Tony Alexander – Evening Report https://eveningreport.nz Independent Analysis and Reportage Thu, 08 Sep 2016 23:09:05 +0000 en-US hourly 1 https://wordpress.org/?v=6.9.1 Tony Alexander’s Weekly Economic Overview 9 September 2016 https://eveningreport.nz/2016/09/09/tony-alexanders-weekly-economic-overview-9-september-2016/ Thu, 08 Sep 2016 23:09:05 +0000 http://eveningreport.nz/?p=11231 ]]> Economic Analysis by Tony Alexander. [caption id="attachment_11232" align="alignleft" width="150"]BNZ Chief Economist, Tony Alexander. BNZ Chief Economist, Tony Alexander.[/caption] This week we note that adopting a pessimistic attitude following the GFC has left many people far worse off than if they had simply admitted the uncertainty and tossed a coin to decide what to do. The NZD has risen close to US 75 cents as more people acknowledge the good state of the NZ economy which we expect official data to confirm for the June quarter next week. Download document pdf 350kb Keep Calm and Carry On I wonder how many people are still sitting out there, holding off from buying a house, hiring staff, or undertaking capital expenditure because they expect the economy to fall into a hole in the ground because of * the collapse in the dairy payout, * the US Presidential election campaign, * Brexit * high house prices in Auckland * money printing in many countries * terrorism * peak oil * unrest in the Middle East, and so on. As humans we are hard wired to pay more attention to things which may turn out bad than things which may turn out good. The media know that and feed us stories which attract our attention and get coverage for the advertisers who pay them. Capitalism hand in hand with generally left-wing reporters exploiting human weakness. As K says in the first Men in Black movie “There’s always an Arquillian battle cruiser, or a Corillian death ray, or an intergalactic plague that is about to wipe out all life on this miserable planet…” There is always something sitting out there which can cause significant economic disruption so you are always presented with an excuse for sitting on your hands and doing nothing. Plenty of people have done that since the global financial crisis and while that was the logical thing to do in 2008 and for much of 2009, ignorance of the fundamentals driving our economy and housing market in particular has seen many people choose to sit out a period of good growth and capital appreciation. If you have avoided buying shares then you have missed a 120% rise in the NZX50 over the past five years. If you have despaired of New Zealand’s prospects and switched your assets into foreign currencies from late-2009 then you’ll have lost about 14% on a trade weighted index basis. If you have held off buying a house waiting for one of those silly forecasts of 40% price falls to come true then you are massively out of money and perhaps out in the wops when you finally make your purchase. Were these gains and the good performance of the NZ economy predictable? No. None of us predicted the extent of money printing. None of us predicted how low interest rates would go and that they would still be falling now. Hardly anyone picked this strength in the NZ dollar. I’ll claim not picking a house price collapse and advising people to buy rather than sit on their hands in the housing market since mid-2009. But I can make no claim to remotely coming close to predicting the extent to which prices have risen. The point is this. Predictability of many things had collapsed post-GFC. But that is no reason for blindly assuming the worst, growing potatoes and building a bunker. When you don’t know what is going to happen its a 50:50 call as to whether good stuff or bad stuff will come along. So why assume only the bad? Because, as noted, we are hard-wired to do exactly that. Plus, because we feel losses three to four times more intensively than gains psychologically-speaking, we give strong preference to lose avoidance rather than making gains. Consider people running to catch a bus. Are they running so they can be on the bus? Usually not. They are running to avoid the situation of just missing the bus and feeling stupid because of the loss they have suffered. If you have no idea when a bus on a regular schedule arrives at all, there is no reason for any particular speed of walking. So as you listen to the news people telling us about the woe surrounding us and how we should feel bad about it whilst anticipating even more woe down the track remember this. Buying into dystopic scenarios guarantees failure. Having at least some hope that the worst will not happen gives you a chance to thrive. Nothing ventured, nothing gained. “After all, tomorrow is another day.” Housing This week Quotable Value NZ released data showing that the average Auckland sales price has averaged just above $1 million for the past three months. Someone wondered if the $1 million average would become a psychological barrier. What a silly comment. There is no single house which you could say is the representative commodity in the Auckland housing market and which is repriced daily or more frequently as happens with say gold, oil, or the NZ dollar. A psychological barrier or resistance point in technical analysis terms is only relevant when talking about a single completely homogeneous product which is traded by a very large number of people and that is not the case in the housing market. There will not be a single auction where the bidders hold back because the price has got to $990,000 and they don’t think a rise above $1 million can be justified. Houses are already trading above that level and have been doing so for many years in the cases of high specification properties. The average price measure is an artificial construction, it is not the market price for a uniform product like gold. So you can kick any thought of the one million dollar mark representing a barrier to the current market’s movements firmly into touch – along with yet again the same analysis-poor comments from those who have been predicting falling prices and smugly warning buyers they have been paying too much for years now. Just in case you have forgotten what we have been writing here for the past eight years, here are the fundamentals for the Auckland housing market. DEMAND EXCEEDS SUPPLY AT CURRENT PRICES. Too simple. More comprehensively… -Population growth is strong. -Interest rates are low and falling. -A large cohort of people are approaching retirement and seeking assets to help fund the retirement which officials for three decades have been brainwashing them into believing will be miserably wretched affairs of shredded blankets and collapsing health unless they save and build a large investment portfolio. -There is an existing shortage which keeps growing. -Supply is being constrained by literally dozens of factors. A few include shortages of builders, electricians, plasterers, surveyors, inspectors, plumbers, concrete slabs, sections, infrastructure and so on. -Finance to allow developments is being reined in by banks having to meet tougher lending standards post-GFC. -Building standards and therefore costs keep rising. The natural pressure is for prices to keep rising. Given that the Reserve Bank continues to express concern about banks being exposed to a shock which might cause prices to fall (insert the foot and mouth scenario here because nothing else bar Mt Rangitoto going up or China invading is going to do it), there will be more lending restrictions introduced. They can next year quickly raise the 40% investor deposit requirement to 50%, then 75% if deemed necessary. But at some stage, again probably early next year, they will introduce a strong regime of controlling credit supply by restricting how much banks can lend to multiples of household incomes. 3.5 times as in Ireland, or 4.5 times as in the UK, or something probably higher to start with. Remember, this environment of influencing bank lending risk by controlling how much they can lend (credit supply) is a reversal of the approach from the mid-1980s of controlling such risk by influencing credit demand by changing borrowers’ interest rates. And also remember this. The Reserve Bank has no goal regarding housing affordability, homelessness, or buying by the young. They don’t even in fact explicitly aim to rein in the pace of price rises. Their aim is simply to make sure that if prices fall sharply for whatever reason the banking system will remain fully functioning. The way things are going, in 2018 we will probably reach a point where there are so many credit supply controls in place bank mortgage portfolios will be exceedingly robust. But supply constraints will not have changed and demand will simply have been delayed and not killed forever in most instances by the RB’s actions. Therefore prices will continue to rise and the Reserve Bank will be quite happy. Note however our view that a plateauing seems likely before mid-2018 on the basis of a lot of price fatigue, higher supply levels, lower net immigration, and the RB measures. But sustained falls? Again, that would take foot and mouth. NZ Dollar US economic data following the interest rate rise last December have continued to be less strong than expected and yet again market expectations for the timing of another rate rise have been pushed out. This time the culprits have been weak numbers on employment growth and the services sector. A rise this year is fairly unlikely and this pattern of disappointment in growth has already been seen elsewhere following rate rises post-GFC. Locations include New Zealand, Australia, Sweden and the ECB where rate rises on the basis of good growth have been more than completely reversed in every case. We noted late last year that the risk is following the US rate rise expectations eventually turn to expecting that increase to be unwound. We are not there yet and the Federal Reserve will be extremely reluctant to do that. With rate rise expectations pulling back again the USD has weakened and the NZD now trades near US 74.5 cents from 72.6 cents last week on its way to the 75 cents we have postulated. Once we get there look for forecasts of 80 cents being regained on top of the growing talk about the NZD exceeding parity against the Aussie dollar. Why so much confidence in a rising NZD? It not only goes hand in hand with a strongly performing economy growing at above a 3% pace, but because dairy prices continue to surprise on the upside. The latest Global Dairy Trade auction produced another 7.8% rise in average prices which now sit 30% above their lows of mid-July and down 57% from the April 2013 peak. Prices have been boosted by supply falling in NZ and elsewhere and we suspect a bit of a scramble from buyers because this turnaround in prices has been far greater than anyone was expecting. It pays to remember that no-one has displayed an ability to accurately forecast dairy prices a season ahead so it would be unwise to blindly extrapolate the recent price gains into further gains this year. We will simply have to take price movements as they come and hope the trend away from so many cows polluting our water continues. If I Were A Borrower What Would I Do? Nothing new.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s New Zealand Economic Overview 18 August 2016 https://eveningreport.nz/2016/08/18/tony-alexanders-new-zealand-economic-overview-18-august-2016/ Thu, 18 Aug 2016 05:13:37 +0000 http://eveningreport.nz/?p=11126 ]]> Analysis by BNZ Economist Tony Alexander. This week we note that if booming retail spending and [caption id="attachment_11124" align="alignleft" width="150"]BNZ Economist, Tony Alexander. BNZ Economist, Tony Alexander.[/caption] employment growth are not causing the rate of inflation to rise then trying to encourage people to borrow more and spend more via lower interest rates probably won’t help the RB reach its goal of inflation back near 2%. Yet two more interest rate cuts remain likely in November and February.
We also list official Statistics NZ projections of population growth for each NZ region and local authority area. This is so all those people looking at investing in regional housing markets do so with full awareness of how local population pressures are likely to develop. For your guide, in some locations in the media recently with people buying very low priced properties the projections are for rapidly declining populations. Be careful when you leave the bright city lights. Download document pdf 358kb Trying To Boost Inflation The Reserve Bank are cutting interest rates in the hope that this will stimulate people to borrow more money and spend it or to save less and spend it, and that this will cause inflationary pressures which will get the annual inflation rate back above 1%. They are failing (along with almost all central banks these days) and we got good insight into this failure last Friday when the Retail Trade Survey numbers appeared. They showed that during the June quarter inflation and seasonally adjusted spending rose by a massive 2.6%. Growth from a year before was 6.4% and for the entire year 5%.
Consumers are already opening their wallets and spending up large and if this recent massive growth is not driving inflation then it is hard to imagine whatever stimulus coming from lower interest rates will make much difference.
Similarly, we learnt yesterday that the labour market may be booming, but analysis is difficult. Job numbers are reported to have surged by 2.4% during the June quarter and by 4.5% from a year earlier. However Statistics NZ have lifted their estimate of employment starting this quarter to better capture people who are self-employed. Thus there is a definite upward bias to the 2.4% quarterly growth rate but we don’t know by how much.
Suffice to say that all reports from employers are that staff are hard to find in spite of fewer Kiwis leaving the country and more coming back, plus a few more foreigners coming in to work than four years ago.
Yet, as previously noted, in spite of strong jobs growth and lowish unemployment at 5.1% from 5.5% a year ago there is no sign that wages growth is accelerating. The Labour Cost Index measure we prefer was ahead 2.8% in the June quarter from a year ago from a 2.5% rise one year ago, 2.9% two years ago, 2.8% three years ago, and 3.4% four years ago.
So no inflation coming from the labour market it seems in spite of rising remuneration in the construction sector and a booming tourism industry.
And it is hard to see much upward pressure on prices coming from the dairy sector in the near future even though average prices improved another 12.7% at this week’s auction after rising 6.6% two weeks ago. The rises are good but they won’t stop dairy farmers from continuing to crunch their expenses and pull back from wasteful supplementary feeding systems.
Housing
Starting from over a year ago Auckland investors began flooding into the regions looking for bargains, smaller mortgages, and better yields in the residential property sector. Once they appeared and snapped up property the locals woke from their slumber and piled in. Now there are major listings shortages all around the country and people are desperate to buy anything they can get their hands on – which means we are in the part of the cycle where those owning rubbish they have wanted to sell for the past nine years can finally get rid of it.
History tells us that at this point in the housing cycle people tend to invest in the regions with a view that there will be a population surge as Aucklanders flood out of their expensive city and baby boomers retire to their beautiful location. This never happens to the degree people expect. Worse than that, there are many parts of the country where short of Mount Rangitoto blowing up population is not going to grow at all.
To get a feel for how populations are likely to change in different locations we make use of the Statistics NZ Population Projections available at the following link.
http://www.stats.govt.nz/browse_for_stats/populati on/estimates_and_projections/SubnationalPopulat ionProjections_HOTP2013base.aspx
There is a good graphic showing projected average annual rates of population growth by region with Auckland showing strong growth followed by Canterbury, then Waikato and Bay of Plenty. On the West Coast, Southland, Gisborne, Manawatu-Wanganui, Hawkes Bay and Marlborough statistics show no or minimal growth projected out to 2043.
This following table shows projected total regional population growth from 2013 – 2043 under the Medium scenario which assumes a net annual migration gain for NZ of 12,000 p.a.
Projected % Population Change 2013-43
Auckland 49.3%
Canterbury 29.5
North Island 29.0
NZ 26.9
Waikato 21.9
South Island 20.4
Bay of Plenty 17.5
Otago 14.8
Nelson 14.8
Taranaki 14.6
Wellington 12.7
Northland 11.1
Tasman 10.7
Marlborough 4.5
Hawkes Bay 3.8
Manawatu-Wanganui 1.5
Gisborne 1.3
Southland 0.8
West Coast 0.6
All regions are projected to enjoy some population growth – but not all local authorities, and buyers of regional property would be advised to pay attention to this following list before selling up in Auckland to buy a few houses elsewhere thinking that capital gains will be the same.
2013-43 %
Upper Harbour 93.0%
Selwyn district 91.4
Waitemata 86.7
Franklin 83.3
Rodney 73.3
Queenstown-Lakes district 70.4
Papakura 68.7
Maungakiekie-Tamaki 62.0
Henderson-Massey 56.0
Hibiscus and Bays 56.0
Whau 54.5 Auckland 49.3
Waimakariri district 49.1
Tauranga city 43.7
Puketapapa 43.5
Howick 42.6
Hamilton city 41.7
Orakei 41.6
Mangere-Otahuhu 41.3
Waikato district 38.5
Albert-Eden 37.3
Waiheke 36.7
Otara-Papatoetoe 35.9
Ashburton district 31.9
Devonport-Takapuna 30.8
Total, New Zealand 26.9
Waipa district 24.0
Waitakere Ranges 23.9
Hurunui district 22.9
Christchurch city 22.5
Kaipatiki 22.2
Wellington city 22.0
New Plymouth district 21.7
Carterton district 20.1
Whangarei district 19.2
Central Otago district 18.4
Kapiti Coast district 18.3
Palmerston North city 18.3
Western Bay of Plenty district 16.5
Mackenzie district 15. 1
Nelson city 14.8
Upper Hutt city 12.3
Manurewa 12.1
Tasman district 10.7
Manawatu district 9.5
Waimate district 8.8
Hastings district 8.2
Porirua city 7.3
Timaru district 7.0
Buller district 6.6
Great Barrier 6.3
Dunedin city 5. 8
Waitaki district 5.6
Kaipara district 4.9
Napier city 4.9
Matamata -Piako district 4.9
South Wairarapa district 4.6
Marlborough district 4.5
Southland district 3.3
Invercargill city 3.0
Far North district 1.7
Taupo district 1.4
Gisborne district 1.3
Stratford district -0.2
South Taranaki district -0.7
Westland district -0.8
Kaikoura district -0.8
Masterton district -1.7
Lower Hutt city -2.1
Grey district -2.9
Thames -Coromandel district -4.0
Rotorua district -4.7
Wanganui district -7.6
Whakatane district -7.6
Clutha district -7.8
Horowhenua district -8.3
Hauraki district -8.6
Central Hawke’s Bay district -9.1
Otorohanga district -10.3
Tararua district -13.2
Gore district -13.3
South Waikato district -14.9
Rangitikei district -15.5
Chatham Islands territory -18.3
Waitomo district -21.7
Wairoa district -24.6
Opotiki district -27.4
Ruapehu district -34.3
Kawerau district -39.8.
NZ Dollar
As previously noted, the Kiwi dollar sitting close to USD65 -70 cents is where it goes after our international dairy prices have collapsed by about 60%. Now those prices have recovered to just 40% off their peak with a 19% average rise the past fortnight.
Now throw in new weak economic data out of the US, UK, and Japan. Add in a spreading realisation that US monetary policy might not tighten at all from current levels for a very long time, plus strong NZ economic data on retail spending this week and it is only a matter of time before the Kiwi dollar powers through very hefty resistance at 73 cents to settle perhaps near 75.
Basically we have the same message here. The Kiwi dollar sticks out as well supported in a world failing to get onto a firm growth track post -GFC.
And for your guide, generally the dollar and house prices move in the same direction, with migration flows on the same boat.
This afternoon the NZD was trading against the greenback near 72.4 cents from 72.9 last week, unchanged against the Australian dollar near 94.5 cents, and down marginally against the Yen, Pound and Euro near 72.7, 55.6, and 64.2 things respectively.
If I Were A Borrower What Would I Do?
Given some of the good data this past week we have pushed out our expectation for the next and probably (hopefully!) final two OCR cuts from September and December to November and February.
The direction in rates remains slightly downward but be careful in placing too much weight on any specific set of interest rate forecasts given the way basic economic relationships have radically altered post -GFC. Thankfully we have been giving that message for seven years now. Doesn’t much help anyone trying to optimally structure their risk management however.
Were I borrowing at the moment I would have a portion floating and fix the rest in the two or three year area. Five years at 5.15% is a nice low rate which will suit conservative borrowers. However I struggle to see monetary policy being sustainably tightened for quite a number of years so personally would feel little need to insulate against much upside risk at this stage.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Economic Analysis: Tony Alexander’s Weekly Overview June 16 2016 https://eveningreport.nz/2016/06/17/economic-analysis-tony-alexanders-weekly-overview-june-16-2016/ Fri, 17 Jun 2016 05:11:59 +0000 https://eveningreport.nz/?p=10569 ]]> Economic Analysis by BNZ economist Tony Alexander. This week I am at Fieldays so start the Overview with a few observations on the mood at Australasia’s biggest agricultural gathering. I also take a look again at the housing market, focussing in on two things. Firstly a list of structural changes helping to explain the apparent downward trend in home ownership. Second the data suggesting near 40% of house sales in our three biggest cities are to investors. We are invited to adopt a view that investors are snatching up everything. Not so. Given the tendency to flick properties on quickly there is an upward bias to the investment proportion of house sales. The same goes for mortgage lending. Quickly sold properties have their debt repaid quickly and new borrowing massively biases upward the proportion of a year’s lending counted as being for investment purchases. It pays to note that while total new mortgage lending since September 2014 has totalled $118bn, the actual stock of debt as at March 2016 was only 12.4% or $24bn higher than in September 2014. Debt repayments during the period totalled $115bn! The difference is largely interest charges. The Reserve Bank in fact has no published data showing changes in the proportion of the mortgage debt owed by investors. None. That is very disappointing because it prevents informed debate and provides space for the same old incorrect housing collapse stories which bad forecasters have been peddling for years now. Pity those who listened to them. For the full analysis, continue reading below or Download document (pdf). Fieldays As is usual for this time of the year I’m spending Wednesday through Friday this week in the BNZ tent at National Farm Fieldays in Mystery Creek, Hamilton. The number of people attending the event seems to be in line with previous years but by all accounts willingness to spend is mildly down – obviously because of the weakness in the dairying sector. Having said that there is a noticeable absence of pessimism. Most operators in the dairy sector have seen downturns before and know what to do, and there is anticipation of payouts slowly improving over the next couple of years. That seems like a reasonable expectation on the basis of some eventual rebuilding of stocks in China and reduced growth in European production along with NZ supply being curtailed as marginal land reverts back to something else (manuka bush for honey perhaps), and farmers pull away from costly supplementary feeding systems. Few farmers have expressed concern about the NZ dollar which at US 70 cents sits below the ten year average of 74 cents, and no-one has moaned about the level of interest rates facing borrowers. Some are concerned about low interest rates being offered to savers. Everyone seems to be wondering what it will mean for the world economy if the UK referendum on June 23 results in a decision to leave the EU – which it probably will – and Donald Trump becomes US President in the November US Presidential election, which seems like a 50:50 call given the quality of his opponent. Fewer people are moaning about Auckland now that house prices in their local towns are rising at a faster pace than those in our biggest city. All up sentiment seems good here and it will be interesting to see the spending figures when they eventually emerge. Housing CoreLogic this week released some analysis showing that in Auckland an estimated 42% of property sales are to investors, same in Christchurch (thus slamming any notion that Auckland is “special”) and Wellington 38% (ditto). The media invite us to adopt the view that such proportions are too high and this is bad for first home buyers. But it pays to note the other anti-investor commentary which runs along the lines that properties are being bought then on sold quickly for rapid profit. CoreLogic note an average investment property holding time in Auckland of less than one year. There is an upward bias in the proportion of sales classified as to investors because of this turnover tendency which does not occur for first home buyers or owner-occupiers moving between houses after a few years. This means some 40% of the housing stock is not suddenly shifting to investor ownership. Table C35 produced by the Reserve Bank on their website since September 2014 shows that between then and the end of March this year total mortgage debt grew by $24bn or 12.4%. But total drawdowns added up to $118bn. Drawdowns, from which data on the proportion of loans going to investors are derived, are over five times the size of debt growth. Loan repayments totalled $115bn. Interest charges largely account for the difference. New lending data focussing on the proportion undertaken by investors is meaningless. For the record, in the 12 months to April 34% of gross new lending was to investors. But what if the new lending is higher risk than the old lending? It isn’t. The proportion of the mortgage stock where lending exceeds 80% of the value of the property has fallen from 18% in September 2014 to 13% in March. The Reserve Bank is being very successful at reducing the threat to financial stability from high risk bank lending. What really matters is the proportion of the housing stock owned by investors if home ownership is the thing you are interested in. The Reserve Bank provides zero information on that breakdown. They do not know what proportion of household debt represents lending to investors. The Reserve Bank’s Table C22 does include a line entitled “Housing loans (including rental properties)” which we can compare with another line “Housing loans (long-term)” and on the face of it see that 37.3% of the loans outstanding are for rental purchases. But do this percentage calculation for all periods from the start of the table in December 1998 and you get a 37.3% answer every single time. That is because the 37.3% is a Statistics NZ estimate which has nothing to do with the Reserve Bank. Statistics NZ has far less information on the nature of bank lending and borrowing than the Reserve Bank so this 37.3% is a number thrown in there and not derived from any up to date statistical survey. It might derive from some adjustment to home ownership rate numbers. We do not know what proportion of household debt is held for the purpose of buying an investment property. We only get a measure of home ownership in the census and that measure itself is imperfect. Last census in 2013 Statistics NZ was unable to specify ownership of just over 20% of the housing stock. The home ownership rate nonetheless was 73.5% in 1991, 66.9% in 2006, and 64.8% in 2013. It has been falling these past few years though perhaps less than shown because of problems with houses going into trusts. One would struggle to realistically challenge the notion that a rising proportion of our housing stock is owned by investors. But you cannot use debt data to determine the current speed of that increase. Why Falling Home Ownership? Regarding the downward trend in home ownership, little analysis exists on why this is happening. Here are a few suggestions. The biggest cause is probably the structural decline in low risk investment returns such as term deposits which has encouraged savers to raise the proportion of housing in their asset base built up these past few decades. After all, you can’t easily get residential property exposure through managed funds. Another is the aging population. More older people own investment properties to fund retirement than young people, the proportion of the population which is old is rising, therefore the proportion of the housing stock in the hands of young people will naturally fall. Life expectancy is also rising seemingly rapidly and young people are choosing to delay home purchasing – especially as it locks them into a location and occupation. In this modern world we are repeatedly told that people entering the workforce should expect to hold multiple roles if not careers during their lengthening lifespan. Flexibility is to be valued and that is hard to achieve when you are locked into home ownership. Bank lending standards are also rising. Central banks are requiring banks to reduce the level of risk in their portfolios and that means people offering the highest security, such as a mortgage secured over two properties, are better deals than those borrowing to the hilt to get into their first home with minimal equity. First home buyers are high risk and we banks are being explicitly steered by the Reserve Bank toward avoiding such risks. Additionally, few entry level houses get built these days. The proportion of the housing stock which is affordable/accessible to first home buyers is structurally declining as developers build big houses on small expensive sections. With nothing else changing, this tendency in the past three to four decades will naturally lower home ownership for first home buyers. But Houses Can Fall In Price! Ignoring the structural factors driving the rate of home ownership down is not the most dishonest ploy to generate headlines which grab reader attention. The killer is this one. Apparently there are times when house prices fall and people need to be wary of that when they contemplate their housing investment. Oh how shocking. Anyone buying any investment product will be aware that prices are not fixed and they go up and down. Were we to however back off massively from buying investment properties because of the occasional period when house prices fall then all arguments for buying other assets like shares go completely out the window. Share prices go up and down on a daily basis and there will be hundreds of thousands more people who have seen their wealth decline for a while and worried about being wiped out because of a rout in share prices in New Zealand than have ever worried about going down the gurgler because their house price has gone down. The following graph shows annual changes in the REINZ measure of Auckland house prices since 2004 and annual changes in the NZX 50 share index calculated as three month averages versus a year earlier. The red line showing share index changes is far more volatile than the line showing house price changes. Share prices dipped over 30% come late-2008, house prices 10%. Note that this graph is just presented to show volatility, not total annual returns and not longterm returns. But as an aside, in the Reserve Bank’s Financial Stability report Excel data file sheet 4.2 you will find a time series of Auckland rental yields. They decline from 5.1% in March quarter 2000 to 2.8% March quarter 2016 with a 16 year average of 4.1%. But the average bank six month term deposit rate has declined from 5.5% to 3.2% with an average of 5.3%. Rental yields are less below average than term deposits. Plus, the average mortgage rate has fallen from 7.6% to 5.6% with an average of 7.5%. Any argument that one should avoid houses because they can sometimes fall in price needs to be put in context. Challengers to this angle will note that house purchases are invariably financed with debt whereas hardly anyone borrows money to invest in shares. True. And the reason why? Because banks with hundreds of analysts consider houses to be much safer than shares as security against a debt. It should hardly be any surprise then that the average person feels the same way and so is choosing to purchase houses rather than shares as they try to boost their returns where those returns are calculated as potential for capital gain and income. But there is another angle to consider. House prices do sometimes fall. But trends have been strongly upward. If you buy fully acknowledging prices will probably fall for a while one day your perceived incentive is to buy sooner rather than later in the cycle. That is because you will expect to build up a buffer to handle the price pullback – three steps forward, one step back. Not bad progress. This next graph shows the levels of the NZX 50 and Auckland house price index in three month rolling average terms since 2004. As shown in commentaries here in recent weeks and in fact years, it is not hard to find fundamental economic factors which explain the strong rises in house prices and declining home ownership. But the main question people have asked us for many years is not about what is causing house prices to move, but whether it is a better idea to buy now or to wait for a price correction before buying. So, would I still buy now? Yes. Why? Because the Auckland shortage is getting worse, all efforts to stop prices rising have failed, the chances of a stringent regime of debt to income rules being applied and proving effective are low, people are still decreasing their expectations for interest rates over the long-term, population growth looks set to stay above the 1.1% per annum norm for a while longer, and because in the regions the sight of Aucklanders buying properties has spurred local investors to storm into their markets in force. But when is it likely I will analyse the balance of factors and probabilities and err on the side of caution? First, there is essentially no chance any of us will correctly forecast a rout should one come along so no-one should try to base their decisions on forecasts of one happening. We can’t do it. However, there will come a time when vulnerability to small shocks will be great enough that any tiny shock will throw up some opportunities for those actively looking for them. When? This is where it gets interesting and you’ll need to pause before moving beyond the next paragraph to truly grasp an understanding. The higher prices go the greater the risks. Right? Not necessarily. Note our comment above and comments in fact from the Reserve Bank that risky bank lending has decreased. Prices can rise while fewer borrowers and less bank capital becomes exposed to a price pullback if lending standards are improved. Those standards are improving courtesy of efforts by our central bank and as seen this past week our own decisions on risk management. Only 13% of outstanding mortgage debt is now above an 80% LVR versus 18% one and a half years ago. The Financial Stability report released in May showed just 4% of top 5 bank lending as at the end of 2015 was at an LVR of 90% or above compared with 7.8% at the end of 2012. The way things are going there will soon come a time when in spite of Auckland house prices still rising in a 10% – 15% range the Reserve Bank will be so happy with the low level of risky bank lending that when asked about the pace of price rises their comment can only realistically be “meh”. Issues of affordability, homelessness, home ownership, etc. are outside their purview. At this stage I anticipate continuing to say I would be happy to be a buyer until some point in 2018. The risk is I become neutral in the second half of next year. Lending to Foreigners Almost all major NZ banks have this past week changed rules regarding lending to people who are not Kiwis or Aussies or do not have permanent residency. There are slight variations so just focussing on our BNZ changes, from now on we will not count the income foreigners earn overseas when calculating their ability to service a mortgage. This is being done because it is extremely difficult to verify the accuracy of information volunteered regarding that foreign income and this raises the risk of incurring losses or lending to someone who cannot really afford the mortgage. So this is an internal and customer risk management-driven change rather than a reaction to worries about the role of foreigners in driving house prices higher in New Zealand. Will there be much impact? At the margin some people will not be able to borrow funds from us lenders in order to buy a property. If they still want to make a purchase they can go to another lender in New Zealand, or pay cash using funds from offshore. Or if they already have assets in New Zealand they might gear them up further. The actual market impact is likely to be small so this will join the list of things which have changed in the past five years making it harder for investors to buy a property but which ultimately don’t much alter market dynamics. Included here are the two year bright line test, need for an IRD number, loan to value rules, removal of easy depreciation claims, removal of ease of using LAQCs to offset losses against other income, higher bank capital requirements for investor financing. Tinkering with little policy changes which attract big headlines is worthless if main players in the regulatory environment don’t even understand the fundamentals causing a market to move, as has been the case in the NZ and especially Auckland housing market since at least 2008. NZ Dollar The NZD has ended this afternoon unchanged from last week against the USD just below 70 cents. But against the Aussie dollar we have jumped to just under 96 cents from 94.5 cents on the back of stronger than expected NZ GDP data this morning (economy ahead 0.7% in the March quarter rather than the expected 0.5%, 2.8% annual growth now). Against the British Pound the NZD has risen to almost 50 pence from 49 last week as more polls have shown voters will almost certainly opt to leave the dysfunctional European Union next week. The likelihood of this happening was one reason behind the US Federal Reserve last night deciding not to raise their funds rate, along with the recent poor employment report. The chances are good that the Fed. will not raise rates again this year. In fact around the world bond yields are rallying to new lows on the back of this building expectation, a flight to safety on expectations of Brexit, and weak growth and inflation numbers coming out of Japan and Europe. The US ten year government bond yield has fallen to only 1.55% from 1.72% last week. This is the lowest yield since late 2012. The low was just below 1.5% that year and before that somewhere before 1970. If the world were looking good this would not be happening – hence money coming down our way. The chances are that the NZD will see US 75 cents before it sees 65 cents, and if you believe dairy prices are rising (they were flat at the auction last night) then you best start thinking of when we get back to 80 cents because relying on rising US interest rates to push the NZD lower has long been a sucker bet. Just for your guide, at US 70 cents the NZD is four cents below the ten year average. But at near 95 Aussie cents we are well above the 84 cent average, at almost 50 pence well above the 45 pence average, at 63 Euro well above the 56 centime average, and at 74 Yen right on the 74 Yen average. If I Were A Borrower What Would I Do? Nothing new. I would fix most of my debt at a two or three year period. Strong NZ growth data mean we will at best see one further rate cut here. But falling foreign yields suggest fixed rates might come down again soon though this is not guaranteed. Could be worth holding off for that to happen if you like a punt.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s New Zealand Economic Overview 9 June 2016 https://eveningreport.nz/2016/06/09/tony-alexanders-new-zealand-economic-overview-9-june-2016/ Thu, 09 Jun 2016 03:10:20 +0000 http://eveningreport.nz/?p=10489 ]]> Economic Analysis by Tony Alexander.

