Economic Analysis by Tony Alexander.
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1. Thinking buying a house is solely a financial decision of comparing rent with mortgage servicing and maintenance costs
2. Failing to realise most people are in NZ for the lifestyle not maximising disposable income and part of that is home ownership.
3. Low interest rates boosting what are considered “affordable” prices because people calculate affordability based on debt servicing costs, not debt versus income.
4. Quarter of a century of messages to people that they need to save and boost assets for their retirement.
5. Lengthening lift expectancy and need for income in retirement.
6. High profile sharemarket failures wiping out wealth of people who for one reason or another failed to diversify.
7. Strengthening average net migration inflows.
8. Internationalisation of the Auckland housing market (foreign buyers).
9. Ever rising construction costs and hassles of building.
10. Decreased availability of builders.NZ Dollar Logic says that the NZD will decline this year and our official view is that come December we will be near US60 cents from close to 65 cents currently. The logical reasons are a narrowing interest rate differential between NZ and the US, falling commodity prices, heightened global risk, and selling of Australasian currencies as proxies for the Chinese currency. Such logic helps explain why the rate is so far down from US88 cents back in 2014. But where do the risks lie? Both ways frankly because one cannot rule out world growth falling away quite a bit this year. But in the absence of a global recession many other fundamentals are actually quite supportive of the NZD. These include the strong housing market and an economy supported by construction, tourism, services sector growth, and non-dairy exports generally. Booming net immigration is a plus as is the good state of government finances, low current account deficit, distance from deepening geo-political problems elsewhere, and low air pollution which is becoming increasingly a source of concern for growing middle classes in the emerging economies. What this adds up to is perhaps a suggestion to exporters that when the NZD does dip to 60 cents it may be a good idea to lock in a good level of cover rather than holding back in anticipation of 55 cents or 50. You will find current spot rates here. http://www.xe.com/currency/nzd-new-zealand-dollar If I Were A Borrower What Would I Do? As noted above, for six years our message on interest rates has been not to base your risk management decisions strongly upon a set of forecasts proving correct. That message then gained the addendum of noone having in fact got their interest rate forecasts correct since 2007 with predictions of rate rises proving wrong over and over again. Two recent examples are US bond yields falling rather than rising after the Fed. ceased printing money in 2014, and the 1% rise in NZ’s official cash rate last year being completely reversed. Now we have the same thing happening again. US monetary policy was tightened 0.25% a month ago and as a result bond yields have not risen but instead gone down courtesy of a long-overdue correction in global sharemarkets bringing downgrades to expectations for world growth, world inflation, and interest rates everywhere. Now lets add in for the NZ case the new falls in petrol prices and only 0.1% inflation last year and we have inflation once again coming in less than the Reserve Bank has been forecasting. What this all adds up to is this. As we noted more and more in the second half of last year and as the Finance Minister also said, the chances are that NZ interest rates are going to stay at very low levels for a number of years. We probably won’t see NZ monetary policy tightening until 2018 – if that. Will the OCR be cut soon? That is possible but we still feel the RB is reluctant to do so. Yet if they cut their inflation forecasts again they may have no choice. In that case raise your expectations of extra restraints on lending for housing purchases because lower interest rates will stimulate even further the regional markets and reignite the Auckland market. I recently was a borrower for the first time since writing this section some years ago and fixed two years at 4.35% if I recall rightly. Now the BNZ have on offer a rate of 4.49% for three years. Given a choice between that and the two year rate at 4.39% I would take the three year rate. It is a very low rate which offers cash outflow certainty for three years. For Noting Every year in the days leading up to Christmas we see the publication of figures from a company called Paymark which processes about 75% of all electronic payment transactions in New Zealand. Here is a New Year example: http://www.stuff.co.nz/business/75605714/card-spending-jumps-on-back-of-economicgrowth-paymark-says The tone of the articles is always one of the numbers being high, people doing lots of spending, craziness potentially prevailing in the malls (same type of coverage on TV), and perhaps a tone of disappointment at the focus on consumerism. The desire to give at Christmas has morphed into the need to buy. Giving seems secondary. But it pays to sit back a tad sometimes and question some of the numbers. For instance, in the Dominion Post of Boxing Day it was reported that in the weekend before Christmas spending was 3.8% higher than a year earlier. That is a nominal figure and we need to adjust it first of all for population growth of almost 2% in the past year. Then there is inflation of 0.4%. That leaves growth on last year’s spending of about 1.4% in volume terms per capita. But there is another adjustment to make. The growing use of contactless cards means we are doing more electronic spending for small items. There is no way of knowing how big this factor is but probably not all that large. Perhaps however this use of contactless cards helps explains why the average size of an electronic purchase was $55 compared with $60 last year. Nevertheless, the pre-Christmas tone of commentary is always that you and I are spending too much, we will rue our spending when the credit card bills come in, and we have lost track of the true meaning of Christmas. And then eventually we get Statistics NZ data on what was really happening and the truth is somewhat different. Spending using debit and credit cards in seasonally adjusted terms fell by 0.4% in December compared with November for core purchases. In fact during the December quarter the annualised pace of card spending slowed to 4.5% from 8% in the September quarter. We did not go ballistic with our money – though come December this year that will once again be the key media theme. You need to apply a filter to take out the media bias when reading a lot of economic commentary. That is especially the case for housing. The bias in media is toward commenting that price rises are unsustainable, and having interviewed the latest show pony for the rent-don’t-buy crowd reporters will try to scare us into holding off buying and perhaps selling to avoid the rush. Actual analysis of fundamentals usually goes out the window, and as pointed out here many times in recent years, if you have bought into the price collapse bias you have missed out on a lot of wealth gain plus perhaps securing a family home at an affordable price. There is bias also in discussions about exchange rates. We are encouraged to believe that a falling NZ dollar is good because some exporters will make more money. Actually a rising exchange rate will make most of us better off as long as the NZ dollar is not being pushed up by hikes in interest rates. Another filter which I have tried strongly to encourage you to apply these past few years is that of reasonable credibility when it comes to forecasting economic and financial variables. Since the global financial crisis our economic models no longer work because of technological changes reducing the costs of searching for alternative prices and supplies of consumer goods and services and business inputs, and because how people react to changes in key things has altered. For example the responsiveness of you and I to interest rate changes has altered. Our ability to forecast things has collapsed. In fact, here is a list of some things which people can’t forecast – meaning not just economists but everyone else.
Iron ore prices
China’s growth rate this year
Dairy product pricesDo not develop a set of business, investment, or personal consumption plans which are highly sensitive to forecasts proving wrong. In fact this is the sixth year in which we have explicitly written here that you would be foolish to develop an interest rate hedging strategy based strongly upon a particular set of interest rate forecasts coming right. Spread your risk with a range of fixed and floating rates. Want a money-making idea? Buy Nespresso capsules in Australia and sell them here. I bought two containers of Roma for AUD13.60 at Robina on the Gold Coast. That equates to NZD 14.55 using a 93.5 cent exchange rate. I then bought the same containers at the bottom of Queen Street in Auckland for $19.40. That is exactly 33% more than the Aussie cost. It would pay one to buy a few thousand containers whilst across the Tasman and flog them off back here for a simple arbitrage gain.