House price bounce called 'suckers' rally'

FALSE PICK-UP?: Property commentator Ollie Newland says a housing market rally had been generated by a historic low in interest rates.

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Investors should be wary of falling into a "suckers' rally" as modest signs of recovery emerge from the property sector, commentator Ollie Newland says.

Mr Newland criticised a comment by Westpac Bank economists that housing had reached "fair value", saying there were "so many improbables" that investors should not pay it any attention.

The rally had been generated by a historic low in interest rates, he said.

"What I think we're having is a blip of pent-up buyers who have been sucking lemons for about three months and what's going to happen next, unfortunately, is a lot of sellers who have been sitting on the sidelines ... are going to put their property on the market and start flooding the market.

"We may have a winter of discontent if we're not careful."

Westpac has maintained since December that the fall in interest rates has stopped housing being a losing proposition.

It now estimates the average house would return fair value at a price of $332,000, taking into account rents, mortgage rates, expectations of inflation, capital gains and other variables.

Median house prices fell to $330,000 in February, according to the Real Estate Institute.

However, Westpac economist Doug Steel said fair value did not mean house prices would not fall further.

Westpac estimates they will fall another 5 per cent by the end of the year and be flat next year after tumbling 8 per cent in 2008. The bank doubts that prices will return to 2007 levels before 2012.

Despite the seeming good news, people would remain cautious given the uncertainty surrounding employment and rumbles of rising inflation, Mr Steel said.

"It's a good yardstick really ... a long-term sort of a view, but certainly in the short term, anything can happen."

Mr Newland urged caution, saying inflation, immigration and unemployment were wild cards right now.

Tightening credit criteria were also stopping people rushing into incautious deals, he said.

"Now you need a minimum of 20 per cent [deposit] and proof of income and everything else. That will cut a lot of people out and they'll stay renting so that will help the rental market, I think, but it will cut a lot of so-called investors out."

Banks were especially reluctant to lend on apartments under 50 square metres the legal minimum now for an apartment even though "shoebox" apartments were renting well.

Banks wanted to be sure they could sell a property if necessary, Mr Newland said. "They don't want to be landlords."

But he said the property market still had its hot spots, in particular luxury apartments and family properties.

Westpac's fair value calculation assumes that house prices will grow 6 per cent in the long run, which includes inflation and capital gain. It is based on rents averaging $11,400 a year ($219 a week) and on a five-year mortgage rate of 6.75 per cent, with the investor paying a top tax rate.

It defines a fair rate of return as house prices growing at the same rate as the nominal economy.

The signs of recovery have been tentative, with leading Auckland real estate agency Barfoot and Thompson reporting an 8.9 per cent rise in February sales volumes.

Banks were also seeing slightly more activity.

TSB managing director Kevin Rimmington said mortgage applications from January to March were well up on the previous year, and a few people had been looking for pre-approvals for investment mortgages.

Kiwibank spokesman Bruce Thompson said it had seen a big rise in mortgage applications but largely from those shifting banks.

Meanwhile, an anticipated stampede towards long-term fixed mortgage rates has not yet begun, even though those rates are rising.

Kiwibank, which raised its five-year rate from 6.49 to 6.75 per cent yesterday, said that 80 to 85 per cent of all its loans were on floating rates, a reversal from a year ago.