Thursday June 9th 2016

[caption id="attachment_10490" align="alignleft" width="150"]Tony-Alexander-BNZ-1 BNZ economist, Tony Alexander.[/caption] As was expected the Reserve Bank left its cash rate unchanged at 2.25% this morning and retained a warning that a further reduction may be needed. They in fact have one pencilled in which we think will arrive in August, and forecast no rate rise until beyond the end of their forecast horison which is the middle of 2019. This ongoing good environment for borrowers can do nothing other than provide continued support to a housing market replete with more and more people seeking accommodation but restricted by some existing shortages and less than optimal construction growth. House prices will rise further and the chances are now very high that soon the RB will strengthen existing loan to valuation rules – though it pays to note that the RB estimate that their effects in restraining the housing market can only be temporary. Some exporters might be surprised by the NZD’s rise above US 71 cents this week. They shouldn’t be. As we have long pointed out, compared with the rest of the world NZ looks politically stable fiscally and economically robust, our currency has already factored in a one-third fall in commodity prices, post-GFC developments suggest US monetary policy will tighten little and may reverse direction quickly, and our current account deficit is below average. But at current levels the NZD is looking stretched in the short-term so importers might want to discuss hedging with their currency advisors – at the BNZ of course. For the full analysis, continue reading below or Download document (pdf 373kb)
Low Interest Rates For A Long Time This morning the Reserve Bank released their latest Monetary Policy Statement and reviewed the 2.25% level of the official cash rate. As was near universally expected the rate was left at the 2.25% it was taken to in March and exactly the same words were used to describe the RB’s view that further easing might be needed. “Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data” http://www.rbnz.govt.nz/monetarypolicy/monetary-policy-statement/mps-june-2016 Does inflation seem headed for such midground? Not really. The current inflation rate is 0.4%, the exchange rate is about 4% above the long-term average, the World Bank last night cut its global growth forecast to 2.4% from 2.9% for 2016, and recent growth measures have been weak in the US, Japan, China, Europe and the UK. Wages growth still shows no signs of accelerating, Offsetting this oil prices have moved back above US50 a barrel overnight, measures of capacity utilisation have lifted slightly, and inflation expectations seem to have stopped falling. But with foreign inflation measures still generally declining the clear risk is that the Reserve Bank will find that further interest rate stimulus needs to be applied to the NZ economy. This is especially so as they have assumed both that the world economy improves and our currency declines. The chances are that the official cash rate will be cut again in August to 2.0%. For your guide, in their Monetary Policy Statement the Reserve Bank see the 90-day bank bill yield, currently just over 2.3%, still sitting at 2.1% come the middle of 2019. In other words they anticipate no need for higher NZ interest rates for at least the next three years. Housing Nothing new to add this week having written quite a bit on this subject recently. Insufficient construction, low interest rates for decades, strong population growth, ever rising construction standards and costs etc. all add up to high and still higher prices. Watch for a new credit supply control soon from the Reserve Bank as with the one hand they stimulate the housing market through record low interest rates and with the other try to impose restraint while waiting for supply to catch-up over the next decade or so. Note that in this morning’s MPS the RB wrote “House price inflation is likely to persist in the near term.” NZ Dollar Commensurate with our long held view that there is a big list of factors strongly supporting the Kiwi dollar we have this past week seen the NZD trade above US 71 cents. The main cause of the three cent jump from a week ago was the worse than expected employment growth number for the United States. Jobs grew just 38,000 in May rather than the 160,000 which had been commonly estimated. The implication of this outcome is that the next tightening of US monetary has – surprise surprise – been pushed back out yet again. Our warning since last year has been that assumptions of a steady upward path for US interest rates need to be restrained in light of complete rate rise reversals in numerous countries since 2010. These include New Zealand, Australia, Sweden, the Eurozone and so on. The way things are going there may be no further US rate rise this year and if there is then it could be reversed next year. The weak US jobs growth might not be quite so concerning if US firms were strongly investing and therefore presumably raising labour productivity. But investment indicators have been weak recently. This means the global development post-GFC of weak productivity growth (NZ included) shows no signs of changing in the US. The poor jobs report also calls into question the sustainability of recent strength in US consumer spending. Nevertheless, the monthly job results can jump all over the place so this latest outcome, nearly the weakest in six years, does not lead to a conclusion that US growth is slowing rapidly. Not yet anyway. But for ourselves the outcome is that with a reduced chance of further US monetary policy tightening our currency seems set to go higher rather than lower as many others have been forecasting on the basis of a blind extrapolation of the expected NZ-US interest rate differential. It pays to note that with oil prices recovering recently the general tone toward commodities has improved and this traditionally adds some support to the NZD. But in the absence of any strong sign of reduced milk production in the EU it would be unwise to simply assume rising oil prices mean a solidly rising track as yet for NZ dairy prices. The second major factor pushing the NZD higher this week was this morning’s Monetary Policy Statement and official cash rate review by the Reserve Bank. There was no cut in the cash rate, and although this was largely expected it appears some punts were nonetheless taken that a cut would come and covering of those positions has pushed the NZD to a one year high against the greenback near 71 cents. Against the Aussie dollar this week the NZD has changed little with the AUD also rising against a weaker USD and lifted by the RBA decision on Tuesday not to cut their cash rate again – for the time being. In Japan the Prime Minister has officially delayed indefinitely the planned consumption tax rise for next year in an effort to remove the risk of recession reappearing. But with the Three Arrows policy having failed because of the simple demographics of a shrinking old population plus absence of very strong structural reforms (the third arrow), it is hard to imagine the Yen being strong. However there is a big caveat to this view. If the Americans are stupid enough to vote Donald Trump as their President in November (President Obama’s lasting legacy?) then the lift in global geopolitical and economic uncertainty will boost flight-to-safety buying of the Yen. The Euro however faces a test in two weeks with the UK referendum on whether to remain within the failed cooperative structure which used to be called the Common Market then morphed into the European Union/track to political union. Same for the Pound. Event risk is huge so be wary of having FX transactions planned involving those two currencies in the next four weeks. Longer term the Euro looks like suffering from ongoing structural economic, political and social woes. No wonder our net migration numbers are so high. Taking all of these factors plus many more into account we get the point we have been making for a number of years now. New Zealand looks like a bright shining fiscal, economic, social and political light during ongoing days of so much darkness in the rest of the world. This will strongly support the Kiwi dollar. As previously mentioned, exporters should look for occasional bouts of weakness in the NZD to boost hedging. If I Were A Borrower What Would I Do? Were I borrowing currently I would have about 20% or so floating and fix the rest for two or three years. I would fix five years if I thought inflation might be a problem two or three years from now – but I don’t.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s New Zealand Economic Overview May 26 2016 https://eveningreport.nz/2016/05/26/tony-alexanders-new-zealand-economic-overview-may-26-2016/ Thu, 26 May 2016 05:45:00 +0000 http://eveningreport.nz/?p=10350 ]]> Economic Analysis by Tony Alexander. Tony-Alexander-BNZ-1As promised by the Finance Minister there were no big surprises in today’s Budget, the numbers look good with small though growing fiscal surpluses projected, growth averaging near 3%, unemployment falling to 4.6%, and interest rates not rising until 2018/19. The Budget Speech referenced an upcoming National Policy Statement on Urban Development which will direct councils to allow more housing and measure the impact on house prices of their decisions. Were existing efforts to boost housing supply working such a statement would not be necessary, and the factors which have met our expectations of insufficient supply growth are so strong that no statement is likely to change where things go from here. In fact just this week Wellington Council said they have failed to reach any of their housing supply targets for two years and see no chance of meeting their full five year target. The upshot is continuing upward pressure on prices and a steadily rising resolve behind doors at the Reserve Bank to bring a new hammer down on the pace of growth in lending – not just in Auckland perhaps but also elsewhere. Investors should pay heed to the general lack of housing shortages in most parts of the country outside Auckland and Queenstown as they contemplate their regional investment and building plans these next three years.

