Bumpy ride for property in 2010

BY GREG NINNESS

The property market may face some fresh headwinds next year which could swamp any recovery in prices.

The strongest recovery in the property market so far has been in the residential sector, with REINZ figures showing that 6464 homes were sold in September, a 44% increase on the same month last year, and the highest sales figure for the month since 2006.

Prices have also recovered strongly, with the median price of $350,000 recouping virtually all of the losses incurred during the slump and putting it within a hair's breadth of the $352,000 all-time record achieved at the peak of the boom in November 2007.

That will be good news for vendors, who may have been sitting on the sidelines waiting for prices to recover before putting their homes on the market, but there are several factors to suggest that if they are still doing so, they may be better off selling sooner rather than later, because the current strong recovery may not be sustainable.

In his latest newsletter, economist Rodney Dickens, of Strategic Risk Analysis, suggested low interest rates and strong net migration gains had been the main drivers of the housing market's recovery.

"Low mortgage interest rates and a sharp upturn in net migration/population growth have temporarily disguised the affordability problem in the housing and section and land markets," Dickens said. And that stimulus was still working its way through the market.

But can it last?

Dickens said he expected interest rates to head higher next year.

Although the current variable mortgage rates of under 6% are exceptionally low, making mortgages more affordable, longer-term fixed rates are much higher, with two to five-year rates mainly in the 6.95%-8.75% range.

The longer-term rates are usually an indication of where the banks think interest rates are headed, and even though the Reserve Bank announced on Thursday it expects to maintain its key wholesale rate at current levels until the middle of next year, it is unlikely to be able to stay its hand indefinitely.

So, at some stage, borrowers are going to have to start paying more for mortgages, either when they shift onto fixed rates, or when floating rates start to rise to match them – and that will inevitably make buying a property more difficult.

Dickens also thinks the current high levels of population growth from migration may not last.

In the year to June, the country's population increased by 12,515 new souls, all needing somewhere to live, the highest increase since 2004.

That increase was achieved from 88,251 immigrants arriving to live in this country, less the 75,736 existing residents who permanently departed for other shores.

Dickens thinks that trend may not continue and sees a "risk of a cyclical fall in net migration" which would take the gloss off housing demand.

"Once the mirage of housing/section affordability driven by low interest rates is gone, the second stage adjustment in housing and section prices that I have long warned about, will start to unfold," he said.

Those dark clouds are also hovering over commercial property.

In his latest report on the state of the commercial market, Colliers research director Alan McMahon compared it to riding out the economic storm, rather than catching the tail winds of recovery.

"Commercial landlords continue to struggle with declining values, pressure on rents and increasing incentives, but in a country which finds itself on the outer edges of the economic storm," McMahon said.

But those countries nearer the eye of the storm were being hit much harder.

"In Singapore, Colliers researchers record that for rents on [the prestigious] Raffles Place, A-grade office space has plummeted 49% this year, with many floors previously occupied by global financial services companies now lying empty." While the situation here may not be that bad, it's bad enough.

In Auckland's CBD, Colliers found that office vacancy rates increased from 5.3% in September last year to 9.5% in September this year.

Over the same period, capital values fell 16.2%, with the decline a whopping 21.9%, compared with two years ago. And McMahon's outlook for the next year was not much better. "We expect the rate of increase in vacancy in both retail and office to slow, but not to peak, for around another 12 months, at which point the absence of new supply [rather than the negative demand experienced over the last 18 months] should produce stable conditions," the report said.

Even industrial property, which has suffered the least during the recession, is facing a patchy outlook.

The report said there were indications that manufacturing activity was starting to increase on both sides of the Tasman, and Colliers' leasing team was looking for more than 120,000sqm of new industrial space in Auckland for various clients, to be filled over time.

"This activity strongly suggests increasing demand for quality property by larger industrial users, but doesn't necessarily herald an easing in the vacancy rate, or of pressures on landlords of older or smaller properties.

"At the same time as we are working on these mandates [to find new space for clients], some of which will result in new buildings being developed, we have over 500 industrial properties available to lease in South Auckland. These are typically small to medium-sized properties," the report said.

And, like Dickens, McMahon also highlighted a risk of a downturn in migration.

"It is Australia's continuing economic resilience that will assist our exporters, but it also has a potential negative effect. As their economy recovers and jobs are created there, Kiwis will again set off to take up employment across the Tasman, risking a fall in net migration."

- © Fairfax NZ News