New Zealand Property Prices Back to “Fair Value”

Depending on which sources you rely upon for your data, property prices in New Zealand have now fallen back to reasonable levels

According to the Westpac Bank, prices for property in New Zealand have now fallen to a fair value, based on rents, interest rates and other costs.  This is the first time that real estate in New Zealand has been below a reasonable price that investors should pay since 2006.

Westpac Bank economists are predicting a 5% drop in New Zealand real estate values for 2009 too, and flat line movement for the market in 2010. 

The Reserve Bank forecast however is a little gloomier, with predictions of a 20% drop in New Zealand house prices from their peak in late 2007, to a bottom sometime at the end of 2010.  But with prices having fallen nationally around 8% since the peak, they have almost lost half of their predicted depreciation already.

Interest rates have also fallen, which is making property in New Zealand more attractive to potential buyers, and based on Westpac’s figures of rents averaging NZD 11,400 per year and a five year mortgage rate of 6.75%, an investor on the top rate of tax should be willing to pay NZD 332,000 for an average house. 

The Real Estate Institute of New Zealand puts the median price of a property in New Zealand at NZD 330,000 and average sale price of property over the last 3 months has averaged NZD 325,000, which, Westpac says, shows that properties are noticeably under “fair value.”

Other moves which may also add some impetus to the real estate market in New Zealand are the government’s election promise to cut the top rate of tax from 39% to 38% on incomes over NZD 70,000 from April 2009, and a further 1% cut to 37% in 2010. 

Buyers are being drawn back into New Zealand property by the increasing investor value brought about by falling interest rates, they are also factoring in long term capital gains of around 6% per annum based on expected inflation of around 2.7% and a historical mean real capital gain of 3.3% per annum between the years 1971 to 2006.

While this all appears to be good news for anyone looking to invest in real estate in New Zealand in 2009 and 2010, it should be borne in mind that according to some, the New Zealand property market is still heavily over inflated.  In the U.S. house prices average 3.2 times household income, in Auckland, New Zealand, that figures jumps to 6.4 times average household earnings.