Click here or continue reading below for the full analysis.

No Game Changers The Finance Minister released the government’s annual Budget this week which for the uninitiated is basically an accounting exercise in which spending is offset against revenue streams to produce projected deficits or surpluses, along with lots of information on debt levels and financing, the outlook and plans for the next ten years, and assessment of risks facing the government accounts along with an updated outlook for the economy from Treasury. The Budget also contains details of new policies, though it has been the practice for perhaps a couple of decades now to announce almost all new spending measures in the weeks leading up to the late-May event. Surprises tend to be few and far between, though last year’s boost to benefit levels was an unexpected development. As a macroeconomist my interest is not in the minutia, important as hundreds of things are to particular groups, but the overall package and whether it suggests a different outlook for the pace of growth in employment, GDP etc., inflation, interest rates, housing, and the robustness of the government’s accounts. In that regard, while the likes of the already announced tax changes for SMEs and money for hi-tech startups are wonderful and at the margin will make running a small business easier in New Zealand, they don’t justify lifting growth expectations unless you are silly enough to deal in growth numbers two out from the decimal point. The same goes for extra funding for apprenticeships, health research, tourism, and so on. All good stuff but no game-changers. Nonetheless, the Innovation New Zealand package of an extra $761mn in operational spending over the next four years is positive, as is the Public Infrastructure Package totalling $697mn. The Health package is the biggest of the four packages getting an extra $2.2bn over four years, with the final package being the Social Investment Package which gets $641mn. Capital spending for the Public Infrastructure Package adds another $1.4bn. The measures announced with give a small positive fiscal impulse to the economy this year then small negatives after that, but with none of the numbers being large enough to alter the positive outlook which we and Treasury have for the economy. They see GDP growth in the coming years of 2.9% for the year to June 2017 then after that 3.2%, 2.8%, and 2.5%. They see no tightening of monetary policy until the 2018/19 year and the unemployment rate trending down to 4.6% come 2020. Fiscal surpluses as percentages of GDP are projected at 0.3% for 2015/16, then 0.3%, 0.9%, 1.7%, and 2.2%. Housing It is popular amongst those who fail to understand the factors pushing Auckland house prices higher and/or have for years incorrectly predicted big declines, to blame speculators for the surge in prices. However grouping all investors into the speculators’ camp gives an incorrect guide to the true make-up of the many people purchasing properties to rent out. The results of a survey by Mortgage Choice in Australia were released this week showing that whereas two years ago 20% of people buying investment properties were first home buyers now the proportion is one-third. These “rentvestors” have become a key driving force behind parts of the Australian housing market and we suspect that the same is happening in New Zealand going by anecdotal reports. It seems reasonable to assume that these rentvestors are not in it for a quick capital gain but a medium-term hold in order to build up a bigger deposit from anticipated price rises and principal repayment and enhance flexibility in their work location early in their career – as in not being tied down to one place through home ownership which can reduce effective functioning of the labour market. Another group of we suspect long-term holders is older people who have built up cash assets which they are looking to invest in order to earn more than simply leaving the money in the bank. These investors have above average deposits so are not much affected by deposit size rules and they are not speculating in order to earn a lump sum which will then go back into a bank to earn very little. They want something which will yield income over a long period with reasonable chance of capital gain. Maybe some will buy an investment property with their offspring. Then there are the people acting on warnings about the need to build wealth for retirement by doing exactly that in the form of housing assets. These are also quite likely long-term investors. Plus there are the people who are pursuing housing investment as a business. It would be great to have data in hand telling us the roles being played by these four groups of investors along with foreign buyers and true buy and flick speculators targeted by the two year bright line test which clearly is having no sustained measurable impact. Without such data the chances that policy can be developed and effectively implemented so that goals around targets like home ownership, social housing provision, and financial system stability can be met are very small – speculative in fact. We need data, not kneejerk analysis and potentially faulty policies. The Solution People are always talking about finding a solution to the Auckland housing crisis – usually without specifying which particular crisis they are talking about. Sometimes affordability, sometimes commuting distance, sometimes social housing and emergency housing, sometimes prices, sometimes rents. Is there a solution? If I walk up to someone attending one of my talks and stab my pen through their hand, what is the solution? Its the same for Auckland. The situation is already at hand with “damage” registered and nothing will radically change things unless truly stringent policies are introduced such as removing all zoning rules. All of them. And a message was provided this week for all those people in other parts of the country who say the government needs to force people to live elsewhere in New Zealand to use their infrastructure and to ease the burden in Auckland. Sorry, according to reports today not even the homeless offered up to $5,000 want to live in your towns. And those Aucklander investors flooding into the regions seeking yield and smaller mortgages should also take note of this development. Your assumptions about regional population growth are probably too optimistic – just as they were last cycle, the cycle before that, the one before that and so on. Auckland is where over one-third of New Zealand’s population want to live. And just like farmers who with open eyes accept the challenges thrown up by their land, weather, animals, markets, pests and diseases, these Aucklanders knowingly accept the challenge of managing dense traffic, high house prices, and high numbers of people per household. For your guide, the Budget contained an extra $100mn to free up Crown land for development, extra assistance for social housing, and a warning to councils. In his Budget Speech the Finance Minister referenced something called the National Policy Statement on Urban Development which is “upcoming”:

“This will direct councils to allow more housing development where necessary and to measure the impact of their decisions on house prices.”

NZ Dollar The NZD has risen close to 93 Aussie cents because the AUD has fallen about 8% against the US dollar after the release of weaker than expected inflation numbers a few weeks ago. Expectations are high that Australia’s 1.75% cash rate will be cut again as the RBA tries to stimulate growth and create extra inflation. The falling AUD has however dragged the NZD lower against the greenback so we now sit near 68 cents compared with near 70 cents five weeks ago. There has also been some movement down in the NZD/USD exchange rate caused by rising expectations that US monetary policy will be tightened again soon, perhaps in July. Against the Euro the NZD sits near 60.0 centimes which is little changed from one, four and eight weeks ago. The risk is that the NZD rises against a Euro depressed by continuing money printing by the ECB and a deteriorating outlook for the French economy if not society as people strike and paralyse the country over the President’s now heavily watered down policy to open up the labour market and provide a route for millions of disaffected youth to find and grow in gainful employment. France’s economic system is one designed to protect those already in work which means change as a response to alterations in consumer demand and competition from offshore is slow to come. Slow growth has become locked in and this means that right at the heart of the EU gaps are opening up between core members just as they have opened up with the less developed economies near the Mediterranean Sea. Each year France looks less and less like Germany and the UK and more and more like Venezuela but without the hyperinflation. Against the Yen the NZD also risks rising from current levels as the economy has barely grown in two years, and government debt is huge and growing as the population ages and shrinks. The Prime Minister this week at the G7 meeting is begging leaders of other G7 countries to show support for yet another wasteful fiscal stimulus package (number 17 since 1990 we believe). Money is being printed with no end-date to the printing programme specified, and further lowering interest rates into negative territory cannot be ruled out. Basically our comments about the NZ dollar’s prospects are the same as they have been since 2009. Most of the rest of the world has major economic problems while our economy is not just doing okay but very strongly underpinned by construction, tourism, migration and even manufacturing, our economy is flexible thus able to respond to the shocks which always come along, and the government accounts are in good order. If I Were A Borrower What Would I Do? Fix 2 – 3 years with maybe 25% floating.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s Weekly Economic Overview 14 April 2016 https://eveningreport.nz/2016/04/14/tony-alexanders-weekly-economic-overview-14-april-2016/ Thu, 14 Apr 2016 06:48:38 +0000 http://eveningreport.nz/?p=9824 ]]> Economic Analysis by Tony Alexander.

Thursday April 14th 2016

[caption id="attachment_3709" align="alignleft" width="150"]Tony Alexander, BNZ economist. Tony Alexander, BNZ economist.[/caption] There is widespread awareness now of the way regional housing markets are rising strongly, and that Auckland has not finished its push higher. With the Reserve Bank expected to cut interest rates later this month and again in June there will clearly be more property demand coming soon from investors – maybe less so first home buyers for whom the problem is not really the interest rate but the property cost and getting a deposit together. For the interests of those contemplating the regions we include a set of graphs published in the Weekly Overview a number of times over the past one and a half decades comparing regional house prices with the NZ average. You can form your own view of whether a region looks like it is due to kick up – but keep in mind projected population growth. Experience of previous cycles tells us that people often over-estimate how many Aucklanders and retiring people will go to the regions.

For the full analysis, continue reading below or click the link to Download the full document (pdf 540kb)

School Holidays Almost Here No great inspiration struck me this week and nothing substantial enough has happened anywhere to greatly alter the NZ or global outlook, so the Overview is on the short side apart from some space filling graphs in the housing section. Enjoy but watch for the Reserve Bank to potentially impose more housing credit controls as they cut interest rates most probably later this month and again toward the middle of June. Housing Housing markets around New Zealand are chugging along, driven to various degrees by Auckland buyers looking for yield and lower mortgages outside of our biggest city, locals jumping onto their local bandwagons now that they see outsiders buying in, low interest rates set to go lower, record net migration inflows, and foreign buyers previously postponing purchases in order to get IRD numbers now having those numbers and back in the market again. This latter effect explains why Auckland saw a lull in sales, prices, and lengthening of days taken to sell a dwelling from October last year. But as noted here four weeks ago that lull seems to have ended in February and March was strong as well. The period of a “paused” Auckland housing market responding to regulatory changes has ended and young buyers who did not take advantage of this window of opportunity to go to auctions and face fewer competing buyers have missed out. Again. In Auckland in March the average sales price adjusted for changes in the mix of properties sold jumped by 4.3% after rising 5.5% in February. That price measure fell in total by 3.3% between September and January. The latest measure represents a rise of 13.3% from a year ago or 12% when comparing the March quarter with March quarter 2015. On average in March it took 31 days to sell a house in Auckland which was 1.4 days faster than average, slightly less strong than February’s 3.7 days faster than average outcome, but the second strongest result since September. In Wellington prices in March were 12.8% ahead of a year ago and for the entire March quarter (a better measure) were up 10% from March quarter last year. Prices are now 19% above early-2009 levels versus a 92% rise for Auckland and 44% rise for Christchurch. Wellington is in the huge catch-up phase written about here last year. Houses sold 8.3 days faster than average compared with slower than average sales days for most months since the end of 2007. In Waikato/Bay of Plenty price changes for the month and quarter on a year ago respectively were 22% and 17.2%, Hawkes Bay 12.7% and 13%, Nelson etc. 15.1% and 10.3%, Central Otago Lakes 26.5% and 17.4%. Elsewhere price changes were positive but not as startling. How long will the surge in the regions last? All we can do is invite you to take your own stab at an answer by comparing where prices sit now with where they have sat versus the NZ average for the past couple of decades. Good luck. But before you get too het up about the likes of Northland and Manawatu/Wanganui, do take a look at the table following the graphs showing projected regional population changes from Statistics NZ. Over-optimism regarding regional population growth is a key cause of investor error.
 
Last housing cycle we saw a lot of people lose money as minimally regulated finance companies raised money and lent it for large developments which failed to produce the returns promised. With interest rates low and headed lower, and an increasing number of people searching for extra yield, one would expect more and more people to be actively searching out the new version of those finance companies so they can get higher promised returns. But such vehicles for gathering little investors’ funds and advancing them on grandiose projects are not there this time around and look unlikely to appear. The Reserve Bank has sharply extended its supervision of such businesses since failing to adequately monitor finance companies, and there are so many requirements which such companies need to meet now that setting up and running something akin to those 2000s enterprises is almost impossible. This means that the rise in dwelling construction this time around will be more spread out than last cycle, and the risk of a correction caused by excess physical supply a lot lot less. This is a positive thing because when the cycle turns there will be harm to fewer uninformed investors chasing risks they have not properly priced. But the absence of investment vehicles for gathering small deposits does not alter the demand from people for property exposure to deliver extra yield. So what will they do? Many will seek to do their own investing, perhaps by purchasing a property with subdivision potential. That is one reason why investor demand is so strong in Auckland and property prices so high. People are investing in land able to be developed as intensification intensifies. People are not just buying expecting the price of what they have to go up. They are also buying expecting the price of what can be done to their property to go up in an environment where it is very unlikely that widespread moves will be made to reduce intensification. Hence the strong concern of some property owners over moves by other owners in their leafy suburbs to prevent the Auckland Unitary Plan allowing intensification. These are two powerful groups, (nimbies, potential developers), but only one group is growing in size and gaining more influence over time – the latter. Intensification will come. It’s inevitable, which is why people will keep buying for future potential development driven by population growth pressures. The Kiwi dollar has ended today unchanged from last week at 68.4 cents with an earlier rise to 69.5 cents assisted by good economic data in China (exports up 11.5%) and higher oil prices making investors slightly less risk averse. But our currency has pulled back today to sit unchanged from where it was last week. Global financial and economic conditions remain vulnerable to changing attitudes toward a very wide range of significant factors. These include how much the Chinese economy is slowing down (not that the data can be at all believed), whether the UK votes on June 23 to leave the EU (probably they will) and what the impact will be, US monetary policy (especially with the markets only pricing a 50% chance of one rate rise this year while the Fed talk in terms of two or three), ongoing weakness in emerging economies like Russia and Brazil, and commodity prices. These uncertainties stand in contrast to the support for growth in NZ coming from booming non-dairy exports, construction and migration which will tend to keep the NZD firm even as the Reserve Bank cuts rates probably two more times. 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? Nothing much new really. Keep 20% – 25% floating and fix the rest probably for two years. If I Were An Investor … I’d see a BNZ Private Banker The text at this link explains why I do not include a section discussing what I would do if I were an investor. http://tonyalexander.co.nz/regular-publications/bnz-weekly-overview/if-i-were-an-investor/ For Noting Nada.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s Weekly Economic Overview 7 April 2016 https://eveningreport.nz/2016/04/07/tony-alexanders-weekly-economic-overview-7-april-2016/ Thu, 07 Apr 2016 04:32:18 +0000 http://eveningreport.nz/?p=9777 ]]> New Zealand trade. New Zealand trade.[/caption] New Zealand Economic Analysis by Tony Alexander.
[caption id="attachment_3709" align="alignleft" width="150"]Tony Alexander, BNZ economist. Tony Alexander, BNZ economist.[/caption] Although some people are optimistic that international dairy prices will rise soon, plenty of forecasters offshore predict still rising supply bringing price restraint, including the US Department of Agriculture which sees no improvement before 2019. Forecasts of rising demand over the long-term remain as robust as ever – but forecasts of supply changing are also as lacking as ever and if you don’t forecast both you can’t reasonably forecast prices. The weak dairying outlook, low inflation, and continuing wobbles offshore mean further monetary policy easing is likely in NZ. But with our economy looking robust in spite of dairy sector weakness the NZ dollar is likely to remain strong. We look this week at how the NZD sits currently compared with 20 year averages.

