their spending and general belt-tightening in most industries.
Interest Rates and Inflation
As shown in the table above, the Reserve Bank of New Zealand recently increased the OCR to 3%. This shows the Reserve Bank’s belief the country’s economy is slowly recovering. As is shown in the table below, bank interest rates are much lower than that of the rates 18 months ago. The recent increase in the OCR has been reflected somewhat in the home lending rates offered by the major banks. However, due to the competitive nature of the retail banking industry, rates have stayed relatively low and competitive, between the banks.
Fig 1: Mortgage Rates
During late July banks responded to the hike in the OCR, raising both floating and fixed rates slightly, as can be seen in the graph above. The graph also shows that the two year fixed rate has been below that of the floating rate for some time. It is now the aim of the banks to bring that trend back into play, as for the last 18 months the floating rate has been well below that of the two year fixed rate, so we expect this gap to narrow over the coming short term future.
Banks, however, are taking a much tighter approach to residential property lending, and are now beginning to focus on each property and its associated risks. Despite the fact there are standard rates which do apply to certain residential home lending, each property is being assessed more than in the past, based on its risk. It is because of this, banks are tending to negotiate to a very small degree with individual clients. It has also been well publicised that banks have toughened up on residential lending, with loan-to-value ratios dropping to 80%, with a small number of banks returning to the 90% loan-to-value ratios seen during the property high. We both hope and expect that the lending will never return to the crazy measures of 100% which were seen in the 2007 period. The positive to ascertain from this is that banks are now ensuring that residential property owners have the ability to service the loan with their own personal income. In summary, money is a lot harder to get.
Dunedin Employment
Over recent times, Dunedin has seen a number of closures of major industries in the city, this includes the Silver Fern Farms processing plant, Fisher & Paykel and the restructure of Cadburys. As expected, and shown on the graph below, this caused a spike in the unemployment rate within Dunedin, however it is interesting to note that this spike is equal to that of the overall New Zealand unemployment rate. Also of interest in the graph is the sharp downward spike in the unemployment rate felt in Quarter Four 2009, however a negative following this is the large increase (back to almost equal with) the New Zealand unemployment rate in Quarter One 2010.
As is shown in the graph below, Dunedin historically remains below the New Zealand unemployment rate, and we hope that this continues. An unfortunate fact however is that local employment has not been bolstered by the construction of the Forsyth Bar Stadium, as construction tenders for this project were issued to out-of-town companies.
For Dunedin to continue to grow and have a strong economic future, and for the property market in Dunedin to remain strong, it is essential that the city focuses on its core industry, which is apparent to be the university. For the unemployment rate to stay low, and begin to drop, Dunedin needs to find ways in which to strengthen itself through promoting the university and its associated industries and ideally, find one or two other major employers.
Fig 2: Otago Unemployment
Dunedin Residential Construction
As shown in the graph below, during the property boom period of 2007 and early 2008, Dunedin saw an influx in both the value and number of building consents issued by the Dunedin City Council. What is interesting to note is that the number of consents for new dwellings was still well below that of the very high peak in 1992. As can be expected, there has been a dramatic drop in the 2009 year in both the value and number of building consents. This reflects the slowdown of the property market and the unfortunate demise of a number of building companies within Dunedin.
Fig 3: Building Consent Value
Statistics from the early part of 2010 show that this graph has had somewhat of a revival, beginning to trend up in the early part of 2010. As shown in the building consent value monthly chart below, we can see that the first half of the year is typically a quieter portion of the year, with building consent values increasing from July onwards. We expect that this is as consents are issued in the July period for building to begin in the spring/summer. Continuing on through 2010 we expect building consents to come on further within the June/July months and then fall away as per usual, in August/September. We expect that the 2010 year will be a better year for building consents than seen in 2009. As shown in the graph below, 2009 was a quiet year as New Zealand and Dunedin continued to come out of the recent recession.
Fig 4: Building Consent Numbers
Dunedin Residential Market
July 2010 statistics
Median selling price $259,000
Average house price $283,600
No. of sales 151
Days on the market 50
Total value of sales $42,867,764
It was widely reported that median house price was up for the period of June 2010 and once again in July, this median price has risen to $259,000. This is the highest median price that has been seen since September 2009.
The $300,000 and below price bracket dominates the Dunedin market as shown in the graph below, with this portion of the market encompassing almost 75% of Dunedin’s residential property market.
Fig 5: Selling Price Distribution
As is well known, Dunedin is a university city, and therefore our student population dominates our population statistics. An interesting statistic which we have been following over recent times is the number of permanent residents within Dunedin city. This is calculated by taking Dunedin’s total population and subtracting student enrolments from both the University of Otago and Otago Polytechnic from this figure. As shown below in the graph, the number of permanent residents in Dunedin has been slowly declining over time. 2009 showed positive net migration into the city, bouncing back from a low in 2007 with the number of permanent residents growing. Unfortunately this statistic is a reality within our city, and therefore the university and businesses associated with it should be promoted in order to promote the city and continue to grow the number of permanent residents. Positives to take from this statistic is that net migration is up, and therefore hopefully the population continues to grow and vacant sections and properties throughout the city can be filled by new residents coming into our city.
Fig 6: Dunedin Population Change
Much like other cities throughout New Zealand, the number of sales that occur each month is quite seasonal. The chart below illustrates this clearly with high sales volumes in the February and November, the summer months, when properties are at their best. Also to note from this graph is that the 2010 numbers still sit below that of 2009. Earlier in 2010 it was a positive to see the sales volumes trending above that of 2008, however we now see that the July statistics show this is the slowest July on record for the past seven years, which is somewhat concerning due to the fact that 2008 was one of the worst years in the residential property market in Dunedin. Our forecasts for this graph over the remainder of the year are that numbers will continue to follow the seasonal trend. We do not expect any great growth and we expect it will sit just below figures from 2009.
Fig 7: Sales per Month
Combining this low sales volume statistic with the rise in the median and average sale price, suggests that we are seeing a larger number of sales within the higher price bracket, most notably above the $300,000 mark. Although as mentioned above, the $300,000 and below market does dominate the Dunedin residential scene, there is obviously a trend towards higher priced houses, as sales volume drops, but the median and average prices continue to rise. This is most obvious on the graph below, which shows the Dunedin median slowly increasing over the last three months, whilst the days on the market have continued to grow.
Fig 8: Sale Prices Vs Days on Market
General Market Projections
The Otago University is the backbone of the economy and as this continues to grow hopefully the city will follow. There is a considerable amount of anticipation around future spending in this area, with both an increase in student numbers and hopefully an increase in the capital expenditure from the university. The recent release of the university’s overall plan has been positive, as it promoted continual capital expenditure from the institution.
- Limited short term residential rental growth
- Reduced numbers in section sales and new subdivisions
- Quiet year for the remainder of the year in both sales numbers and median sale price
- Stabilising of the median sale price which will follow, similar to 2009
- Will be interesting to watch the outcome in October as the new tax changes and GST come into play.
- We do not expect a mass exodus from the residential property market as landlords continue to hold their properties for future capital gain.
- First home buyers market will continue to stay strong as interest rates remain low and banks slightly let up on mortgage requirements.