The boom in farm prices couldn’t last and the value of farm land is now expected to drop by about 10%.
The Reserve Bank of New Zealand has warned of the possibility “of a sharp decline in farm values” and Errol Saunders , the managing director Canterbury-based Ford Baker Valuation, said a 10% contraction would not surprise him, due to stable prices, an increase in farms for sale and a longer time to sell them.
Fuelled initially by demand for dairy land and latterly by a resurgence in the fortunes of the cropping sector, land prices reached unprecedented levels, with $55,000 a ha paid for some of the premium farms.
Mr Saunders said prices for those same farms could ease to between $40,000 and $50,000 a ha in the next year.
Grazing land prices peaked at between $600 to $800 a stock unit, not the $1000 a stock unit some were expecting, he said.
A fall in the value of land by itself isn’t a problem if the owners can meet their mortgage commitments and aren’t wanting to sell. However, capital gain has always been a factor in farm viability.
Farm accountants said that some sheep and beef clients were going backwards last season because higher costs and lower returns meant their annual losses were outpacing the gains in the value of the land so their equity was decreasing. While returns for meat are looking brighter for the coming season they’ll be negated by falling land values.
The Real Estate Institute of New Zealand rural spokesman Peter McDonald said a lack of finance was preventing some sales being completed, but despite that the national median price of farm sales in the three months to October was $1.5 million, compared to $1.3 million from August to October 2007.
Fewer farms sold between August and October this year: 390 compared to 582 in the same period last year and 470 in 2006
While the median price for sales nationwide rose slightly, the median price of Otago and Southland farms sold fell last month.
REINZ figures show the median price for the 30 farms sold in Otago was $1.83 million for the month, down from $2.2 million in September for the 40 farms sold . . .
The median farm price in Southland fell from $2.2 million in September to $1.75 million in October.
Sales in the region slowed too. Last month 66 farms sold, 6 fewer than in September and well down on the 112 farm sales last October.
Rising prices in recent years made it difficult for new entrants but falling prices may not improve affordability because credit will be harder to get.