For the full analysis, keep reading below or Download document (pdf 446kb)

Dairying – When Too Pessimistic? One of the comments I have made in talks for many years and here in the Weekly Overview every now and then is that while we can all take a usually well reasoned and reasonable view on where demand for a commodity will go, we are all hopeless at forecasting supply. That means we cannot forecast commodity prices. In the dairying context this manifests itself currently as many people saying that in spite of the current low level of prices the long term outlook for demand for dairy products is good. In the NZ Herald yesterday for instance…”Demand from China is expected to increase by 30% over the next ten years, and some analysts have picked a 40% to 45% increase in world demand over the same period.” We are invited to believe that things will soon get a lot better. But where are the supply forecasts? And where are the cost of production comparisons between alternative suppliers? Demand probably will rise, but that gives little insight into price let alone profit forecasts unless you also forecast both supply growth and cost changes, both of which have surprised Kiwi farmers on the upper side the past two years. This week an emailer referred me to some material just put out by the European Commission. They estimate that global milk production this year will rise by 3.5 million tonnes and note that in February milk production in Ireland was up 37% from a year earlier. Last week the Chief Executive of Westland Milk came back from a trip offshore and made comments along the lines that European milk production will be higher and its international promotion will be more aggressive than anticipated. And “We were expecting European processors and farmers to be already feeling some economic pain that might cause them to reduce production, but this is not the situation for most.” https://www.agriland.ie/farming-news/new-zealand-co-op-expects-two-seasons-low-milk-prices/ On this basis they anticipate two more seasons of weak prices after the current season – meaning four years of weak returns. What will happen if milk solid payouts stay below average breakeven levels for two more seasons as European production takes some time to react to lower prices, and currently rising stockpiles of dairy output eventually get run down?

 Dairy farmers will shift away from bringing in supplementary feed and revert to pasture grazing. Already well underway.

 Cow numbers will fall bringing potentially much more price weakness for cows than we have seen so far where prices have gone from around $2,200 a head to $1,700. In previous, lesser, downturns some herds have sold for $400 a head. This is the way in which sharemilkers see their net asset position most badly affected.

 Demand for water irrigation will fall, calling into question the viability of some proposed schemes.

 Our rivers will thankfully get cleaner as cow numbers and fertilizer application decline.

 Incomes for companies servicing the dairying sector will fall sharply, bringing weakness initially in dairying regions but spreading to the city-based operations of these servicing companies.

 Land prices will fall, perhaps by up 40% though variation will be huge. Given that in contrast to the United States where 80% of dairy returns accrue as dividends, 80% of NZ dairy farm returns accrue as capital gains, this will cause some substantial losses for many investors. Price falls for regions will depend substantially upon what the next most valuable use is for that land.

For your guide, the US Department of Agriculture recently projected that dairy prices won’t start rising until 2019. http://www.ers.usda.gov/publications/oce-usda-agricultural-projections/oce-2016-1.aspx Thankfully average prices rose 2.1% at the Global Dairy Trade auction two nights ago. But the volumes being placed at those auctions have been deliberately reduced over the past year so they may not provide as good a guide to how things are faring on an individual contract basis behind the scenes as was the case previously. Nonetheless a rise is a rise so that is good. And it pays to remember one of the key fundamentals for any asset able to be quickly repriced – like currencies, shares etc. Just as prices can overshoot on the topside they can also overshoot on the downside. At some point pessimism about NZ dairying will be well overblown. The trouble is that we never really know when that point is reached until we are well past it. Given the paucity of dairy farm ownership changes so far, we are probably not there yet. Saving For Retirement – or The Misfortune of Not Being Run Over By a Bus For quarter of a century now governments in New Zealand have officially been encouraging us householders to save. Sometimes national interest of a reduced foreign debt has been cited, sometimes the vulnerability of the banking sector to the changing whims of offshore savers regarding whether they want to keep lending money to NZ banks. Mainly though it has been on the basis of scare stories regarding national superannuation being unsustainable and the inevitability of it being cut and the retirement age raised. It is not inevitable that it be cut given that voters shy away from parties promising to make reductions, and even though the logic of rising life expectancy says the age of eligibility should go up, voters probably won’t go for it. Saving is good from a precautionary point of view in terms of being prepared for something going wrong, and if one assumes that super will still be paid at the current rate from 65 down the track – an assumption which seems reasonable given the politics involved, not the fiscal reality – then saving is a good idea for covering health costs. Two-thirds of the fiscal impact of an aging population comes from higher health costs and as anyone who has been sick or injured knows it is not always the case that the generally well respected NZ public health system is able to provide the services required in a timely manner. So saving for health costs in retirement is probably a good idea. I mention this as partial counter to the argument in some quarters that there is no point in saving for retirement because when you are old you will be sick and unable to enjoy life anyway. By this argument better enjoyment from a whole of life point of view can be gained by spending the money when young and able to fully benefit in a recreation sense rather than having it sitting doing nothing when old – or worse – being taken by a government as offset to unaffordable superannuation costs. This logic is sound. But spending up large on the assumption of ill health and good public health provision leaves a person highly vulnerable to the very unfortunate situation that they retire and remain healthy for many years but with not much money to do anything! What a disaster. Its like the people who say there is little point spending a lot of money on education etc. because you might be run over by a bus tomorrow. They run the risk of the disaster of not being run over. As long as the mortgage is paid off by retirement things probably won’t be bad except for the adjustment from spending up large from one’s wage or salary income to living off super at a rate of $296 a week per person if living with someone else, $385 a week living alone. Housing Here are our main housing themes

 Auckland’s market has ended a pause and is now going up again underpinned by a worsening shortage of property.

 Regional markets are well underpinned by investor demand and that is propelling more construction which in some smaller lifestyle-like centres will eventually lead to excess supply.

 Falling interest rates will encourage more investors to seek property assets while having little impact on already outbid young buyers. A new wave of out bidders is coming.

 Construction costs will keep rising with the latest extra costs coming from better health and safety regulations.

 The Reserve Bank will soon again warn about housing and get closer to using non-interest rate controls in the regions – e.g. a 30% investor minimum deposit requirement.

This week we learnt that in Auckland Barfoot and Thompson real estate agency sold 1,341 dwellings which was a 16% fall from a year earlier but firm 15% seasonally adjusted rebound from February. However this monthly rebound followed a 20% fall in February and if we look at the entire March quarter we see sales were down 11% on a year ago and flat seasonally adjusted. Thus we might lean toward saying that a period of weakening sales since the start of October could have ended. The average sales price jumped to $867,000 in March from $822,000 in February but this measure always jumps a large amount at this time of year as the nature of stock being sold shifts a tad toward houses from apartments. Compared with a year ago in the March quarter average sales prices were ahead by 9.6%, but down around 3% from the December quarter. It is however normal for this three month price change to be quite weak compared with earlier months so we would not advise extrapolating out the 3% fall to an annualised decline of 12%. Lets assume for the moment that prices have flattened. One cannot say either that they are trending down or that retracement since October has definitely ended. Stock remains in short supply, which generally means prices risk rising further. The number of new listings received in March was 6.2% fewer than a year earlier and at the end of the month the stock of listings was down 7.6% from a year ago. NZ Dollar If the NZD were going to drop lower on the back of dairy prices falling away it not only would have done it by now it probably already has done so given that the USD rate near 68 cents is 20 cents lower than the rate almost two years ago. First point. Second point, the commodity price link exists on the basis that reduced export receipts mean reduced demand for the NZD (to be converted from other currencies). But the NZ current account deficit is sitting at only 3.1% of GDP which is below the average for the past two decades of 4.1% of GDP. On this basis, if anything, the NZD should be above average (if you believe trade flows are the main currency determinant, which they are not). So what are the 20 year averages and where do we sit now? The NZD is above average, by about 4.5% on a trade weighted basis. That is not much considering
  • the below average current account, and considering -interest rates still above levels offshore
  • the good state of our economy compared with economies offshore,
  • the stable political situation in NZ compared with the crumbling European project, approaching potential Brexit in UK, frightening presidential contest in the United States, potential early election in Australia, and failing key economic policy for the Japanese Prime Minister.
Frankly, the NZD looks undervalued. Hence a repeat of our comment made here for many months now. Exporters might be advised to boost hedging on the occasional bouts of weakness in the NZD because compared with the rest of the world we look really, really good. Who wouldn’t want some of that to rub off on the rest of the world by appointing Helen Clark as UN head? 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? Nothing much new to report here. The Reserve Bank is expected to cut the official cash rate again, taking it to 2% either on April 28 or more probably June 9. If I were borrowing at the moment I would have around 20% floating and the rest probably fixed for 2 years at 4.39%. If I Were An Investor …I’d see a BNZ Private Banker The text at this link explains why I do not include a section discussing what I would do if I were an investor. http://tonyalexander.co.nz/regular-publications/bnz-weekly-overview/if-i-were-an-investor/ For Noting The NZIER this week released their long running Quarterly Survey of Business Opinion. It dates quickly but when released gives us quite a good up to date feel for what is happening in the economy. What this release tells us is unsurprisingly that businesses have become more cautious about how strong the economy will be in the near future. Only a net 2% expect economic conditions to improve, down from a net 15% in the previous three months but above the long term average of a net 4% pessimistic. Only a net 6% expect their domestic activity levels to improve which is below the 10% average, down from 20% the previous quarter, and the weakest result since early-2011. Nonetheless, a net 9% plan hiring more staff, down from 14% the previous quarter but above the 2% long term average. And why not given that a net 33% of businesses say they are having trouble finding skilled staff and a net 11% say they are having difficulty getting unskilled people. A net 11% of businesses plan boosting capital spending, up from 10% in the December quarter and above the 2% average. So we can say that businesses are feeling downbeat, but they nonetheless still plan to hire people and invest. That is good for jobs growth and economic growth overall.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s Weekly Economic Overview March 23 2016 https://eveningreport.nz/2016/03/23/tony-alexanders-weekly-economic-overview-march-23-2016/ Wed, 23 Mar 2016 04:58:19 +0000 http://eveningreport.nz/?p=9671 ]]> Economic Analysis by Tony Alexander.
[caption id="attachment_3709" align="alignleft" width="150"]Tony Alexander, BNZ economist. Tony Alexander, BNZ economist.[/caption]

Welcome to this week’s Overview sent one day early because of Easter.

This week I take a look at the migration numbers in the context of some people calling for restrictions on the number of people coming here. When we look at the 66,000 jump in net annual inflows in the past three years we find 28,000 of the rise is fewer people leaving, 9,000 is Kiwis and Aussies coming in, 14,000 is more fee paying/goods buying foreign students, leaving a true foreigner migration rise from early-2013 of only 15,000 which is almost entirely people on work visas – probably helping rebuild Christchurch, working on dairy farms, and staffing our health system. Scope to stem the record net migration inflow by slamming immigration is limited. Though there is one answer at the end of my article. I also look run through nine key points regarding prospects for Auckland’s housing market discussed at a large function in Auckland last night. Happy Easter

To read the full analysis, continue reading below or click on this link: Download document pdf 356kb

Migration Nation There was a lot of commentary this week following release of the monthly International Travel and Migration data by Statistics NZ. The data show that in the year to February there was a net migration gain of 67,400 people or 1.4% of the population compared with a 1,100 gain three years ago and 20 year average of 10,000. The impression given was that this surge in the net migration gain is due to lots more foreigners coming into the country and that they are taking our jobs and pushing up house prices. Firstly, there are more people happy about house prices rising than there are unhappy. Second, lets have a look at what has caused the 66,000 turnaround in the net flow since early-2013. The gross inflow back then was 86,000 now it is 124,000. Thus 38,000 or 58% of the change is due to more people coming in. The other 42% or 28,000 is fewer people leaving New Zealand. Of the extra 38,000 people coming in 9,000 are Kiwis and Aussies exercising their legal right to hop between our two countries. Another 14,000 are extra students coming to study here and contribute to the $3bn+ in exports we gain annually from the export education sector. That leaves a true foreigner migration increase from levels of three years ago of just 15,000. Of that 13,000 extra people have come in on work visas to undertake tasks such as rebuilding Christchurch and to supply skills which we are lacking sufficient depth of in New Zealand. Their presence has occurred over a time when the unemployment rate has fallen from 6.3% to 5.3% and 174,000 net extra jobs have been created. If the government responded to calls for the net inflow to be slashed, perhaps back to the long-term average of 10,000, then in the past year a net flow of 56,000 people would have had to be stopped. The government can do nothing about the people choosing to leave, some 57,000 this past year, so they would have to stop 56,000 of the 124,000 people coming in. Since 36,000 of these are Kiwis and Aussies that means taking 56,000 out of the 88,000 foreigners. So who do you tell to bugger off from this list of visa categories?

14,000 Residence

28,000 Students

39,000 Work

6,000 Visitors

1,000 Other

Refuse the students and you reduce export earnings. Refuse the workers and you deny businesses the ability to grow, function, and perhaps remain in New Zealand. Deny the visitors and again you hit export earnings. Deny people coming as residents, family linkages, and you renege on rules which were in place when earlier migrants were accepted saying they could bring family members with them such as a spouse and one’s children. In a nutshell, the surge in net migration inflows from three years ago to 67,000 from 1,100 has been driven by 28,000 fewer people leaving, an extra 9,000 Kiwis and Aussies leaving a weakened Aussie economy, and 14,000 higher student numbers. Only 15,000 of the 66,000 three year net inflow surge is true foreigners coming to live here. That is hardly an unsustainable boom in the context of a gross annual flow of people in and out of 181,000 (57,000 out plus 124,000 in). What should the government do if society truly decided the net flow is excessive and causing angst? Pay people to leave. Maybe people without the skills we are short of. Maybe shout them some funding to get tattoos so they can feel right at home amongst Kiwis on the Gold Coast. Assisted passage westward. Housing I gave a talk on the Auckland property market to some 700 people at Ellerslie Event Centre last night and here are the nine key points which I spoke to in terms of whether they represented a threat to the strength in Auckland’s market. The answer for all was no. Hence, as written since 2009, Auckland prices rise. NZ economic growth. Is the growth outlook bad meaning the outlook for jobs and incomes is bad meaning people will find themselves unwilling and in more and more cases unable to buy a house? No. While dairying is weak there is a lot of strength in tourism, export education, wine, pipfruit, kiwifruit, honey, manufacturing even, and construction. Auckland growth Has the surge been a flash in the pan and will we go back to the old world of Auckland being just a bigger version of Wanganui? No. Auckland is New Zealand’s agglomeration delivering growth from the fast interaction of talented young people from diversified backgrounds. Auckland was 21% of NZ’s population in 1961 and now it is over 34% heading to 40%. Migration Is the migration boom about to bust? No. Migration busts when we head across the ditch to make money during an Australian minerals boom and our economy is in or close to recession. But our economy is not forecast to enter recession soon and Australia’s mining boom has been and gone and won’t come back for a generation. Net migration is likely to remain strong for a number of years and 60% of the net flow goes to Auckland. Construction Is Auckland house supply about to boom? No. There is a shortage of builders, shortage of developable land, shortage of land not simply being landbanked, development costs to finance infrastructure can be huge. Supply will rise but the shortage is still getting worse. Interest rates Are they about to rise strongly? No. The RBNZ is still easing monetary policy and the bigger global problem is low inflation rather than any inflation threat. Interest rates look like staying low for a great number of years/decades. Regional investing Are investors flocking to the regions for yield and low mortgages going to keep doing this at the expense of investing in Auckland for the next few years? No. Investors, having soaked up cheap stock which has sat on the market a long time in the regions will soon start to ask themselves whether population growth will justify growth in supply they see in some locations. In certain locations like Hamilton and Wellington prices are likely to rise with logical economic and population growth support for a number of years. But in many locations elsewhere population growth is likely to be less than some people are thinking and investors questioning growth assumptions will eventually wonder whether they can liquidate their asset quickly should times and rentability again get tough in the less popular places. Aging population Are baby boomers going to sell their housing investments soon to fund their retirements? No. They need yield over a greater number of years (rising life expectancy) than people were thinking just a few years ago. The boomers will hold their housing assets for the income they yield. Chinese buyers Have they disappeared for good? No. They are returning in force going by the anecdotes over the past four weeks with more to come when eventually the Chinese implement their Qualified Domestic Individual Investor 2 regime in six large cities. There is no timing on when this will happen and it probably won’t until the capital outflow from China seen this past year eases off. Backlog Have potential buyers given up all hope? No There is no shortage of people bemoaning their decision to hold off buying since 2007. They want to buy and eventually will raise the deposit to do so. There are other factors but these main ones sum up the situation. Pressure on Auckland prices is upward though it is not only doubtful that we will see prices rise at the same average speed as in recent years, we had better not else the Reserve Bank will impose stronger lending controls. Should the regions produce widespread rises near 20% per annum then the 30% minimum deposit requirement for purchase of investment properties in Auckland will be applied to the rest of the country. NZ Dollar The only reasonable change in the NZ dollar between last Thursday and this afternoon has been some extra weakness against the Aussie dollar. We now sit at a six month low near 88.5 cents courtesy of the Aussie dollar attracting some more buyers on the back of hopes of higher infrastructure spending in China and therefore higher demand for coal and iron ore. In addition the Aussie economy seems to be doing okay and for now the threat of an early election (but only by a few months) is not having much impact. If I Were A Borrower What Would I Do? Slap myself to be sure I was awake. Having paid 18.5% for my first mortgage in 1987 the current level of rates is amazing. Of course what has happened since then is that the benefit to borrowers of low borrowing costs has been offset by having to borrow a lot more because prices are a lot higher. Prices would not have skyrocketed if interest rates had not fallen so far. The lower borrowing costs have been factored into house prices to different degrees around the country. So when young people moan about how we older generations paid so little for our houses, remember that we paid interest rates which you can’t relate to – though which are still lower than what you probably pay on your credit card should you take the time to think about what that quick source of credit is costing you. First move in building a house deposit? Get rid of your credit cards, then your coffees, then nights out drinking, then annual trips overseas, fags of course, and your growing number of television service subscriptions. Just as you may have invested in your career by sacrificing wages to spend some years studying at university, now you need to invest in your house purchase (if that is your goal) by sacrificing consumption. Then when you make your purchase in a suburb more distant from your workplace than you wanted (like most first home buyers through history) you switch back to investing in your career through longer commute times with the aim of getting up your relevant ladder and eventually being able to shift closer to your workplace. Or you can bypass this investment oriented life cycle development process by living in a small town – and being vulnerable to the local big employer closing down. What sounds optimal? Living in a small town with occasional trips to a big city whilst pursuing a net-based career. Were I borrowing at the moment I would look to fix most of my mortgage in the 2 – 3 year area. Investors should always seek slightly longer timeframes as an extra hedge against interest rate risk. If I Were An Investor … I’d see a BNZ Private Banker The text at this link explains why I do not include a section discussing what I would do if I were an investor. http://tonyalexander.co.nz/regular-publications/bnz-weekly-overview/if-i-were-an-investor/ For Noting
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s Weekly Economic Overview March 17 2016 https://eveningreport.nz/2016/03/18/tony-alexanders-weekly-economic-overview-march-17-2016/ Thu, 17 Mar 2016 23:32:28 +0000 http://eveningreport.nz/?p=9597 ]]> Economic Analysis by Tony Alexander.
[caption id="attachment_3709" align="alignleft" width="150"]Tony Alexander, BNZ economist. Tony Alexander, BNZ economist.[/caption] In this week’s Overview I start by taking a look at reasons why not all banks have passed on all the 0.25% cut in the Reserve Bank’s official cash rate. It comes down to changes in the OCR not being the best measure of changes in overall bank funding costs since the global financial crisis – something well known by the Reserve Bank and a message delivered by all of us since 2008. If the Reserve Bank wants all floating rates to drop at least 0.25% given that the credit spread for us borrowing funds offshore has increased sharply recently, all they have to do is cut the cash rate again. Simple. I also take a three page look at the dairy sector with a graph on page 2 which visually explains why the sector went ballistic post-GFC and which allows you to generate your own “assumption” about what the payout for the next five years will average if we strip out the boom period and look at the underlying price trend from 1990 to 2007. You’ll need a ruler. Instructions at the bottom of page 4 for those who have never extrapolated a trend before. I also take a quick updated look at the Auckland housing market noting the strength seen in February’s numbers, rumours of Chinese buyers returning, ever-increasing migration, and how dwelling consent numbers are running at about half the level needed to start reducing the shortage. The price implications are obvious – especially with the recent (small) cuts in mortgage rates with it seems more to come. Probably worth a few minutes to have a read this week.

