Licensed, REAA (2008)

www.erskineowen.co.nz

This is a compressed web version for those who attended our NZ Property Market Update to Kiwis in New York, London and Singapore in Feb 2011.

Many of you requested copies of the slides. We have put together a selection that summarises the

key information presented.

Where have we come from?Where have we come from?What’s the NZ Property Market Doing now?What’s the NZ Property Market Doing now?

Where is it headed?Where is it headed?

The housing market is critical to NZ’s economy

• Housing stock in NZ is worth $614 Billion. This is nearly 4 times the value of total GDP.

• Housing stock makes up 70% of household net wealth

Get up, dust off and get moving again

Post-boom :Prices bottomed out

at 10% below peak prices.

Currently: National prices are 5.6%below market peak

.Source: Quotable Value

Sales Volumes trend downwards

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House Sale Volumes Jan 07 - Dec 10

Source: REINZ

Sales volumes lead the demand side factorsSales volumes respond to the supply side factors

Importance of Sales Volumes

Sales volumes provide a key link to where the property market is at and more importantly where it is going. When sales volumes are high price growth is strong. When sales volumes are low, pricing remains soft.

Sales volumes correlate also with a number of the key demand and supply drivers. (slides to follow). Monitoring the behaviour of sales volumes in relation to these drivers over time provides a basis for short-term forecasting of housing price movements.

The Key Extrinsic Drivers

Supply

Population GrowthInterest RatesAffordabilityAvailability of creditConsumer ConfidenceCurrent return on InvestmentTax Changes

Availability of landConsents IssuanceConstruction Costs

Properties on the marketDeveloper’s ease to obtain finance

Demand

Key Extrinsic Drivers

House prices respond to the basic laws of economics. If demand exceeds supply, prices will increase and vice-versa.

These Key Extrinsic Drivers summarise our framework for evaluating where the property market is at and more importantly to assess the outlook for house pricing.

In the 5 year period 2002-2007 NZ experienced an unprecedented property boom. Historically housing cycles were driven almost exclusively by interest rates and net migration. Now that is not the case. We have to assess the impact of other relevant factors.

NZ’s growth chart – next 15 yrs

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Projected Population growth for NZ (millions)

2/3 of total population growth projected will be in Auckland

Auckland: 24% increaseChristchurch: 7% increaseWellington: 4% increase

Source: Dept of Statistics, NZ – medium projections

Population will increase by approx 780 people each week over next 15 yrs.

Net Migration over long term

•Net inflows have eased considerably from Nov 09 to Nov 10

•Driven by fall in arrivals and rise in departures

•Despite easing net migration levels are still consistent with long term average of 12,000 people per year.

Source: Dept of statistics

Bucking the trend...

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House Sales (Advanced 6 mths) Net Migration

Source: Dept of Statistics NZ, REINZ

Sales Volumes are low despite net migration levels not being significantly below average. This indicates there must be other factors contributing.

Low interest rates not making good bait

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REINZ House sales Volumes and Fixed Mortgage rates

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Source: REINZ and RBNZ

Interest rates advanced 3 months R scale

sales volumes have been slower to respond despite lower rates. Another deviation from historical pattern.

Sales Volumes in relation to interest rates and net migration

Net migration and interest rates are the most powerful of the drivers in the national number of house sales.The preceding graphs show the strong correlations. We can see that house sale volumes respond to net migration with an approx 6 month lag and an approx 3 month lag with interest rates.This provides a basis for analysing where we can expect house sale volumes to be in the 3-6 months following.

Affordability... A growing issue for NZ

• No. of working households unable to buy at the lower quartile house price in 5 yrs to 2006 grew by: 239.%

• No. Of stressed* households expected to increase by:66.68%

• Renter households projected to increase in 10yr period to 2016 by: 30%

* Stressed is defined as spending 30% or more of gross income on housing costs

Interest Interest RatesRates

WagesWagesHouse House PricesPrices

Affordability is underpinned by the combination of interest rates, wages and house prices.

Affordability improving

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Interest as % of average income vs house sale volumes

House sale volumes

Interest on median house price as % of av. income

Source: Dept of Statistics, RBNZ, REINZ

National affordability improved nearly 10% last year – but not enough

Assumptions: 2 yr mortgage rate

Not bad by comparison

Source: Demographia 7th international housing affordability survey 2011

Affordability and demand

Affordability has had a negative impact on housing demand as a result of more people squeezing in to the existing housing stock.

At some point, possibly later in 2011 this will start to become positive. The number of people per house will slow down and we will start to see the full impact of population growth flow through to housing demand. Another boost to demand will come once the economy has experienced a period of strong growth again – as the number of people per house will fall away again.

