Why is there such a value disconnect?

Posted on 09/29/10 in General, 1 Comment

A subject I’ve been pondering over the last few weeks is why we seem to have such a long way to go with the drop in New Zealand Real Estate values?

I don’t mean to pull out the scare tactics but the rest of the world seems to have taken a much bigger bath in price drops than New Zealand, and some places are coming back out the other side from this now and looking even more healthy for the experience.

Think of Ireland, where they have endured a 50% drop in home values across the board, hard to swallow sure but at least they got it all over with in one good hit and know were they are with house values now.

America seems to have handled the recession badly in areas of reduced population and jobs like Detroit and badly also in areas of over supply like Las Vegas, but over all they still have 310 million people a large majority of which need to be housed.

Compare some of that with or own country were we have had a 9% reduction in prices in 2008 followed by a 5% recovery in 2009, is it any wonder we seem to be slipping back again now?

We seem to be determined to have a double dip?

The only saving grace as far as investors go is that we really don’t seem to have oversupplied the market which is why rent levels have remained so strong with only a $10 fluctuation over the last 5-6 years.

This is either really good news or a sign of limited growth in the rental market depending on who you speak to.

Personally If I was to decide between having capital gain from limited housing stock or cash flow from healthy rent levels I’ll take the cash flow every day of the week.

But it makes you wonder how much longer the property market can take the beating it’s getting from all sides at the moment before even the hardiest investors decide to call it quits and sell their portfolios.

In the last few months we have had:

  1. Higher Tax’s
  2. Lower Tax breaks
  3. Higher GST levels
  4. Lower Available lending levels
  5. Media printing never ending property horror stories
  6. Earthquakes (Even another good one today)
  7. Insurance companies not prepared to cover some housing (See number 6)
  8. Leaking homes
  9. Raising Interest rates
  10. Insane numbers of homes coming onto the market

I could really go on all night….

And yet still most vendors when selling their homes are asking the agent “How much above GV can you get me?”

As you will have noticed from previous blogs I’m getting more and more interested in the American market, and they have some really easy ways to tell if a market is ripe to get back into.

Mostly they use this test.

Can you buy housing for 50% of the cost to replace it?

Now think about that because it’s really rather scary if you do.

What would happen to our monetary system if you could go to a suburb in Auckland, Wellington or Christchurch and buy property for half of it’s true replacement cost?

In most case’s that would account for a sale at around 30 or 40% of the current GV.

This is why I think we have a value disconnect, and this is why I think it’s going to be a better bet investing in the US for the next 5 or so years than in New Zealand.

One Comment

  1. Steven

    Some interesting value comments here http://stevengoodey.com/a-quick-trip-to-america/

    Posted 10-2-2010

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