For the full analysis, continue reading below or Download document pdf 367kb.

Interest Rates and Dairying You will have noticed that not all banks have passed on last week’s 0.25% cut in the official cash rate and of those that have not all have passed it on completely. Why is this? There are two reasons. The first is that banks on average in New Zealand get about 25% – 30% of the money they lend and have already lent out to Kiwi businesses and households from foreign savers. This is because we Kiwis prefer to spend now rather than later, we save little, and as a result we live off the willingness of people overseas to continue to fund our overspending. That willingness has declined recently amidst a wave of investor withdrawal from holding bank assets associated with worries about European bank exposure to the retrenching energy sector. We have been caught in the backwash of this wave of concern and as the 25%+ portion of money we have lent out comes up for renewal it is costing us near a 2% margin above the equivalent NZ rate as opposed to a 1% margin a year or so ago. During the depths of the GFC this credit spread as we call it was about 3% and before the GFC it was only 0.2%. Consider that change from 0.2% credit spread pre-GFC to 1% – 2% after and you will see why the old relationship between things like the official cash rate, bank bill yields, swap rates, and eventual retail lending rates has changed substantially since 2008. Because our funding costs have been rising there have recently been increases in bank retail lending rates facing householders and businesses in Australia and New Zealand without an increase in the official cash rates. In fact the Reserve Bank specifically referred to the rising credit spreads as one of the reasons they surprised 80% of the market and cut their cash rate last week to 2.25%. They were seeking to offset the impact of rate rises already underway. Not all banks have the same proportion of their funding derived from offshore. Some small banks with small lending books but large local depositor bases don’t fund offshore at all. Thus for them funding costs have not risen as much as for those that do. They are in a position to cut their floating rates 0.25% with minimal margin impact. The other reason for banks not all passing on all the 0.25% cash rate decrease is simple competition. Mortgages are fairly vanilla products but competition comes in more than the form of price. Distribution channels are important and some banks will be investing in such areas rather than trying to win more business from their same structure by just cutting rates. What about the calls in some quarters for banks to be forced to pass on the rate cuts because we are not doing what some interpret as the Reserve Bank’s wishes with a threat of violence to achieve that aim? No need for such dictatorial practices loved by former Prime Minister Rob Muldoon or Jake the mus. If the RBNZ truly wants floating interest rates to fall 0.25% and that is not happening then they can simply cut the cash rate again. Prior to the 2007 crash we saw this the other way around. The Reserve Bank were trying to slow growth in the economy and reduce inflation by raising the cash rate. But fixed rates remained low so the expected impact on inflation of raising floating mortgage rates was not working. Therefore they did the only thing they could do and raised the cash rate even more. The rate eventually hit 8.25% in 2007 and helped push the NZ economy into recession before we took a hit from the GFC which doubled the length of that recession. Dairying On another issue, media are scouring the countryside seeking dairy farmers upset at their banks during this time of stress. Memories run deep of the farming sector rout in the 1980s when farmers were hit by the combined effects of a high exchange rate, high interest rates, and removal of subsidies which had encouraged over-investment and over-production. But the memories of those times and other periods run deep amongst bankers as well and since then practices related to handling businesses in trouble across all sectors, not just farming, have vastly changed. The monitoring by banks of client accounts and financial positions is far deeper and more frequent than ever before as most borrowers and accountants could attest, with one aim being to allow the early identification of problems and to work with the borrower to develop plans for handling issues as soon as possible. There is no desire simply to let the rot set in then force a sale of the business somewhere down the track. Will there be forced ownership changes of dairy farms? Yes there will and there even was when the payout was $8.40. But it is often not the financier doing any forcing but rather mates, accountants, farm advisors, equity partners and family members reaching the unfortunate conclusion that the extent to which outflows exceed inflows cannot be offset through attracting new capital. Same as in every other sector. In fact the even more unfortunate realisation eventually arrives that the operation’s growth in recent years should probably have been funded with capital rather than bank debt and the decision to use debt rather than get others to share the profits was not optimal. This scenario of decline through choosing to use debt rather than extra capital or choosing to self-fund growth at a slower pace is the same as in every other industry such as house building, forestry contracting, computer servicing, electronics retailing, women’s clothing retailing and so on. The dairy sector has been seen by many here and overseas to be a highly profitable one with huge growth potential based around rising demand from Asian countries. No-one probably ever seriously tried to convince anyone that their crystal ball made them certain about what prices would be in coming years, and some of us well over a decade ago proved we cannot forecast the payout. But now we have proof not a single person can predict dairy prices – and the same goes for oil, coal, iron ore and so on. To get a feel for why the dairy sector boomed recently consider the impact on people’s willingness to gear up and expand based upon what happened with prices. In the graph below we show the five year average Fonterra payout from 1990. Note the steady rise over time which accelerated after the global financial crisis assisted by rising demand from China. The latest projected payout of $3.90 is just two-thirds exactly of the five year average. Assumptions always have to be made about what revenue from a business will be thus payouts have to be assumed and as it turns out those assumptions were too high. Why? Only partly because demand has surprised on the weak side from China since just under a year ago. Mainly it is because of the factor we have highlighted increasingly in recent years. All of us can take a reasoned and probably reasonable view on where the demand for a commodity will go. But we seem all equally appalling at picking what will happen with supply. We have a tendency to assume few other people have seen the demand growth fundamentals we have. And when industry participants start to realise that their supply growth assumptions are proving too low, that is when a rapid price change can occur and that is what has mainly happened in the oil and dairying sector. Three years ago most of us simply under-estimated by how much production would rise in the likes of the European Union and United States. Now the altered supply assumptions have been factored in and price expectations have been slashed. This is hitting our previously rapidly expanding dairy sector hard for a number of reasons. First, the pace of expansion has naturally meant higher dairy farm expansion and set-up costs than would be the case if recent production system growth had been spread over a longer period of time. Debt levels have grown rapidly to fund this accelerated burst of growth. That is what debt does – it allows an acceleration in growth. But it comes at a cost of heightened exposure to shocks. Second, related to this, farmers have been reluctant to fund their growth with capital even though all operators would know someone who in the past had to sell their farm to another farmer because they could not service their debt. Kiwi businesspeople suffer from an unwillingness to use outside capital to fund their growth because it leads to some loss of control over all decisions and sharing of the gains. There has been a preference in farming for rapid growth to be funded by debt rather than equity. Third, any expanding agricultural sector naturally moves into less productive land so marginal production costs tend to be higher than for existing operators. Fourth, there appears to be a problem for the dairy industry understanding the difference between marginal cost and average cost and this has led to the adoption of production-boosting supplementary feedout systems which either reduce profits or fail to boost them for 90% of operators according to a study released last year. Every extra pint of milk produced these past few years has gone into the production of low value milk powder sold in big bags to bulk buyers. No extra milk has been needed to produce more value-added products. This is a key failing of the cooperative system. Fifth, dairy farmers want maximum payout and do not support retention of capital by their cooperative to move rapidly up the value-added chain to get to where the best dairy sector returns lie – off the farm. In fact milk suppliers have made it clear they also won’t accept moving up the chain if funded by outside capital. Their growth focus is almost solely physically on the farm which surrounds them and that focus remains today the same as it has always been – maximising production. This is like a factory contracting out consultants to sell their toasters but reinvesting all earnings in producing more and more of the same toasters from more and more factories rather than investing in high priced heavily branded toasters which give nutritional advice, display updates on bread shape and colour as toasting occurs, and can untoast bread should one leave it in too long. Land prices are falling as a result of the dairy downturn and they will keep falling for the coming year, but getting data on the extent of changes in farmland prices is notoriously difficult as no two pieces of ground are the same. But prices start from high levels and as we have highlighted for a few years now, the world is awash with money looking for a home. That money is increasingly willing to accept low yields, and that money is increasingly looking further afield and in the case of many Asian investors is seeking exposure to the agribusiness sector to benefit from rising food consumption sophistication in Asia. Thus falls in land prices are likely to be limited this time around as there are many willing buyers and that will help mitigate the pace of farm ownership changes. In fact, while all the media attention is on farmers who have overexpanded in recent years and raised their production costs, there are plenty of old hands who have taken on board the message that debt is dangerous and constrained their growth. Some of them, now sitting on good cash reserves, will be willing purchasers of some of the farms which will come on the market. But only if the land is good. The properties which have been developed on marginal land in recent years may find very few buyers and they will suffer the greatest price declines as they revert to running sheep and beef or manuka for honey production. Golden gold, as opposed to white gold or the original black gold. Does the dairy downturn need addressing with government legislation preventing banks from foreclosing in extremis? No, and were that to happen the long-term impact on the farming sector would be quite radical. Deprived of the backstop of protecting bank capital through having the ability to force a change in farm ownership to bring in extra capital banks would not be able to lend as much into the sector as has been the case and where lending would occur the cost would be higher to reflect the loss of that protective backstop. The farming sector would end up less indebted which would probably be a good thing, but immediate growth would cease as credit would have to be actively reduced across all dairy and non-dairy sectors to reflect the change in riskiness of farm lending. Does the weakness in dairying justify a debt-funded infrastructure spending boom to boost economic growth as some commentators have suggested? No. The construction sector is already booming and does not have capacity to handle a swathe of new Think Big projects, and most non-dairy exporters are doing well – especially tourism operators and education providers. Plus any spending surge means more debt and as so many countries have shown us there are high dangers for governments in running high debt levels – absence of ability to insulate an economy when true big shocks come along, and diversion of revenue toward debt servicing rather than other projects. Plus, as we have been at pains to point out for so long now, while dairying may be weak other sectors are going gangbusters and it is factually incorrect to claim as some commentators are that everyone is suffering in New Zealand. Even as it cut the cash rate last week the Reserve Bank predicted growth in each of the coming two years of over 3%. That is hardly an environment requiring a new splurge in government debt and probably dubious rushed construction projects. Will there be dairy sector pain for many in the coming two or three years? Yes there will and that includes the non-dairying farms which have traditionally produced feed for dairy farms and are now switching to running their own stock, and companies which service and supply the sector, whether or not their payment terms are being stretched out to a three months. But when can we expect prices to improve? Given that no-one has displayed an ability to accurately forecast prices for dairy products, oil, coal, and interest rates even there is no basis for believing any forecast of prices rising back to average levels in any given time period. Just look at Tuesday night’s Global Dairy Trade auction which produced a 2.9% fall in the average indicator whereas all expectations ahead of the auction had been for a small price rise. Forget forecasting the next five years. We can’t forecast ahead 12 hours. But if you really do need a forecast then I suggest this exercise. You will need to do it yourself as I have not made a payout forecast since getting one wrong many years ago and won’t restart now. Go to the graph on page 2 showing the five year average payout from 1990. Pick up a ruler and draw a trend line through the tops of the bars running from 1990 to 2007. See where that ruler hits the scale at the far right. That is what the trend suggests is a reasonable expectation for the current average payout, and if you extend the time scale a tad to the right you can generate an estimate of the average payout for the coming five years ending in 2021. (Hint, draw a vertical line down from where the text ends on the far right in the line just above the graph to get a 2021 vertical end point.) Looks only just above the current much-cited average break-even payout doesn’t it? Housing Lets get right to the basics of the Auckland housing market.

1. There are signs that Chinese buyers are returning. If true then extra demand lies ahead, one day to be added to by buyers from India.

2. Interest rates have just been cut, further cuts lie ahead, the pool of savers needing to boost yield through assets other than bank deposits has grown again and will grow further.

3. There remains a big stack of young people wanting to buy property, some catching up on buying they have delayed since 2007.

4. Ney migration inflows are not only high and expected to stay high, they are still growing and 60% of the net flow goes to Auckland.

5. The number of dwelling consents being issued in Auckland is running at about half the number needed just to stabilise the shortage at current levels.

The Auckland housing market has been in pause mode since about October last year. We can see this in the Days to Sell measure which went from 3.5 days faster than average in September, 4.2 days in August and 5.1 days in July to only 0.9 days in October, 0.4 days slower than average in November, 0.4 days faster in December and only 0.1 days faster than average in January. I’ll tell you February’s outcome further along. The stratified median dwelling sales price rose 2.6% in August and 3.3% in September, then fell 4% in October, was flat in November, then fell 2.3% in December and again in January. I will tell you February’s result below. The Auckland market has paused since October and that was when the requirement for all buyers to have an IRD number came into play along with the two year bright line test for capital gains tax. And from November 1 all investors needed at least a 30% deposit. But now look at the February numbers. The Days to Sell measure in Auckland for February was 3.7 days faster than average. Back at September’s level. The median stratified dwelling sales price jumped 5.5%. The upshot? There are growing signs that after pausing for four months the Auckland market is sparking back into life with new assistance now from the latest easing of monetary policy and indications of more to come. Will the return of Auckland strength be at the expense of the rest of the country’s surge? No. Its a nationwide phenomena now. NZ Dollar The Kiwi dollar was edging lower this week until the Federal Reserve adopted a more dovish than expected tone last night whilst leaving their funds rate target unchanged. We end against the USD just over 67 cents compared with just under last week. Nothing interesting to note in other words. More interesting is the NZD’s continuing weakness against the Aussie dollar. The AUD was lifted a couple of weeks ago by anticipation of some further improvement in minerals prices stemming from China’s stepped up efforts to boost growth focussing on infrastructure. The NZD is near where it was last Thursday against the AUD at about 89 cents. Personally speaking it feels like a good level to shift some funds back to NZ from Australia. 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? The surprise move by the Reserve Bank last week to cut the OCR to 2.25% provides us with an opportunity to remind everyone of a key point we have been making with regard to interest rates for six years now. You are foolish to make your interest rate risk management decisions highly dependent upon a particular set of interest rate forecasts proving accurate. As noted here so many times before, our ability to forecast interest rates has gone out the window post-GFC because apart from correctly picking the 1% rise in the cash rate over 2014 we and everyone else have gotten essentially nothing right – since late-2007 in fact. We cannot pick the low point in interest rates this cycle. There is in fact no identifiable cycle in place. Monetary policies globally are in uncharted territory, inflation forecasts are repeatedly too high yet the world is awash with printed money looking for a home which pre-GFC would have sparked a massive inflation surge. Post-GFC households and businesses are reluctant to boost their debt levels – dairy farmers being the exception. Were I borrowing at the moment maybe to buy another disused bar in Auckland (see The Listener, February 29) I would have one-third floating to allow repayment flexibility and offsetting against credit funds, and the rest fixed for two years at 4.39%. If I Were An Investor …I’d see a BNZ Private Banker The text at this link explains why I do not include a section discussing what I would do if I were an investor. http://tonyalexander.co.nz/regular-publications/bnz-weekly-overview/if-i-were-an-investor/ For Noting

Current account deficit at just 3.1% of GDP = very low and one reason for NZD strength.

Probable Trump candidacy for Republicans in the US. Impact on NZ. No-one knows. Not even him.

Brexit? Increasingly probable. Source of weakness for both the British pound and Euro, upside for other currencies, huge uncertainties and deeper questions about the future of the European Union.

Wellington house prices – lots more upside to come. Big catch-up with Auckland.

GDP up 0.9% in the December quarter after 0.9% in the September quarter bringing calendar year growth of 2.5% forecast to rise above 3% soon. The economy is in a strong state with many sectors offsetting weakness in dairying – just as we have been saying for all the past year and will do so for all this year.

