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NEW ZEALAND RURAL 2009

Falling Sales Volumes Pull Back Values

Latest farm sales statistics released by the Real Estate Institute of New Zealand (REINZ) clearly illustrate the sharp fall in purchaser activity which has impacted upon the rural market over the last year, and the resulting effect that has had on values.

The first three quarters of 2008 witnessed historically high farm sales volumes driven by the record dairy payout of $7.90 per kg of milk solids, and a belief that high commodity prices were here to stay. The heightened competition, particularly for dairy farms and land suitable for conversion to dairy, forced up values, with the national median farm price peaking at more than $1.8 million in the first half of 2008.

During the latter half of 2008, the impact of the global recession became apparent, with commodity prices, particularly dairy, falling sharply, leading to a significantly reduced payout from the dairy co-operatives.

Despite better returns being achieved for sheep and beef, the economic climate eroded confidence in the sector, which has resulted in falling levels of sales activity.

The September quarter of 2009 has witnessed a further fall in sales activity with just 132 sales during the period. The national farm median fell again to $868,750 its lowest level since the September quarter of 2005.

The rural sector is not unique in experiencing these trends. Both the residential and commercial and industrial markets have seen the same influences in play over the last two years. Indeed, the rural market was the last of the major property sectors to experience a downturn in purchaser activity. It is not surprising therefore that the rebound in sales activity being witnessed in the other sectors has yet to become apparent in the farming sector.

There is no doubt that purchasers remain in the market. However, they are keenly aware of the change in values which has occurred over recent months and offers are therefore reflecting this. Market reports suggest that there is often a marked difference in the price expectations of vendors and potential purchasers which has stopped transactions from completing.

The recent rebound in commodity prices may result in renewed confidence within the sector, however, a stubbornly high New Zealand dollar and farm debt levels, which have increased sharply over the last year, will continue to weigh upon the sector.

The Reserve Bank of New Zealand (RBNZ), in its latest Financial Stability Report, commented that debt levels within the agricultural sector have doubled since 2004. There has been particularly strong increase in debt within the dairy sector which now accounts for almost two thirds of total agricultural outstanding lending. It is noted by RBNZ, however, that the distribution of debt is heavily skewed with a small proportion of farms heavily indebted.

The RBNZ advises that a number of farms are now experiencing significant financial distress, and are working hard to cut costs and reduce debt levels as the graph above illustrates, albeit that the farming sector has been unable to match the business sector in this respect. The RBNZ states that banks are continuing to work with borrowers where possible. However, some farms are holding too much debt, and will be forced to sell some or all of their operations.

As the graph above illustrates the impact on values has been felt across the country. Hawkes Bay was the only region which has recorded a higher average sales price during the September 2009 quarter than in the corresponding period last year, and even this on limited sales volumes which can lead to skewed figures.

All other regions have recorded a fall in values with only the Waikato, Hawkes Bay and Wellington regions showing an increase over the average figures achieved in the three months to September 2007.