If the supply levels remain low (new construction) this situation will be amplified.

What does all this mean for the investor?

• Private investment in rental housing critical.

• Rental demand projected to increase, creating upward pressure on rents.

• Rental demand will increase at a greater rate than owner occupier demand.

(CHRANZ Centre for Housing Research. Housing Research: 2003-2008 and Beyond)

More Confidence inProperty Market

• Now more people who:• who believe house prices

will rise in next 12 months.• believe prices will rise than

people who think they’ll drop.• who think it is a good time

to buy. Very few believe it is a good time to sell.

• Consumers expect house prices to average 2.3% increase per year for the next 2 years.

Source: QV Consumer Confidence Survey, Dec 2010ANZ Roy-Morgan Consumer Confidence Survey, Nov 2010

Rental Yields improving

• Gap between Yields and Interest rates starting to close

• Rental demand is increasing

• The gap will need to close further to underpin next upturn

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Gross Rental Yields and Interest Rates

Source: REINZ, RBNZ, Tenancy Services

National Rent Performance 2005-2010

• Rents trending upwards

• With a fall in house prices investors may raise rents to compensate for reduced capital gains

• Tax changes (GST) that took effect 1 October 2010 are also likely to lead to rent increases.

Source: Department of Building & Housing

2 Key Tax Changes for property owners

• Eliminates depreciation on buildings for tax purposes.

• (cashflow impact on $350K property = approx $nzd 1,100 pa.)

• LAQC – Can no longer attribute losses against personal income

New Changes will come in to force April 1 2011

GDP & Building activity closely linked

Source: Statistics NZ, RBNZ

• Housing market is key to driving cycles in GDP growth• GDP expected to rise through 2011. Even further growth will be

expected as we get a huge construction stimulus as a result of the Christchurch earthquake.

Source: RBNZ, Dept of Statistics NZ. GDP = Real

Building consents very low

•Consents are at historic lows. December 2010 figures lowest since 1965

•Low volumes of new dwelling construction activity expected first half 2011.

Source: Dept of Statistics,NZ, new dwellings only including apartments.

Auckland’s land supply dwindling

• Total residential capacity is approx 170,000 households

• 200,000 households will be required by 2031.

• Will be approx 30,000 short. Supply will not meet growth needs

• In some areas supply will be exhausted as soon as 2016

Source: Dept Building Housing, Adequacy of Auckland Region’s Land Supply, Harrison Grierson

This will increase demand relative to low supply levels creating pressure on pricing

2011 2021Auckland Residential Land Capacity

2026 2031

Auckland Residential Land Capacity

Signs to look for.What must happen before the next upturn

• Migration projections improve – Australian growth to slow down for NZ to experience better migration.

• 90 Day bill rate/OCR and Interest Rates remain relatively low

• Gross rental yields continue to increase

• Wage growth improves to underpin affordability

• Median Days to sell continue to track downwards and sales volumes increase.

• Consumer confidence continues to track up from current 115 on index.

• Historical trends show a slump lasts at least 60% of the timeframe of last boom – that was Dec 2010.

Summary

• Performance moving in the right direction

• All demand side factors are stabilising which is a good sign

• We expect subdued activity through to mid-2011 then looking for some improvement after that time

Why Auckland?

• Auckland is the country’s economic engine.

• 62% of NZ’s population growth in the next 20 years will be in Auckland.

• Auckland will grow by the population of Wellington.

• Dwelling demand will increase 40% over next 2 decades creating upward pressure on house prices

Demand for Property is highest in Auckland

Urban a much safer bet than the provinces

Urban

Provinces

Source: Quotable Value

Demand in Auckland is greater

Source: Quotable Value

Auckland’s performance remained stronger through 2010

Capital Growth Driver OverviewE

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Fact

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Intri

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SupplyDemand

Population Land & Use of

Population growth Demographic makeup Accessibility Land development

Community development

Economic Factors

1.How is demand for housing responding in my chosen area?2. At what rate is supply responding to that demand?3. What is growth in housing stock versus growth in population in my chosen area?

Trends and outlook

Do your homeworkDon’t be random

Your investment is too important to

gamble with

Our Services

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Licensed Buyers’ Agent (REAA 2008)• Property Sourcing – residential and commercial• Negotiation and Due Diligence• Business Premises relocation/leasing• Property Management• Project management of renovation• Feasibility Studies

Erskine + Owen Ltd, Licensed REAA (2008). Level 2, 6 Clayton St, Newmarket, Auckland, New ZealandP: +64 9 306 6463 www.erskineowen.co.nz E: info@erskineowen.co.nz