Housing Market: where to from here?
Existing home owners and prospective buyers are always looking for an answer to this question.
On July 2, the New Zealand Herald published an opinion of Westpac Bank about expected changes to New Zealand house prices over coming few years. According to Westpac, the house prices are only slightly overvalued, the rents are expected to rise and house prices to go down by around 2% per year over next two-year period.
Other analysts are also of the view that rents will rise over coming few months as the properties will be returning less tax benefits to landlords due to withdrawal of depreciation deduction on buildings with effect from April 1, 2011.
At present property investors can claim depreciation on buildings at the rate of 2% or 3% of building value depending on straight line or diminishing value method they choose. Take an example here, on a house of $400,000; if building is valued at $200,000 for an example (other $200,000 being land value), the yearly depreciation is $6000, calculated on 3% depreciation rate. Depending on an investor’s marginal tax rate, his/her tax benefits will be lowered by $1200-$2280 per year when depreciation is disallowed. How much of this will be recovered from tenants is difficult to answer. But even if half of it is recovered from tenants in terms of increased rents, the typical property investor’s cash inflow will be lower by $600 to $1140 per year per property.
What will be the impact on house prices of lost $600 to $1140 per year remains to be seen. Is this amount that significant so as to adversely impact property prices in a big way?
In Auckland, there is limited supply of new houses. The new building activity is very slow. The primary reason is lack of finance opportunities available to builders and developers. This situation may continue in near term future. It will help stability in house prices.
There is uncertainty about pace of global economic recovery. It has both positives and negatives for New Zealand economy and thus housing. Over the past few weeks, due to worries about global recovery, in the US, 30 year mortgage interest rate has gone down to levels not seen in last 50 years. (source: www.cnbc.com). In New Zealand also the banks have reduced fixed rates for 2 to 5 year maturity periods. It is due to the fact that there is less likelihood that interest rates in major economies will be increased soon. Even Reserve bank in New Zealand will pause to raise OCR if world economic situation worsens.
If the interest rates stay low, it will help stability in housing market. If the rents go up and interest rates remain low, it will narrow the gap between mortgage repayments and rents, which will encourage more people to buy houses who were renting otherwise.
It is not that easy to get a mortgage now as was the case couple of years ago. If the situation changes for the better, the banks become more willing and relax their lending policies, it will boost property prices
Over the past few weeks, though activity in real estate is very low, the house prices have been fairly stable. The reason is there is no glut of properties available for sale and the vendors, though have become realistic in terms of their expectations about prices they want, are not giving away easily and are holding on to their prices.
So what is the good time to buy a house?
There is no good or bad time as such. There are social and emotional considerations involved in owning a house in addition to financial considerations. Remember, one can sell at peak and buy at bottom only by chance, as peaks and bottoms are impossible to predict. The only mistake one should avoid is taking too big mortgage whose servicing can be a problem at a later stage. One should think carefully about how much loan one should take. The factors like impact on mortgage repayments of increase in interest rates, risk of incomes being reduced in future, etc., should be considered before deciding on how much mortgage one should take.
Everyone should make a decision about buying a house according to their own individual circumstances.
Ravi Mehta is an Auckland based Financial Advisor and can be contacted on ravi.mehta@pfsl.co.nz. A disclosure statement as required under Securities Act 1988 is freely available on request.
Existing home owners and prospective buyers are always looking for an answer to this question. On July 2, the New Zealand Herald published an opinion of Westpac Bank about expected changes to New Zealand house prices over coming few years. According to Westpac, the house prices are only slightly...
Existing home owners and prospective buyers are always looking for an answer to this question.
On July 2, the New Zealand Herald published an opinion of Westpac Bank about expected changes to New Zealand house prices over coming few years. According to Westpac, the house prices are only slightly overvalued, the rents are expected to rise and house prices to go down by around 2% per year over next two-year period.
Other analysts are also of the view that rents will rise over coming few months as the properties will be returning less tax benefits to landlords due to withdrawal of depreciation deduction on buildings with effect from April 1, 2011.
At present property investors can claim depreciation on buildings at the rate of 2% or 3% of building value depending on straight line or diminishing value method they choose. Take an example here, on a house of $400,000; if building is valued at $200,000 for an example (other $200,000 being land value), the yearly depreciation is $6000, calculated on 3% depreciation rate. Depending on an investor’s marginal tax rate, his/her tax benefits will be lowered by $1200-$2280 per year when depreciation is disallowed. How much of this will be recovered from tenants is difficult to answer. But even if half of it is recovered from tenants in terms of increased rents, the typical property investor’s cash inflow will be lower by $600 to $1140 per year per property.
What will be the impact on house prices of lost $600 to $1140 per year remains to be seen. Is this amount that significant so as to adversely impact property prices in a big way?
In Auckland, there is limited supply of new houses. The new building activity is very slow. The primary reason is lack of finance opportunities available to builders and developers. This situation may continue in near term future. It will help stability in house prices.
There is uncertainty about pace of global economic recovery. It has both positives and negatives for New Zealand economy and thus housing. Over the past few weeks, due to worries about global recovery, in the US, 30 year mortgage interest rate has gone down to levels not seen in last 50 years. (source: www.cnbc.com). In New Zealand also the banks have reduced fixed rates for 2 to 5 year maturity periods. It is due to the fact that there is less likelihood that interest rates in major economies will be increased soon. Even Reserve bank in New Zealand will pause to raise OCR if world economic situation worsens.
If the interest rates stay low, it will help stability in housing market. If the rents go up and interest rates remain low, it will narrow the gap between mortgage repayments and rents, which will encourage more people to buy houses who were renting otherwise.
It is not that easy to get a mortgage now as was the case couple of years ago. If the situation changes for the better, the banks become more willing and relax their lending policies, it will boost property prices
Over the past few weeks, though activity in real estate is very low, the house prices have been fairly stable. The reason is there is no glut of properties available for sale and the vendors, though have become realistic in terms of their expectations about prices they want, are not giving away easily and are holding on to their prices.
So what is the good time to buy a house?
There is no good or bad time as such. There are social and emotional considerations involved in owning a house in addition to financial considerations. Remember, one can sell at peak and buy at bottom only by chance, as peaks and bottoms are impossible to predict. The only mistake one should avoid is taking too big mortgage whose servicing can be a problem at a later stage. One should think carefully about how much loan one should take. The factors like impact on mortgage repayments of increase in interest rates, risk of incomes being reduced in future, etc., should be considered before deciding on how much mortgage one should take.
Everyone should make a decision about buying a house according to their own individual circumstances.
Ravi Mehta is an Auckland based Financial Advisor and can be contacted on ravi.mehta@pfsl.co.nz. A disclosure statement as required under Securities Act 1988 is freely available on request.
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