House prices versus fundamentals

0

50

100

150

200

250

300

350

400

450

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

NZD (000)

0

50

100

150

200

250

300

350

400

450NZD (000)

Investor Value

Actual median price

Source: REINZ, RBNZ, Stats NZ, Westpac

Buy so long as:

Rent(1-t) + Price*πe ≥ Price(i+f)(1-t)

Maximum price investor willing to pay:

Price = Rent(1-t) / ( (i+f)(1-t) - πe )

Investor housing valuation

t = marginal tax rate

πe = long run expected capital gain

i = mortgage interest rate

f = other costs