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s Weekly Economic Overview M-10 2016 https://eveningreport.nz/2016/03/12/tony-alexanders-weekly-economic-overview-m-10-2016/ Fri, 11 Mar 2016 22:03:28 +0000 http://eveningreport.nz/?p=9523 ]]> Economic Analysis by Tony Alexander.
[caption id="attachment_3709" align="alignleft" width="150"]Tony Alexander, BNZ economist. Tony Alexander, BNZ economist.[/caption] The Reserve Bank cut it’s official cash rate another 0.25% Thursday morning so it now sits at a record low of 2.25%, even lower than right after the depths of the global financial crisis. So why cut when the economy is growing near a 3% pace? They are worried about inflation settling uncomfortably low having missed their inflation target range of 1% – 3% for a year and a bit now. Current inflation is only 0.1%. The cash rate cut will lead to some retail lending rates going down, but with bank funding costs offshore rising because of investor concerns about European banks the feed-through in many instances probably won’t amount to the full 0.25%. Download document pdf 280kb
Monetary Policy Eased Again The global story currently is one of deepening worries about prospective growth rates, high volatility in financial asset and commodity prices, and central banks easing monetary policies to try and boost growth and stoke some inflation. The fact that central banks are still doing this almost eight years after the global financial crisis hit its strides in late-2008 means that such easings to date have not done the job. Therefore moving to a -0.1% rate in Japan and -0.3% rate in Europe probably won’t achieve the results desired in a world where people and businesses are far more cautious about raising debt levels than in the past, and inflation is settling structurally lower for a variety of reasons ranging from technology developments to reluctance of employees to seek high wage rises. In the United States the Federal Reserve is still signalling that they will raise rates further, but the markets have changed from expecting four rate rises there this year when the first rise occurred in December to assigning about a 60% chance to only one more coming maybe toward the end of the year. Here in New Zealand our central bank has responded to the deepening worries about world growth, rise in bank funding costs offshore, rise in the NZ dollar, falls in local inflation expectations, and decline in dairy incomes by cutting the official cash rate this morning from 2.5% to 2.25%. They have signalled a further cut as likely and that probably will come in June though April cannot be ruled out. We had thought they would wait for a bit more data before acting and the markets had only given about a 30% chance to a rate cut coming today so the surprise has seen the NZD drop back from around 68 cents to lie exactly where it was last Thursday near 66.5 cents. We discuss the currency and interest rates in more detail in following sections. One thing to keep an eye on in coming months will be the response of investors to their worsening outlook for returns on simple bank deposits. As investors factor in lower returns on low risk assets they will increasingly chase returns on other assets. This is why we have foreign parties seeking properties in New Zealand and it is likely that affected investors here will initially look for corporate bonds then join the crowd and look for higher property exposure. Falling interest rate expectations will boost housing demand and push prices higher all around New Zealand. Housing Nothing this week beyond a restatement of our key thoughts. Aucklanders since just before the middle of last year have been buying assets in the regions. The locals have seen this and joined in. Construction in the regions is rising now that supply is drying up and people are buying into stories of Auckland being so expensive that there will be a flood of people leaving the city to live in the wonderfulness of our smaller urban locations. They won’t in bulk numbers though a few people will and the local media will write about them. There will be over-investment in new subdivisions and dwellings in some areas because of over-optimistic population growth forecasts and eventually, a few years from now, this will cause problems for some late cycle investors. For now the ball is rolling. Many investors are still adjusting to a world of permanently low interest rates and they have yet to enter housing markets. Their yet to arrive buying will help underpin all locations these coming couple of years. The Chinese buyers will eventually come back into Auckland as they find ways to get capital off the mainland. Migration net inflows will stay strong and remain concentrated in Auckland, worsening the housing shortage, pushing prices higher. House building will be a strong source of economic stimulus for the economy in all but Christchurch over the next two or three years. Construction costs will rise, difficulties sourcing tradespeople will grow. NZ Dollar If the Kiwi dollar was going to fall strongly on the back of lower dairy prices then it would have done so by now. It is already fully factored into expectations that dairy producers will have three bad seasons in a row and that this will dent New Zealand’s export earnings. However, to the extent that the balance on goods and services exports and imports matters to exchange rate movements and it doesn’t really over less than the very long-term, there is massive offset to dairying weakness. This offset is coming from the likes of tourism where visitor numbers have soared over 11% in the past year and their spending has risen three times more than that. This is fostering an investment surge in tourism assets and employment growth in the sector. The export education sector is also growing strongly with a surge in Indian student inflows. Conditions and growth are reported to be good in sectors like honey, wine, pipfruit, forestry and beef to a lesser extent. These good news stories will attract interest from offshore in investing in NZ assets and there are reports of large institutional fund managers from overseas trying to buy just about any commercial property someone is willing to sell in our major centres in order to get higher yields than they can find offshore. There are reports also of some increase in recent weeks in the number of Chinese entering the residential real estate market in Auckland. New Zealand offers higher interest rates than on offer in other developed parts of the world, even after this morning’s 0.25% rate cut, our economy is nicely deregulated with high rankings on many economic scorecards like low corruption and ease of starting a business and accessing credit. The government’s accounts are in good order with the latest two months’ accounts coming in better than expected and leaving open the possibility of a surplus for the second year in a row. There is also good support for the overall pace of economic growth not just from non-dairy exports but construction, strong consumer spending growth, infrastructure spending, and of course the ongoing and yet to peak migration boom. With so many positive things happening it is not surprising that the Kiwi dollar retains a lot of strength at a time of rising pessimism around the world regarding geopolitical stability and the pace of global growth. Nevertheless, Thursday morning’s rate cut by the RBNZ was a move taken earlier than the markets and ourselves expected so the NZD has eased off and wiped out gains made earlier in the week assisted by all of the just mentioned factors. This afternoon we sat against the USD unchanged from a week ago and in fact four weeks ago also just below 67 cents. We have ended unchanged from last Thursday and a month ago also against the Japanese yen but well down against the Australian dollar near 89 cents from 91 cents last week and 94 cents a month ago. This five cent decline over the month largely reflects a strong AUD. The AUD has risen mainly because of some better than expected data on the likes of GDP growth during the December quarter along with inflows of foreign capital seeking exposure to the agribusiness sector, booming tourism, the very recent jump in some minerals prices, new economic stimulus policies in China, and an overall view that the economy is adjusting well to the mining slump. Where to for the NZD from here? We retain the view we have long been expressing. There is scope for the NZD to decline on the back of world growth worries and a fall back below US65 cents is possible. But if and when such a fall comes along exporters should give serious thought to boosting their hedging and importers should think about delaying account payments because the chances are that the NZD will go back up again relatively quickly. Which is what it has had a bout of doing already. We were trading at US 64 cents less than two months ago. Against the AUD at 89 cents feels like a good time personally speaking to be moving some funds out of AUD back into NZD if that is something one has been thinking about doing for some time. This is the lowest we have been against the Aussie dollar since August last year. Regarding the pound one would be unwise to run large open positions currently given the uncertainty and likely fluctuations in views surrounding the June 23 referendum on whether the UK stays in the European Union. The pound has weakened recently in response to an increased probability being assigned to the country voting to leave. Anything is possible and don’t be surprised if the pound suddenly regains strength should some polls show majority support for staying. Predicting movements in the Japanese Yen has always been very difficult but has become more so recently. There is clear downward pressure from the move to negative interest rates, printing of money with no end date in prospect, and slow realisation that Abenomics is not boosting either the pace of economic growth or inflation. Yet there is upward pressure on the Yen as investors consider it a safe asset to buy when worries grow about the world economy, partly because of the current account surplus Japan runs. The Euro is highly vulnerable to worries about economic disturbance associated with Brexit, faltering growth in many economies and new unrest in that hotbed of socialist reality denial France, and indications from the ECB that monetary policy could easily be eased yet again to try and boost growth and inflation. Out of all of this the greenback ends up looking good, along with the AUD and NZD. Good luck picking trends in this uncertain world and be extremely careful about running open currency positions. The risk of event shock causing large changes in major currencies is very high. 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 the RBNZ have expressed concern about the further deterioration in the dairy sector and world economy, falls in inflation expectations and rise in the currency, and increase in bank offshore funding costs (credit spreads) so have cut the official cash rate to a record low of 2.25% from the 2.5% it was taken to back in early-December. They have also pencilled in another cut later this year according to their forecast track for the 90-day bank bill. As a result of their cut we may or may not see a round of cuts in retail interest rates occur. The may not possibility exists because of the rise in the cost to NZ banks of raising funds offshore caused by investors becoming newly nervous about European banks and us banks down here getting caught in the backwash. It is hard to know how these factors will balance out. Therefore if I were borrowing at the moment I would feel inclined to hold off for maybe a week before making a decision regarding what term to fix at. My desire would be to fix for three years at the current rate we offer of 4.64% but I would be prepared to punt on a cut within a week or two though this is not guaranteed. If I Were An Investor The text at this link explains why I do not include a section discussing what I would do if I were an investor. http://tonyalexander.co.nz/regular-publications/bnz-weekly-overview/if-i-were-an-investor/ For Noting The earliest gauge we get of any changes in the pace of growth in consumer spending comes from the monthly Electronic Card Transaction data released by Statistics NZ. These data showed very strong spending growth exceeding 10% at an annualised pace up to late last year but since then things have slowed down and the latest annualised pace of growth is 6.4% in the three months to February for core retail spending. This is above the average growth rate of 5.7% achieved when inflation was running at higher levels than now therefore we can say there is actually a very good pace of growth still happening in consumer spending. In fact for just the month of February spending rose 1.2% but the monthly data can be highly volatile which is why we average over three months before calculating an annual pace of increase.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s Weekly Economic Overview March 3 2016 https://eveningreport.nz/2016/03/03/tony-alexanders-weekly-economic-overview-march-3-2016/ Thu, 03 Mar 2016 04:20:02 +0000 http://eveningreport.nz/?p=9392 ]]> Economic Analysis by Tony Alexander. [caption id="attachment_3709" align="alignleft" width="150"]Tony Alexander, BNZ economist. Tony Alexander, BNZ economist.[/caption] This week I discuss the recent reduction in business confidence but how the spread between winners and losers across sectors in NZ at the moment is amazingly wide. If tourists could be encouraged to spend a day frolicking with cows that would be great. Exchange rates have moved little while some retail interest rates have been lifted in response to bank funding costs rising offshore as the world gets concerned about offshore bank exposure to the likes of the energy sector and we Australasian banks get caught in the backwash.
The Overview isn’t a must read this time around in my opinion.

For the full analysis, continue reading below or Download document (pdf 360kb).

Business Slightly More Cautious – But The Averages Hide Wide Disparities We received evidence this week that the spike in concerns about world growth, wobbly sharemarkets, and renewed decline in dairy prices has dented the sentiment of the country’s business sector. A net 7% of respondents in the latest ANZ Business Outlook survey say that they feel optimistic about the economy in a year’s time. This is down from a net 23% in December and slightly below the ten year average reading for this measure of +10%. Thus caution prevails out there. Is it much denting intentions of hiring and investing however? A net 12% of businesses say they plan hiring more people. This is down from 20% in December so a sizeable drop. But it is still twice the average February reading of just +6% so we remain prepared to say that jobs growth will be reasonable going forward. Though it depends of course upon what sector you are thinking about. Hiring intentions are well above average in retailing, manufacturing and services. But at -8.7% agricultural intentions are below the net 2% positive average and at 0% the construction sector reading is below the 10% average and December’s 30% reading. That is probably the most interesting of the employment readings and worth keeping an eye on because it will probably not stay that weak given the volume of work coming up.
Intentions of investing in new plant and machinery etc. have not changed much in recent months and sit now at 14% from 15% in December and an average of 12%. To put more flesh on the bones of these numerical surveys run by the likes of ANZ and NZIER we run our quarterly BNZ Confidence Survey the results of which were distributed to everyone on the Weekly Overview emailing list on Wednesday. In the dairying sector deep pessimism prevails and it would be quite bold to extrapolate this week’s 1.4% rise in average prices at the Global Dairy Trade auction into an upward trend as yet. The dairying pain is being felt more and more amongst firms supporting the sector with an extra aggravating factor being new weakness showing up in sheep and beef. But outside of those primary sectors most others are doing quite well. This includes honey, venison, kiwifruit, pipfruit, horticulture and forestry. Wine sales and production are also going well. Then there are the sectors which are booming. Top of the list is tourism with huge rises in visitor numbers and spending spread throughout the country. Construction is also very firm with a noticeable lift in positive comments from the regions backing up the growth apparent in monthly consent issuance data. The survey basically shows strong offset to the dairy sector weakness which leaves fairly much all of us forecasters continuing to speak in terms of 2% – 3% growth over each the next couple of years. For most of us the outlook also translates into the absence of any expectation of much weakness in the NZD. Regarding monetary policy views are more mixed. We don’t think the RB will cut again but others who perhaps have failed to factor in the global development of monetary policy easings consistently failing to lift inflation rates still expect two more decreases. Possible but not probable. Housing Construction of dwellings in New Zealand is rising with consents for 27,124 dwellings issued in the year to January ahead 9.9% from a year earlier and 95% higher than in the year to January 2012. But there are big variations around the country. In Canterbury consents have fallen by 13% this past year to sit at 6,311 from 7,255 a year ago. This is still well above the 23 year average of 3,700 but in the three months to January numbers were 25% down from a year ago. So things are falling away quite quickly now that a lot of the postearthquake construction is done. In Auckland there is in contrast good growth – though not enough to make many people think that the shortage is going to radically improve let alone disappear in the next few years. In the year to January in Auckland consents for the construction of 9,275 dwellings were issued. This makes for a 22% rise from a year before but in the three months to January growth was less than that at 16.4% from a year ago. So maybe growth is slowing a tad. Average consents issued per annum for the past 23 years total 7,400. It is in the rest of the country however where things are getting interesting. In a traditional lagged response to a lift in sales and prices construction is rising with consents issued in NZ excluding Auckland and Canterbury ahead 39% in the three months to January from a year ago. Average consent issuance outside our two biggest cities has been 11,200 these past 23 years and the latest total is only just above that at 11,538. What does it all mean? As the construction boom fades in Christchurch tail-end companies which might have over-traded will be caught out. Everyone knew this would be coming. In Auckland supply is not rising fast enough even to meet the needs of migration-driven population growth. Growth in building outside of Auckland will make it even harder for people to find builders in Auckland. Tradies are going to quit Auckland for work elsewhere. History tells us to watch out for over-optimistic building in some parts of the country which seem flavour of the month to investors currently and perhaps draw some media exposure, but which have fairly low population growth which in the end will generate a price impact down the track. In other words, if you are an Aucklander in panic mode because you missed out on some cheap place in Huntly or elsewhere, watch what the locals may soon be trying to sell you and for most though not all locations don’t blindly extrapolate the construction of houses on a new subdivision into a multi-year boom in construction in that area for which it would be a good idea to prepare for by snapping up sections in the next development. The one you see underway could soak up all that town’s population growth if any for the next decade. Speaking of Auckland, there was weakness apparent in the Barfoot and Thompson monthly numbers released this morning. Their sales in Auckland in February were down by 17% from a year ago and off a seasonally adjusted pace near 20% from January. The average sales price lifted to $822,000 from $812,000 in January to lie 10% ahead of a year ago. But this annual gain reflects rises earlier in the 12 month period and over the past three months prices have fallen on average by 1.9%. This change from +3.2% in the three months to November and +3% in the three months to August is largely a seasonal thing. Nonetheless the result still shows a market taking a decent summer pause. The stock of listings at the end of the month was ahead 1.8% from a year ago but of greater interest is the strong lift in new listings received during the month to 2,060 from 1,771 a year ago. This is the greatest number of new listings in February for at least the past 15 years so price restraint is likely to continue in the near future as buyers focus their attention on the regions. But before anyone starts thinking that sellers are rushing agents it pays to note that in the middle of last year for a while new listings were running 88% ahead of the same month a year earlier. NZ Dollar This has been a week in which investors have smiled a bit more because the People’s Bank of China cut reserve requirements for Chinese banks thus injecting more money into their banking system, the US Treasury reduced their worries about a Chinese currency devaluation, economic data in the United States came in better than expected, and the Reserve Bank of Australia left monetary policy unchanged feeling slightly less worried about their economy. The improvement in risk tolerance has caused sharemarkets to rise, the Yen to weaken slightly, and we have lost ground slightly against a marginally firmer Aussie dollar boosted by the no-change stance from the RBA and better than expected 0.6% growth in Australia’s GDP during the December quarter. Full year growth was a good 2.5%. Yet no decisive blows have been struck against the many factors which since the start of the year have been occupying the minds of people. These include weak energy and commodity prices, the ineffectiveness of monetary policy and limited ability of central banks to respond if something new and nasty hits world growth, the rising probability that the UK will exit the EU, deepening divisions between EU members over the projects appalling floundering on the refugee crises, the militarisation of the South China seas by China and rising rhetoric against such expansionism by the US and directly affected countries who are boosting military spending in response, the Middle East crisis in its many forms, the unpredictability of financial and economic variables as the GFC has changed relationships between things, and to top it all off the now rising prevalence of questions regarding what a United States led by Donald Trump might look like and do. Late today the NZD was buying the same USDs as a week ago near 66.5, more Yen of about 75.5 from 74.3, fewer pounds near 47.3 from 47.8, more Euros near 61.3 from 60.4, and fewer AUDs near 91.2 cents from 92.4. This is about as low as the NZD has been against the Aussie dollar since early December so for the many people out there holding AUDs wanting them in NZDs one wonders if this might not be an opportune time to transact some – whilst realistically having no idea personally about where the rate will be in a week, month, year, or decades time. 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? US bond yields have risen this week amidst a mild rise in expectations of more Fed tightening this year. But more easing remains likely in other parts of the world like Japan and Europe, and wariness of banks in Europe has blown out NZ bank offshore funding costs which you might notice have been passed on slightly this past week in the form of higher fixed lending rates. Would I still fix three years now that our rate has been lifted from 4.49% to 4.64%. Yes. I would be great security for a low price as compared with October last year when I fixed two years near 4.4% but the three year rate was a tad out of reach at 5.19%. If I Were An Investor The text at this link explains why I do not include a section discussing what I would do if I were an investor. http://tonyalexander.co.nz/regular-publications/bnz-weekly-overview/if-i-were-an-investor/ For Noting
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander: BNZ’s Confidence Quarterly Survey For 2016 Is Released https://eveningreport.nz/2016/03/03/tony-alexander-bnzs-confidence-quarterly-survey-for-2016-is-released/ https://eveningreport.nz/2016/03/03/tony-alexander-bnzs-confidence-quarterly-survey-for-2016-is-released/#respond Thu, 03 Mar 2016 01:54:54 +0000 http://eveningreport.nz/?p=9390 ]]> MIL OSI – Source: BNZ Economist Tony Alexander – Analysis:
Our first quarterly BNZ Confidence Survey for 2016 has unsurprisingly shown that the dairying sector is extremely pessimistic and experiencing hard times while record optimism prevails in tourism where visitor numbers and spending are booming. The weakness in dairying is starting to spread out but construction around the country is very strong, regional housing markets are lifting, and in Auckland while real estate comments are highly mixed it is interesting to note some respondents observing more Chinese buyers recently. Download the entire document here 513kb (pdf) Dairy Woe But Tourism & Construction Booms Underway Our first quarterly survey for 2016 in which we ask Weekly Overview readers to comment on their sectors has produced some stark results. At the negative end understandably is the dairy sector with high pessimism and also some reduced confidence in sheep and beef. However in horticulture sentiment is very positive. At the other end of the spectrum are regional housing markets now benefitting from Aucklanders seeking assets and locals jumping on this cyclical bandwagon, and tourism. Strong growth in visitor numbers and their spending has produced the most positive set of comments on tourism or potentially any sector that we have seen in the 11 year history of this survey. The construction and engineering sectors are also very buoyant and forestry positive. Retailing is also generally though not completely positive and with margins under pressure. In the middle is the Auckland residential property market with a mixture of negative comments but also continuing listings shortages in some areas and one or two comments that Chinese buyers appear to be returning. With regard to specific sectors the following broad comments can be made. Accountancy Lots of compliance work, tightening in rural areas. Advertising and Marketing Generally good activity. No indication of either fresh caution amongst clients or surge in spending. Construction Most obvious development is a lift in activity in the regions. Auckland as busy as ever, costs rising. Engineering Extremely busy Farming Very negative comments regarding dairying, sheep and beef less positive than before, venison good. Weakness in dairying is sharply affecting farm servicing companies. Forestry Quite positive comments including for sawmilling. Horticulture Nothing but positive comments spread across kiwifruit, avocadoes, blueberries, flowers and vegetables. Manufacturing Flat to good but with dairying weakness starting to come through for some. Property Development Strong growth apparent but slowing in Christchurch. Property Management/Investment Good tenant demand, rents rising typically less than 5% but one example of more, investors paying high prices to get stock. Recruitment Very busy but often with shortages of potential staff. Residential Real Estate Very strong outside Auckland and Christchurch. Some signs that Chinese buyers are returning to the market in Auckland but overall quite mixed comments for Auckland. Retail Margins squeezed but sales good overall. Tourism Absolutely booming. Never before have we received such an abundance of positive tourism sector comments.
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]]> https://eveningreport.nz/2016/03/03/tony-alexander-bnzs-confidence-quarterly-survey-for-2016-is-released/feed/ 0 Tony Alexander’s Weekly Economic Overview February 18 2016 https://eveningreport.nz/2016/02/18/tony-alexanders-weekly-economic-overview-february-18-2016/ Thu, 18 Feb 2016 08:21:15 +0000 http://eveningreport.nz/?p=9214 ]]> Economic Analysis by Tony Alexander.
[caption id="attachment_3709" align="alignleft" width="150"]Tony Alexander, BNZ economist. Tony Alexander, BNZ economist.[/caption] Last week I wrote about the weakness in world sharemarkets in terms of specific factors. These included losses for energy sector businesses because of the structural decline in oil prices, slowing growth in China and worries about debt and capital outflows, weakness in the Japanese economy, and worries about the impact of tightening US monetary policy. But there are wider issues in play which also lie behind the growing disquiet. One of these is the ineffectiveness of very loose monetary policies in recent years in stimulating growth in Europe and Japan. Another rapidly rising worry is the inability of loose monetary policies to boost inflation, and the growing uselessness of central banks maintaining 2% inflation targets when they seemingly no longer have the tools to much influence inflation. Related to that is concern that as they keep easing to aim at a target they are no longer able to hit the flood of cheap money will cause asset bubbles and collapses bringing new economic woe. Related to that is the realisation that central banks have very little ability any longer to insulate their economies when not just cyclical but shock-driven downturns come along. So as the monetary policy backstop disappears from investor and business expectations the risk is that investors rush to less risky assets – bonds – and businesses build even greater cash buffers and hold off on investments. This big picture loss of monetary policy effectiveness means come the next wave of shocks countries will need to rely upon fiscal policies – but from governments with already large debts. The way out is structural economic reforms aimed at boosting the ability of economies to adapt to change. But such reforms bring short-term pain, there is no appetite in Europe or Japan to inflict or accept such pain, and out of this will come a long-term redirection of capital away from those parts of the world toward America, Australasia, and the rest of Asia. These big shifts mean we should expect continued bouts of extreme financial market volatility.

