Market Considerations

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In order to ascertain an accurate value for the subject property, we have looked at both the economic market and the property market conditions, and their flow on implications to the residential property sector across both Dunedin and New Zealand.

Economic Overview
    
With the New Zealand economy currently facing interesting times, 2010 reported some of the highest inflation seen in some years, we do note however that this inflation is recognised as being attributed to the rise in GST. The high inflation has affected the greater economy over the early part of 2011.

Some of the key economic data indicates that the New Zealand economy remains stable, with unemployment stable for the first part of 2011, as well as the OCR (Official Cash Rate) remaining unchanged. Economic reports from throughout the country suggest that it will remain at this low figure for some time to come. Interestingly, over the early part of 2011 the exchange rate with both Australia and the United States of America have fluctuated dramatically, with the US dollar climbing to the mid 80 cent mark once again, while the Australian dollar has dropped to lows not seen in some time. Although on the surface retailers seem to be continuing to struggle with sales in the retail market, and electronic transactions remain low, we note that there are a number of retail tenants who are new to the market, who are paying at, or above, market rental, which is a positive sign for Dunedin.

Interest Rates and Inflation 
The OCR continues to sit around 2.5% and banks continue to compete in the marketplace. As shown in the graph below, both the floating rate and two year fixed rate continue to fly in the face of history, with the floating rate staying less than the two year fixed rate. However both these plummeted in the early part of 2011, with the floating rate approaching (and in some cases dropping below) the 6% mark.

This is a good sign for the residential property market, with the hope that this may spark a resurgence in property investment. Initial signs however are that property investments are still slow, with Dunedin’s most popular investment market, the student sector, having a somewhat slow start to 2011. With banks offering low interest rates, and relaxing their borrowing requirements, we suspect that this market will begin to take off once again.

Both the floating and two year fixed rate remained stable over the April/May period, staying at 6.1% (floating), and 6.5% (two year fixed).

    Fig 1: Mortgage Rates


Dunedin Employment
Unfortunately for New Zealand, unemployment rose over the first quarter of 2011, however a positive for Dunedin and Otago is that the Otago unemployment rate dropped to around 4.5%. This shows a strengthening of the Dunedin employment market, and hopefully indicates Dunedin is beginning to grow. It is our hope that Dunedin continues to grow and strengthen its economy and that this is further bolstered with the prospect of oil exploration in the Great South Basin.

Dunedin is primarily a university city, and we see further growth within this market. We further hope that something positive can be gained from the unfortunate events in Canterbury, with technology and science based businesses establishing themselves further south in Dunedin, tapping into the wealth of knowledge here associated with the university.

     Fig 2: Otago Unemployment


Dunedin Residential Market

Median Selling Price	Average House Price	No. of Sales	Days on the market	Total Value of Sales
$250,000	$272,031	166	36	$45,157,220

    




As can be seen from the figures above, the slowdown from May onward has begun, with another dip in the number of sales, and a drop in the median and average sale prices. Although this is another downturn, this is expected, and is normal for this time of the year, with the residential market slowing down over the winter months.

For the second month running, both the median and average prices sit higher than normal. This is due to the statistics reflecting another sale over the $2,000,000 mark, which has once again swayed the statistics slightly. However despite this, it does appear to have been a good May, with the number of sales and the median sale price both up on May 2010.

A further slowdown in the residential market can be illustrated by the number of new consents which were issued during April. With only seven new building consents issued, this is the lowest number in over five years. Once again this is a trend which can be expected for the April/May period; however we would comment that this number is extremely low. We further note that the number of new building consents issued matches the number of residential section sales, also at a low of 10.

     Fig 3: Selling Price Distribution

Dunedin’s $0-$300,000 market still remains very strong, accounting for some 75% of the market. The $300,000-$400,000 market however has begun to strengthen, taking a greater market share. The $0-$300,000 stranglehold on the market can be seen as positive, as it indicates there may be growth in the city, with new home buyers continuing to purchase. However the opposite side of the coin suggests this could also illustrate that investors continue to take advantage of the downturn in the residential property market. We hope the latter is not the case, and that Dunedin continues to grow in a positive manner.

     Fig 4: Sales per Month

Suburb View
Mosgiel, St Kilda and Mornington still continue to be the strongest selling markets in Dunedin, with Mosgiel accounting for a whopping 20% of sales within the Dunedin area in the month of May, St Kilda with 7% and Mornington with 5%.
Mosgiel saw an unusually high percentage of sales, a huge 34 sales for the month of May. It is not a surprise that Mosgiel topped the suburb statistics; however it is surprising that it was such a high percentage of the monthly sales turnover. This could indicate that the population of Dunedin views Mosgiel as a great place to live.
The median sale price in Caversham continues to drop, showing a $165,000 median for the month of May, the lowest seen since February 2010. This is a very low median not just for the Caversham area, but for Dunedin generally, and may create opportunities in the market, possibly sparking investment in Caversham.
In terms of the number of sales for the month of May a small resurgence has occurred, with the graph bucking the trend which has been seen over the last couple of years. May 2011 shows the highest number of sales since 2008. This is a very positive sign, and indicates that the market may be beginning to slowly recover. It will be interesting to monitor these sales volumes over the winter period, to see if a resurgence does in fact occur.

     Fig 5: Sale Prices Vs Days on Market

An interesting statistic that we have been tracking is nominal house price inflation. As clearly evident in the graph below, boom periods are approximately eight years apart, however the current market, and the drop seen in 2008/2009 is something not seen before. According to statistics, 2011 should be the next boom year; however the graph clearly indicates that 2011 will once again see a drop, approaching the lows of 2008/2009.

However this statistic is slightly swayed as nominal house price inflation is calculated using current inflation. With current inflation being blown out of proportion due to the rise in GST, this drop is slightly more exaggerated. Adjusting for normal inflation there would still be a drop, just not as substantial as shown on the graph below. One thing this graph does indicate is that growth is not expected until 2012 and possibly 2013 - some nine or 10 years after the original boom period in 2003/2004.

General Market Projections
Over the winter months of 2011 we expect little or no growth within the Dunedin residential market, as the traditional slowdown period begins. As spring approaches in September/October we believe there will be slow growth, continuing into the summer period, leading to a possible boost in sales during February/March once the hype and involvement around the Rugby World Cup and General Election has subsided.

In brief then, our market projections for the year include:

• limited short term residential rental growth
• reduced section sales in new subdivisions and sections in general
• a quiet year for sales numbers
• a small amount of strengthening within the university student investment market
• continued strengthening of the first home buyers market up to the $300,000 mark