MIL OSI Analysis – Source: BNZ Economist Tony Alexander – Analysis:
-NZ IRD and foreign tax identifiers required from October 1
-Two year capital gains tax bright line test
-Consultation underway on a withholding tax from perhaps July next year
-30% minimum investment property deposit (not relevant for many buyers who have cash).Note that it is not just offshore Chinese backing away from Auckland at the moment. Inexperienced, undercapitalised people who were entering the housing market from early this year feeling that they had to buy any old piece of crap to avoid missing out on “easy” money have also backed away – thank goodness. The figures do not show this yet, but they probably will before the end of the year. Speaking of figures, some showing the surge in housing activity since early this year are contained in lending data. The annual pace of growth in total household debt has accelerated to 6% in July from 4.8% in January. This is the fastest pace of debt growth since late-2008. Migration is Huge Third, given that population growth is an obvious factor influencing housing markets the fact that net migration inflows continue to go through the roof is supportive of markets all around New Zealand, though more so in Auckland which garners around 60% of the net flow. Data released on Monday show that the country’s annual net gain has risen to 60,300 in August from 59,600 in July and 43,500 a year ago. In seasonally adjusted terms the net monthly gain appears close to plateauing, suggesting the peak annual flow may end up very near 65,000 or a 1.4% population boost. In fact since flows turned positive in mid-2012 the population boost adds up to a total of 2.6%. For your interest, here is a table showing the net migration flow for each region since August 2012. Back to the record net national migration gain of over 60,000 – here is the question to be answered. How fast will the turnaround in flows be? Given that economic expectations offshore are deteriorating, and that in Australia especially there is no sign that growth is about to take off, it does not seem reasonable at this stage to expect that the easing of the net migration gain will be sudden. Migration flows are likely to remain a stimulatory factor for our economy over the next two to three years. This will support the housing market in particular and suppress wage rises yet again while keeping the unemployment rate elevated while jobs growth likely remains firm. Back To The Fifties The fourth housing factor needing to be highlighted, which has huge relevance outside of housing, is the continued deterioration in expectations that borrowing costs are going to go up to any appreciable degree in the near future. In the United States last week the Federal Reserve expressed concern about the Chinese economy and decided not to start raising their 0.25% funds rate. The European Central Bank has openly opined about extending money printing because inflation shows no sign of approaching 2%. Our own central bank not only cut the cash rate another 0.25% two weeks ago, they also sounded more dovish regarding future growth, inflation, and the interest rates track than the markets had been expecting. A range of central banks are likely to ease their monetary policies in coming months. Given that high inflation tends to beget high inflation expectations it seems reasonable to expect that low inflation globally will beget low inflation expectations – and falling ones at that in many parts of the world. Low inflation is starting to get locked in, especially as businesses say they are getting less pricing power as consumers use modern technology to search for better prices when buying something. The chances are strong that just as all forecasts of a decent sustained hike in interest rates anywhere on the planet these past eight years have been wrong, so too will similar forecasts for the next one to three years. Frankly it seems best to stop thinking in terms of interest rates rising but not quite getting to levels of the 2000s, and instead think in terms of the post-WW2 period through to the eartly-1970s. Floating mortgage rates averaged less than 4% in the late-1940s. They crept slowly higher and two decades later were just over 6.5%. NZ floating rates are likely to reach an average near 5.75% within two months. Fixed interest rates in many cases will be over 1% lower than that. Welcome to the fifties – but without the milk bars and winkle-pickers. Low interest rates are supportive of debt-funded asset purchases. Property. Equities are supported not by low purchase funding costs but the search for yield outside of fixed interest and call rate products. Notice the double positive whammy then for housing – yield search, purchase cost. Miscellaneous NZ Dollar Risks for the moment lie on the downside, associated with weakish dairy prices, El Nino risk, US interest rates likely to rise next year, NZ GDP growth slowing. But speaking with people who have travelled in offshore business and investment circles recently it is clear that NZ is viewed as a nice, safe, reasonably yielding part of the world to place one’s funds and gain some primary product exposure to long-term growth associated with improving Chinese and Asia consumer buying. The Kiwi dollar is unlikely to drop substantially below current levels. Personally speaking below US 60 cents looks attractive, as does below 87 Aussie cents, 39 British Pence. Oil As global growth forecasts and predictions for Chinese growth in particular get scaled back, oil prices have been falling anew. It is true that US shale oil production is likely to back off quite a bit in the coming year as capital supply dries up. But ready-to-tap inventory in the ground looks strong, Iran’s oil is likely to hit world markets in the coming year, and OPEC cohesion seems minimal. No-one talks about Peak Oil any longer, new huge gas fields seem to appear every few months, Japan is slowly restarting nuclear electricity production, and ever so slowly solar energy collection becomes more efficient. Energy costs look like remaining low for many years. Hence the coal industry faces continued bleak times, the energy exploration and development sector faces many weak years, and you and I slowly will think about doing the opposite of what so many other people are doing and we will buy bigger cars (SUVs) rather than those little ones that seem to be populating our roads like midges. Dead Wood The world is awash with liquidity. That means lots and lots of people, managed funds, companies, are looking for places to store their cash and hopefully earn a reasonable return. Were New Zealand’s capital markets more sophisticated than they are we could be attracting huge quantities of funds into our country to back our many ventures – rather than just a handful of large one-offs. Somewhere out there a managed fund is willing to back your Angora bunny farm. Taking this angle when discussing the world awash with cash sounds positive. But there is another angle. When finding investors globally was harder, and the cost of funding ongoing losses higher, businesses would get weeded out at a faster pace. Now, the dead wood clings on for longer. It is taking longer for businesses with bad ideas/management/products etc. to be capitalistically weeded out and their assets freed up for others to use. Global productivity and therefore income growth is slowing down. This will exacerbate worries about the absence of income growth for individuals and households in many countries, retard even further the growth prospects and opportunities for reform in Europe particularly, and reduce the speed with which the growing divide between rich and poor can be narrowed as gains from growth are distributed further down the income ladder. Consider the New Zealand case. NZ business profits are being squeezed with rising import costs but inability to pass on such rises, plus wages rising faster than 0.4% inflation. Eventually the economy will be ready for another bout of business cleanout. Previously high interest rates might be the trigger, but not now. So companies past their use-by date will hang around a lot longer, sapping growth and raising debt risks. Unpredictability This is a theme I have discussed strongly in recent months. In fact five and a half years ago I noted that a person would be foolish to develop an interest rate risk management strategy reliant heavily upon any particular set of interest rate forecasts proving correct. Post-GFC the world has changed and old relationships between key economic variables like interest rates and consumer spending, employment growth and wage rises, money supply and inflation no longer hold. The economic forecasting models run by central banks, private firms etc. are no longer accurate. Throw in the effects of unpredictable technological disruption (oil, music, taxis etc.), changing fashions, the guessed-at effects of aging populations, geopolitical shocks, and weather events and you have a world where relying strongly upon forecasts is dangerous. Businesses need to place priority on identifying trends not highly at risk of disruption and error (e.g. rising demand for safe, quality food from Asia), get close to customers to identify changes and new competition as soon as possible, stress innovation in production processes, and build flexibility in costs and practices while building resilience to the changes we have no hope of predicting. If I Were A Borrower What Would I Do? Banks are competing strongly with discounted short-term fixed rates so that is where I would look.