To read the full analysis, continue reading below or click the link: Download document (pdf 291kb)

When The Barrel’s Empty The global financial crisis was caused by an over-supply of over-priced houses causing plummeting prices and huge losses for those who financed the excess construction (the builders had a boom!). The situation arose because of an official policy by the US Federal government to boost home ownership in the 1990s encouraging a relaxation of lending standards, blind eyes being turned to such laxity, and the US roller coaster encouraging similar surges overseas. Home buyers borrowed too much, banks lent too much, investors financed bank lending too willingly, and central banks and rating agencies miscalculated the riskiness of the lending products. Egg on everyone’s face in other words from too much credit flying around. As house prices corrected downward and the falls backwashed into securities backed by house values investors dumped such products, banks recorded huge losses, investors backed away from banks, and for about six weeks over September – October 2008 the world stood on the cusp of a new Depression as the global banking system seized up. Courtesy of hefty injections of cash by central banks, major interest rate reductions, and eventually easier fiscal policies we saw a 1930s repeat avoided and green shoots appearing in March 2009 in the form of economic indicators falling at a slowing pace in the United States. After that a huge sigh of relief around the world caused sharemarkets to recover, housing markets to rise, confidence levels to soar, and currencies of risky countries such as NZ to jump sharply. We soared from less than US50 cents in early-2009 to over 76 cents by year’s-end. Then things started to falter as the life giving gasps of breath of 2009 as economies surfaced from beneath the waters gave way to laboured breathing as attention turned to high government deficits and debt levels, Greece of course, the unwillingness of businesses and households to borrow and so on. To counter this post-GFC weakness central banks decided the best thing to do to spur things along would be to pump more credit into the world economy through direct money printing and sustained, falling, interest rates. Basically, the central bankers decided to engage in a hair of the dog that bit them exercise of recreating the loose credit conditions of pre-GFC while at the same time working with banking sectors to boost capital bases and lending practices ready for the next crisis. As monetary policies stayed loose however the economic outcomes failed to reach levels desired by all, yet each time a new bout of the heebie jeebies went through investors the fear and selling quickly turned to buying as central banks eased policies even further. In fact things eventually reached the stage whereby bad economic data would be greeted by rising share prices in anticipation of lower interest rates and more money printing. Money looking for a home and ending up in shares and commodity futures. But all that cash sloshing around the world had some major deleterious impacts. As investors sought yield in a low interest rate world assets like residential property prices got bid back up again along with commodities – witness our dairy boom. And as investors, finding themselves flush with cash, kept firms afloat which pre-GFC would have been closed down and their parts flogged off, excess quantities of goods appeared – especially in China which engaged in a huge series of stimulatory packages from 2009. Worries about deflation resulting from excess production and altered consumer, business, and wage earner price-setting behaviour led to more easing of monetary policy, more cash, more over-valued assets, more excess production. And investors started to act on the new reality of sustained low inflation and central banks not likely to raise interest rates much for a very long period of time. They flooded into low yielding bonds. And as this was happening imbalances in some markets like oil and dairy products brought logical big falls in prices. And at the same time China’s economy lost the puff created by the mother of all stimulatory programmes focussed on construction from 2009 at the same time as the period arrived for it to transition from growth driven by exports, manufacturing, and fixed asset investment to services and consumption. Unfortunate timing. Which brings us to late last year. An environment of the following.
  • -Worries about the impact of the first US monetary policy tightening since 2006.
  • -Worries about global growth as China continued to slow.
  • -Worries about unstable capital flows associated with expectations of a probable big devaluation of the Chinese yuan.
  • -Worries about major asset and profit write-downs in all businesses associated with the energy sector.
Which brings us to where we are now with the two new big worries driving markets downward. The first is concern about bank profitability as write-offs will have to be undertaken for exposure to the energy sector, slowing economic growth, and tight margins caused by sustained low interest rates. The second is the killer and it goes right back to one of our main comments/warnings from late-2009. We warned that because of the massive easings of fiscal and monetary policies to fight the GFC, the next time a big hit came along governments and central banks would have very little dry powder to help insulate their economies. In fact central banks have used the past six years depleting their remaining dry powder reserves trying to stimulate their economies – and they have failed. We wrote that central banks cannot create growth. All they can do is buy time for the private sector to get back on its feet and start investing and growing naturally with the sugar hit of low interest rates and loose liquidity eventually being taken away. But while time has been bought, governments needing to create better conditions for growth have failed to restructure their economies (Japan and Europe), and businesses used to loose monetary conditions have shuddered each time at the thought of the sugar disappearing. And in multiple countries including New Zealand, Australia, Europe, and now the markets speculate perhaps even the US, the sugar bowl has had to be put back on the table with interest rate rises being reversed – twice in our case. And now here we sit with analysts concluding that central banks have failed to stimulate growth, forgetting that such is not their job on a sustained basis. But the conclusion these analysts reach is nonetheless the same as if they did have better understanding of the role of central banks. There is nothing left that central banks can do of any great magnitude to boost growth any longer. The realisation that central banks have become near impotent as a buffering factor for weak economies is sweeping the markets reinforced by the sheer desperation shown by the Bank of Japan in introducing a negative interest rate. The Japanese economy recorded no growth in 2014 and only 0.4% in 2015. So what is going to happen now? Commercial banks will be able to finance themselves so a credit crunch scenario as happened awhile over 2008-09 is extremely unlikely. But funding costs may rise briefly until losses have been revealed by large lenders to sectors such as energy. Little interest rate rises will get lost in the wash of central banks still easing and introducing negative rates so businesses and households won’t back away from borrowing because of debt servicing costs. Growth forecasts for this year and next will get revised down slightly, inflation will stay low and deflation worries persist, and businesses will look to boost productivity to cut margins facing downward pressure from easing retail prices in some countries. But here is the key thing which means that even though central banks have become toothless tigers, the world economy will do alright. The world is awash with cash. The cash is looking for a home. Some of that cash will be eagerly used to purchase the assets of distressed businesses more than would have happened in the past because return on investment hurdles are lower than pre-GFC. Thus underneath what for the next few years will be a series of bouts of market turmoil and negative headlines, capitalists will be buying and restructuring companies which can’t hack it, new technologies will continue to be developed and implemented, and countries with specific driving factors such as we have will enjoy strong currencies and migration inflows as they will look so much better than other places. But in areas where these economic forces are not free to function – much of Europe and Japan – the aversion to pain will produce more useless policy easing, rising government debt, and eventually long-term capital flight to other parts of the world – America, Asia, and Australasia. Not Eastern Europe because of the deteriorating situation between economically failing Russia and economically stagnant Europe. Not the Middle East because of the munted energy sector and war. Not Africa because as the sugar of huge Chinese investment passes without political, social, institutional, and legislative structures being reformed, old under-performance will return. Dairy Speaking of under-performance – dairy. For a number of years now it has been as politically incorrect to say anything negative about the dairying sector as it is to say cats should be killed. ( I was jumped on by many 10-15 years ago for predicting a sub-$3 payout.) But thankfully we have been able to slip in a few reality checks along two themes. The first has been an observation from practising economics since the mid-1980s that while we can all generally make some good reasoned predictions about where demand for a commodity will go, we are all completely hopeless at forecasting supply growth – be that for oil, iron ore, coal, LNG, beef, wool, or of course milk. And if you can’t accurately forecast both supply and demand changes then you have no hope of predicting prices. Currently the Europeans in our media are being “blamed” for producing too much milk and depressing prices. But here in New Zealand we have invested in high cost feeding out regimes, pushed into more marginal land, and focussed capital on more and more milk production – rather than avoiding what has been our second theme – not going up the value added chain. We have failed to radically boost the proportion of our milk going offshore as highly processed high margin items. The usual example is infant formula. To boost value added capital needs to be invested in such things. But that means lower payouts to farmers in the short to medium term. Yet farmers have raised substantial debt to boost production by buying increasingly expensive land and animals so they have made it clear that maximising the payout is everything and capital cannot be retained in any great magnitude to take dairy cooperatives up the value chain. And this will never happen in New Zealand. In dairy all we will ever be primarily is a bulk producer of milk which we dry out and bag for someone else to reliquify or process further. Why? Because dairy farmers enter the industry taking on the daily challenge of working the land, working with their animals, handling the weather, the pests, the diseases, the regulations, the sheer unpredictability of so many things around them with the aim of extracting maximum milk from the land available to them. (Same as sheep and beef farmers for meat.) And the industry has a great career structure for doing this. Few aim to make enough capital as quickly as possible so they can get their organic infant formula from named animals into Asia. Some do. The vast majority don’t. Dairy re-investment occurs almost always back in the land by the farmers, not up the chain. Under the cooperative structure where someone will buy everything you produce once you are in we cannot rely upon dairy to lead our economy to higher wealth. Or any other commodity which we minimally process. But why then has our economy grown so long on the back of some animal? Because for a long time we were a low cost producer of high quality products. Now we are not so cheap, and other countries are getting in on the game as they try to boost their domestic food security. China has barely started on milk. But this is not an argument against our primary sector in the end – only a reminder that our farmers survive as a driving force behind our economy because of what drove them to the land in the first place – acceptance of a challenge, willingness to learn as much as possible on the job and proudly teach it to others, and to change land use when the numbers demanded it. That is the crux of it and the best current illustration is the land being given over to growing manuka bush for bees to feed on to produce high value manuka honey. Exports of honey from New Zealand are now worth $300mn. In same dollar terms that is where the wine industry was in 2002. Wine exports are now worth $1.5bn. Some farmers are also converting to milking goats. As long as land use can freely change in New Zealand then farming will always be a key part of our economic base, though it won’t take us up the OECD ladder and that is why we need the Auckland agglomeration and the talented people developing and implementing new technologies. Only if a government were to ever try and retard that land use change process with artificial support mechanisms would we sink – like in the 1970s up until the painful removal of SMPs. Google it young ones. And why have I written this? Because for the first time in over two decades whilst speaking at a conference last week of people involved in the animal industry, someone asked if it might be a good idea for the government to help dairy producers with a price support mechanism. Then it happened again at a different session this morning in Matamata. It would never work because farmers would not give up payout in good times, because no-one knows what average level payout can be accurately assumed for the next decade, because the taxpayer has in the past bailed out farmers who in the 1970s and 80s benefitted from price equalisation schemes set with prices too high, and because it is necessary in all sectors that when hard times come the most indebted and highest cost units get weeded out. Same as happens in every other sector. If price stabilisation is important then each farmer could have done it for themselves with a special bank account. The old hands probably did by keeping debt down. They will be the ones buying some of the assets which will come on the market in the next two years. Like they did in 2009, 2003, and 1991 Housing What things cause house prices to fall and are any of these things likely in the near future? Soaring interest rates. -Nope. Our central bank is under pressure to cut rates further following last year’s 1% reduction in the official cash rate, central banks overseas are either easing or delaying planned rises, and one of the factors causing recent sharemarket weakness has been worries about deflation. In NZ inflation is just 0.1% and the RBNZ has found itself unable to get headline inflation back into the target range of 1% – 3%. Soaring house supply. -Nope. Courtesy of massive net migration flows NZ population growth is picking up. NZ’s average population growth rate is 1.1% per annum. Growth last year was 1.9% following 1.5% in 2014. Since 2006 the population has risen by 411,100 people. At an average nationwide house occupancy rate of 2.7 people that means a need for 152,000 houses. Since 2006 consents have been issued nationwide for 204,000 houses. With some 80% of consents estimated as adding to the housing stock this means 163,000 extra houses. Take off about 12,000 houses in Christchurch removed from the available stock by the earthquakes five years ago and things are about in balance until you allow for an aging population bringing more households of just one or two people. So no over-supply BUT. Auckland has a big and worsening shortage. Many other parts of the country will have an over-supply. So if you are an Auckland investor jumping boots and all into the regions buying what you consider to be cheap properties with good yields be very, very careful. Those locals giggling outside the dairy may not be laughing at the latest headlines regarding some celebrity, but at you. Watch for investors whipping back toward Auckland once this run of regional growth peters out perhaps early next year. Migration outflows. -Nope. The net gain last year was 65,000 people, our economy is in good shape compared with others, we are distant from worsening geo-political situations offshore, and the commodities boom has been and gone in Australia. Annual flows will likely peak this year but the easing off is likely to be very gradual and occur over many years. NZ Dollar The NZD has weakened over the past week despite dairy prices falling much less than expected in the fortnightly auction (but they still fell 2.8%) and retail spending rising more than expected, mainly in response to low inflation expectations recorded in a quarterly Reserve Bank survey. This survey rarely receives any attention but has taken on increased importance because of low 0.1% inflation in New Zealand, the Reserve Bank’s displayed failure to forecast inflation accurately any longer (they are in good company), their displayed failure to boost inflation (again not alone there), and the way monetary policies elsewhere are being eased anew as inflation readings track lower and lower. Basically the expectation is building that the RB will have to follow the offshore trend and ease monetary policy – which in itself gives us an answer to the question of whether an easing or two this year will much depress the NZD. It won’t because policies are also being eased elsewhere. Maybe more than that however, policies are being eased offshore in economies with low inflation and weak growth. We also have low inflation but good economic growth. For exporters the message here remains the same. Now and then the NZD will have a decent run downward but it probably won’t stay low for long given our economic state relative to other economies. It might be a good idea to boost hedging whenever we approach US 60 cents and AUD 90 cents.

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? Personally I would fix three years at 4.49%. It is true that rates may go lower if the Reserve Bank eases monetary policy again. But there is some upward pressure on bank funding costs offshore currently because of worries about European banks. Plus the NZ economy does not need a boost from even lower interest rates, as evidenced by the strong growth in retail spending discussed just below. The only argument in favour of lower interest rates comes from inflation persistently under-shooting the target range. But the RB will not feel the need to lower rates to try and boost inflation if it believes doing so will not in fact boost inflation. Offshore the easiest monetary policy settings ever seen are not lifting inflation and wages growth is slowing in the UK, Japan and Europe therefore there seems little reason for believing lower rates here would suddenly alter pricing behaviour. In addition there is no evidence that people are worried enough about deflation to put off buying durable and discretionary items. That is a key argument against letting deflation development – that people will stop buying to wait for lower prices and the longer they wait the weaker their spending, the deeper the recession, the further the price falls and so on in a Depression spiral. We are not in recession so that deflation link is completely different from the environment we all think of and fear when saying deflation must be avoided, the 1930s Great Depression. For Noting We consumers have been doing a lot of spending recently with strength assisted by falls in petrol prices, a tourism boom, strong population growth, reasonable jobs growth, and low interest rates. In seasonally and price adjusted terms core retail spending (no cars or petrol) grew by 1.4% during the December quarter after rising 1.1% in the September quarter. Full year growth was a very strong 5.8%.Spending growth on durable goods was even stronger at 3.6% for the quarter and 10.6% for all the year.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s Weekly Overview February 11 2016 https://eveningreport.nz/2016/02/11/tony-alexanders-weekly-overview-february-11-2016/ Thu, 11 Feb 2016 04:35:46 +0000 https://eveningreport.nz/?p=9082 ]]> Economic Analysis by BNZ’s Chief Economist Tony Alexander.

Thursday February 11th 2016

[caption id="attachment_3709" align="alignleft" width="150"]Tony Alexander, BNZ economist. Tony Alexander, BNZ economist.[/caption] Sharemarkets have fallen again this past week as investors find themselves with plenty of reasons for backing away from riskier assets. For some it is the fall in oil prices and resulting poor profit outlooks for businesses involved in the energy sector, expectations that sovereign funds of oil exporting countries will sell assets to offset revenue losses, and losses to be taken by banks which have lent to energy companies. For others it is worries about the still slowing pace of growth in China and the high risk that capital outflows from China’s millions of individuals and businesses will continue to rapidly deplete reserves and force a currency devaluation. This then would worsen deflation risks in other countries and pose more problems for central banks who are printing money and introducing negative interest rates yet failing to stimulate business investment. For still more it is the need for banks in Europe to raise more capital, Europe’s many problems more specifically, and if not that then worries about the Middle East, Korean Peninsula, spread of radical Islamism, and US monetary policy. Through all of this we are affected by downward pressure on commodity prices yet absence of a concomitant fall in the NZ dollar which has risen three US cents his past fortnight. This is because our economy is in far better structural, financial, and growth positions than most other economies. For the full analysis, keen reading below or click this link Download document (pdf 284kb).
So Many Problems Overseas Since the start of this year share prices around the world have fallen sharply, oil prices have tumbled taking prices for other commodities with them, the Bank of Japan has introduced a negative interest rate, the European Central Bank is expected to ease again soon, and expectations of four rate rises this year from the US Federal Reserve have evaporated. Why the turnaround in sentiment? There is no single factor accounting for the deepening heebie geebies but a gathering of many geographically dispersed things. An early trigger for the rout was the tightening of US monetary last year and uncertainty about what it would do and the risk that the Fed. might blindly continue to tighten regardless of current economic conditions. An underlying source of concern getting worse by the week now is weakness in China’s economy, evidence of massive excess housing and factory capacity, worries about debt levels, and a weakening yuan pushed downward by massive capital outflows which are steadily depleting China’s huge foreign currency reserves. Plus the lower the Yuan goes the cheaper Chinese products in foreign markets and the higher the risk of deflation in economies like Japan and the EU. Japan’s economy spluttered last year almost back into recession and faith in the efficacy of Prime Minister Abe’s Three Arrows policy (easy fiscal and monetary policies plus deregulation) has evaporated. The Bank of Japan is engaging in unlimited money printing, businesses and aging households don’t won’t to borrow more money, government debt grows still, and the BoJ is now charging banks 0.1% to deposit money overnight. Oil exporting economies are suffering badly because of the 70% fall in oil prices from 2014 levels, FX reserves are being run down, new taxes are being planned and subsidies targeted to be reined in, while unrest rises in the likes of Saudi Arabia. The Middle East is all but going up in flames in large portions and radical Islamism has taken hold in northern Africa. Prices of shares in energy sector stocks are tumbling and banks exposed to the broader energy sector are expected to take some hefty losses and hundreds of billions of dollars of planned investments in the energy sector have been scrapped. The same goes for investments in exploitation of resources of coal and iron ore. It is now also believed that sovereign funds of oil exporting countries are offsetting oil revenue losses by selling shares and thereby depressing global equity markets. The European Union remains afflicted with rigid economies, a poor banking sector now getting slammed on sharemarkets, fiscal problems, migration digestion pains, an aggressive Russian neighbour, weak business investment, and a failing deflation fight even with a -0.3% central bank deposit rate which looks likely to be cut again. Perversely, according to some analysts any further rate cuts in Europe may tighten monetary conditions rather than loosen them as banks raise lending rates to compensate for lost margins from overnight deposits with the ECB. This potentially self-defeating monetary policy is a bit like the theory that money printing during weak growth periods encourages rather than discourages deflation because extra money sloshing around means businesses stay open longer and keep flooding markets with their product and depressing prices. There is also a rerating of the global tech sector going on with talk of a repeat of the dotcom crash of the late-1990s. Share prices have fallen sharply for the likes of Netflix, Yahoo, LinkedIn, Twitter, Yelp, Facebook, Amazon, Fitbit, eBay, etc. Plus there are long-term lingering problems associated with the global financial crisis of 2008-09. Banks still need to raise more capital in Europe, hard core hard to change youth unemployment has worsened in Europe, fiscal and monetary buffers to use against any new shock are minor compared with capacity which existed in 2008, China’s excess construction of just about everything as they fought the GFC from 2009 has been mentioned above, productivity growth globally has declined and wages growth has stalled in most economies, restructuring problems and strikes persist in Greece and a new crisis there could easily erupt. And finally, following the major concerns of US monetary policy, China and oil, we now have major worries about banks overseas. On top of worries about bank losses from lending to the energy sector and emerging markets are concerns about negative central bank deposit rates hitting margins, difficulties in finding capital to meet strengthening capitalisation requirements, continuing investigations of irregularities pre- and postGFC, and now flattening yield curves in the United States slashing profits from the traditional borrow short/lend long strategy. In coming weeks we will see central bankers and government ministers increasingly acknowledge the risk to their economies and inflation forecasts from global woes and proposals will be mad to try and boost growth and inflation. But quick macro policy changes will not alter the new economics of the oil and wider energy sector, will not hasten China’s transition to a consumption-driven economy and make debt and capacity problems disappear overnight, or compensate for the failure of European countries to open their economies up and stop ongoing reliance upon temporary stimulatory packages to boost declining trend growth rates. Yet as pointed out not just all last year but since 2009 in terms of ourselves being less munted in New Zealand during and following the GFC, we have a highly deregulated economy will positioned to adjust itself to unpredictable shocks and a set of special growth supporting factors. These factors include high migration which is highly likely to continue as the one million Kiwis offshore compare what is happening around themselves with good stories from NZ. Hopefully people in the regions realise that with the combination of massive net migration inflows and Auckland’s high house prices they have a perhaps once in a lifetime opportunity to boost populations quickly in their towns. We have a construction boom set to last a number of years, stretched out partly by a shortage of tradespeople. We may have a dairying sector adjusting to the other 99.8% of the world’s population realising rising Asian incomes means higher milk demand thus boosting their own production, but we are seeing in our farming sector what we have always seen – diversification to new profitable areas. These include not just wine which now brings in $1.5bn in FX earnings a year, but honey exports now worth what wine was worth in 2002 – $300mn – and farmers planting hillsides in manuka. Tourism is booming as is the foreign education sector, and unlike in other countries businesses in New Zealand are willing to invest in new plant and equipment with such investment intentions at well above average levels. Auckland is becoming an international city attractive to the highly talented people needed to boost technology developments and their implementation. The relatively good position we find ourselves in means there will remain strong support for the Kiwi dollar and exporters should give thought to boosting hedging on dips toward 60 cents every few months. Borrowers face so benign an environment it is difficult to describe. And with a cash rate of 2.5% scope exists to cut rates should the world’s woes hit our shores more forcefully. House prices will keep rising in response to low debt servicing costs, strong population growth, investors searching for higher yielding assets, and shortages in some locations. Employers will continue to struggle to find the staff they want even with the net migration boom and while some may leave Auckland for lower occupancy and transport costs, others will shift there to access the staff pool and 1.5mn potential customers with a growth rate twice the rest of the country. What is our biggest risk? Not the Auckland housing market having a big correction as so many people have badly predicted for many years now through lack of understanding what the market’s prime drivers are. (The shortage gets worse every day.) China is our big risk, not just because we get 19% of our merchandise export receipts from there, but because everyone else we trade with has hefty exposures also to the Chinese economy. Housing Part of the story for the NZ housing market at the moment is Auckland stepping back as investors have been scared away by a 30% deposit requirement, IRD number and bank account rule, two year bright line test for capital gains, on top of low yields encouraging investors to look elsewhere. The withdrawal of investors for now is providing space for owner occupiers to step in but they are only arriving in limited numbers so turnover in the three months to January in Auckland was down 15.8% from a year earlier. Prices meanwhile on average have fallen by 3.8% to sit 11.5% up from a year earlier. This is a decent giveback after prices in the previous three quarters on average rose by 3.8%, 6.1%, and 8.0%. Will this fall in Auckland prices continue? In the short-term maybe. But the fundamentals for Auckland argue in favour of prices steadying then rising again though not remotely at the 25% annual pace of mid-2015. These fundamentals centre around a booming population growing near 3% per annum but the existing housing shortage still worsening because construction is well below levels required. In the regions things are quite different. In the three months to January turnover in Northland was ahead 48% from a year ago, Waikato/Bay of Plenty 32%, Hawkes Bay 32%, Central Otago Lakes 24%, Taranaki 21%, and Southland 18%. And prices in the past three months have risen respectively 1.6%, 4%, 6.7%, 10.4%, 5.2%, but they have fallen 1.1% in Southland. Note that these price measures, included in the following graph, are not adjusted for changes in the type of houses being sold whereas the Auckland numbers above are from adjusted data. Auckland’s unadjusted three month change was a fall of just 0.2%. This regional strength is likely to continue all year given the low interest rate environment and the Reserve Bank may feel it necessary to slow things down with a 30% deposit requirement though that is a 50:50 call at this stage. NZ Dollar The NZ dollar this afternoon was trading near US67 cents from 66.8 one week ago and 64.4 two weeks ago. Similar movement has been made upward against the Australian dollar to 94 cents, lesser gains against the Euro and Pound, and no gain against the Yen. This latter development reflects the Yen rising in spite of the cut in the Bank of Japan’s deposit rate to -0.1% a fortnight ago because the bout of nervousness gripping investors around the world has led to buying of the Yen as a save haven. And yet, in the past when such nervousness appeared the NZD would invariably suffer as well. That is not happening now. The NZD is holding up and in fact even stronger than it was before the most recent 7.4% fall in global dairy prices. Why the disconnect? Because New Zealand stands out very well as a good performer at a time when the rest of the world has so, so many problems. Our fiscal accounts are good, non-dairy exports are strong, construction is booming, migration is stellar, and our cash rate of 2.5% is well above rates elsewhere. This then goes to illustrate our key currency point – the NZD is well supported and it is not reasonable to expect that any bouts of weakness will prove long-lived. If I Were A Borrower What Would I Do? Wholesale interest rates have fallen over the past week spurred downward by the cutting of Japan’s deposit rate to -0.1% and fall of Japanese ten year government bond yields below 0% for the first time ever, new falls in oil prices assisted by the International Energy Agency lifting its estimate of excess production, more declines in share prices centred around tech, energy, and banking stocks, and growing worries that the world economy is in for a decent downturn. The one year swap rate here in NZ has fallen to near 2.60% from 2.65% last week and 2.75% one month ago, and the five year rate to near 2.86% from 2.93% and 3.16% respectively. Does this mean bank fixed lending rates are going to fall sharply? Not as much as you might think because one of the things happening offshore is that as investors worry about everything around them they are increasingly worried about the profitability of banks in Europe. This has led to a general shying away from funding banks in general around the world meaning we NZ and Australian banks are having to pay more to get our offshore funding. We raise funds in foreign currencies at foreign market interest rates and swap that money back into NZ dollars with the cost of the swap to remove exchange rate risk effectively raising the interest rates we pay to NZ levels from foreign levels. So no, we do not raise cheap money offshore to lend for big margins in NZ. The only way you can do that is to not hedge away the risk of exchange rate movements and that would be a very stupid thing to do in stable times let alone the increasingly unpredictable risky environment we live in nowadays. For Noting Nada.
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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]]> Tony Alexander’s Weekly Economic Overview February 4 2016 https://eveningreport.nz/2016/02/04/tony-alexanders-weekly-economic-overview-february-4-2016/ Thu, 04 Feb 2016 04:30:27 +0000 http://eveningreport.nz/?p=8927 ]]> Analysis by BNZ Chief Economist Tony Alexander.
[caption id="attachment_3709" align="alignleft" width="150"]Tony Alexander, BNZ economist. Tony Alexander, BNZ economist.[/caption] Two weeks ago I listed reasons why despite the dairying downturn growth in the NZ economy would remain good especially compared with other countries and this would limit scope for lower interest rates, support jobs growth, and keep the NZD from falling much. This week has brought a surge in others saying the same thing. One trigger was the better than expected labour market numbers yesterday showing a fall in the unemployment rate from 6% to 5.3% and 0.9% jump in jobs in the December quarter despite dairying weakness. Another was the jump in net migration over calendar 2015 to 65,000 or 1.4% of the population from a negative flow during 2012. Regarding interest rates the Reserve Bank Governor yesterday reminded everyone that the RB concentrates not just on the headline inflation rate of 0.1% when setting policy, but core inflation which is currently near 1.6% or so, and issues of financial stability and avoiding volatility. His comments have reduced growing expectations of another rate cut and helped the NZD to end this afternoon two cents higher than a week ago against the Australian and US dollars.

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Unemployment Rate The Lowest Since 2008 I started the Overview this year with an article noting that although there are worries offshore we have plenty of things helping support growth in the New Zealand economy, limiting the chances of further interest rate cuts, and keeping the currency well supported. These were the themes repeated strongly this week by many commentators following the good labour market data yesterday and by the Reserve Bank Governor as well. Yesterday we learnt that during the last quarter of 2015 there was a good hike in job numbers around New Zealand of 0.9% or 22,000 people. This followed a 0.5% fall in the September quarter so the result does have an upward bias and it would be best to say that on average last year job numbers grew 0.3% a quarter and this pace was close to sustained in the second half of the year. The unemployment rate interestingly and completely against expectations fell away to 5.3% from 6% in the September quarter and 5.8% a year earlier. In fact the rate is now the lowest since 4.6% at the end of 2008. The decline partly reflects some people leaving the workforce taking the participation rate down a tad to 68.4% from 68.7%. Nonetheless, the result remains a good one which is supportive of good consumer sentiment and household buying.
Compared with a year ago employment in agriculture was down 0.6% but in construction it was up 13.4%, real estate 10.4%, and all industries 1.4%. But yet again there remains zero evidence that the pace of wages growth in New Zealand is accelerating as one would expect to have happened by now were it not for the role of the global financial crisis in changing the way things link economically these days. The wages measure which I use, an analytical series created by Statistics NZ where an attempt is made to strip out changes in work quality and quantity, rose 2.7% over 2015. This was the same pace of change as the year to September and statistically-speaking unchanged from the 2.6% pace of 2014. The rises in 2012 and 2013 were both 3.0% and 2011 was 3.2%. But with inflation at 0.1% that means a 2.6% real wage rise which is brilliant! Hence strength in consumer spending. This means that the Reserve Bank will struggle to look at the fall in the unemployment rate and conclude that wages growth is about to take off. Thus the door remains open for another cut in interest rates though our view is still that they don’t want to cut and will just get by without doing so. This is the case even allowing for the further 7.4% fall in the average dairy auction price this week which raises the chances of Fonterra having to cut this year’s payout forecast again. In fact on Wednesday the Reserve Bank Governor was at pains to stress that although headline inflation is low at just 0.1%, the Policy Targets Agreement requires the RB to take into consideration a lot more than just the main CPI reading when setting monetary policy, that price shocks stemming from the likes of oil price changes can be “looked through”, and that core measures of inflation are close to the mid-point of the target band. Those comments dashed some optimistic expectations out there of another rate cut soon and coming on top of the strong jobs numbers caused a spike in the NZ dollar toward 66.5 cents last night. To repeat, our currency is well supported by non-dairy exports doing well, the domestic economy being assisted by strong construction and migration, and now reductions in expectations of tighter monetary policy in the United States plus the desperation-driven cut in Japan’s key rate to -0.1%. Housing Dwelling supply continues to move upward in Auckland while falling away rapidly now in Christchurch. In the three months to December the number of consents issued for the construction of new dwellings in Auckland was ahead by 24% from a year earlier while for Canterbury there was a decline of 24%. For all the rest of New Zealand there was a rise of 38%. Regional house building is rising strongly which will make boosting Auckland house supply even harder as builders doing the same job for the same wage in the regions will face far lower housing costs for themselves than working in Auckland. For all of 2015 Auckland consents totalled 9,251 which was a strong 23% rise from 2014 and the highest annual total since June 2005. This is good news for Auckland and hopefully this year will bring another 23% rise to 11,400. But while dwelling supply outside Canterbury is growing well, so too is demand. Adding to:
  • the pent-up demand from those people who have after seven years finally given up on expecting house prices to collapse,
  • buyers edging toward minimum deposit requirements, and
  • foreign buyers getting their heads around the very simple bank account, IRD number and bright line text rules,
we have still booming net immigration. In calendar 2015 NZ received a net gain from permanent and long-term migration flows of 64,930 people. This was well above the average net gain of 10,000 people per annum, 2014’s gain of 50,922, and the 2012 loss of 1,165. Over the past year departures have fallen 2.4% after declining 18.3% over 2014 signalling that the decline in you and I leaving is flattening out. But arrivals for the year were up 11.5% after rising 16.3% in 2014, signalling a far slower pace of flattening. Is the net gain slowing down yet? In seasonally adjusted terms we can see some hints of this happening with the annualised net gain for the December quarter at 71,360 from 67,520 in the September quarter and 59,560 in the June quarter. But the numbers are still going up and with Auckland receiving over 60% of the net gain, their 38,900 extra people last year required 13,000 extra houses. Consents for only 9,251 were issued therefore the shortage got worse last year and even much worse than suggested here as natural population growth has not even been taken into account! It is worth noting that according to the realestate.co.nz monthly report the inventory of listings nationwide at the end of January was 31% lower than a year before at 26,832. This represented 14.7 weeks of sales from 21.4 a year ago and shows us how so much stock out in the regions has been soaked up in the past year as buyers have shifted their attention from Auckland. Auckland’s inventory in January was just 13% down from a year earlier and weeks taken to sell a property higher at 10.3 from 9.4. NZ Dollar The Bank of Japan last Friday cut the interest rate banks receive for deposits with the BoJ which has been zero for many years to -0.1%, sending the Yen down and sharemarkets around the world skyward. The move follows the failure of money printing to generate sustained growth in Japan which followed failure of low interest rates to boost growth and failure of ongoing easing of fiscal policy. 90% of printed money is right back with the BoJ as banks find customers have little interest in borrowing more and corporates anyway are sitting on a huge pile of cash already. So the rate cut is very, very unlikely to have any noticeable impact on Japanese growth. The relevance for us is some extra strength in the NZD against the Yen and we have risen to 78.6 from 76.4 last Thursday. This rise however mainly reflects the NZD’s jump against the USD to 66.8 cents from 66.4 as the markets have reacted to NZ’s good employment data and comments from the RB Governor dampening down expectations of further monetary policy easing in NZ. This change in view also accounts for us rising back up against the AUD to 93.2 from 91.6 meaning the NZD is back where it was a fortnight ago. You will find current spot rates here.  If I Were A Borrower What Would I Do? Fix three years at 4.49%. Simple as that, but leave a proportion floating to allow flexibility for early repayment. Chances are good that the RB will not cut the cash rate again unless things turn to custard offshore, and while our official view is they start raising it late next year the risk is no move before 2018. For Noting A couple of weeks ago I noted the business opportunity available of buying Nespresso coffee capsules in Australia and selling them in New Zealand. The people from Muzzbuzz kindly sent me some of their capsules which cost 75 cents each postage free for three boxes of ten (even lower for boxes of 50) versus just over $1.00 for each Nespresso capsule bought instore. The taste is good and you might like to check them out at www.muzzbuzz.co.nz
The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz To change your address or unsubscribe please click the link at the bottom of your email. Tony.alexander@bnz.co.nz
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