Global View - December 2006
By John Paine
Last week both the Australian and New Zealand Reserve Banks left their official cash rate unchanged at 6.25% and 7.25%
No changes were expected. But what wasn’t expected here was the stern tone of Alan Bollard’s accompanying message.
“Looking ahead”, he said, “our projections and risk assessment suggest that a firmer monetary policy stance could still
be required to maintain downward pressure on inflation in the medium term. Further tightening cannot therefore be ruled
out. This will depend on economic outcomes and in particular the emerging trends in housing and domestic demand
indicators. Any easing of policy must remain some considerable way off.”
Translated this means:
• Until people stop spending on consumer goods using the new equity in their homes from rising house prices, we’re
going to keep the pressure on interest rates.
• Any easing in interest rates remains a long way off.
The market reacted by raising wholesale interest rates and the NZ dollar immediately rose to USD 68.7 cents.
The RBNZ estimates $7 billion has been withdrawn from housing equity over the last 4 years and accounts for about 15% of
the increase in consumption.
It goes on to note that this has led to a redistribution of wealth which accrues to older age groups as they leave the
housing market. This has been paid for by increased borrowing from new buyers - largely financed by overseas banks.
Younger generations are paying for the wealth transfer in the form of reduced housing affordability, higher debts, or by
foregoing home ownership altogether.
In most Australian state capitals housing affordability has dropped to lows not seen since the late 1980s when mortgage
interest rates reached 17%. Affordability is worse here in New Zealand where the average house price is 8 times the
average income compared with 6 times in Australia. Here in 1986 the average house price was about 3 times the average
There’s a view that because interest rates now are half what they were then, servicing costs are lower. But the real
problem, as the BNZ notes, is that the level of debt has doubled since 2001 while incomes have only risen by a quarter.
In 2001 the average amount of debt people were servicing was 7.8% of income but by March this year it had risen to
The good news for New Zealand house owners is net immigration – which supports house prices - is still ahead of the
10,000 average over the last 10 years. At 13,760, annual net immigration is more than double last year’s increase and
ahead of the Reserve Bank’s forecast of 12,000.
There’s also been a rise in short term visitors to New Zealand. The 186,000 in October was the highest ever for that
month – despite a high New Zealand dollar.
House prices offshore have moderated in response to interest rate rises. In the U.S. homes sold in October fell for the
third straight month and posted the biggest drop on record. But in spite of this moderation world central banks are
still on inflation alert.
At a November meeting of G-20 central bankers and finance ministers in Melbourne, Australian Treasurer Peter Costello
said “There are many engines of growth going on in the world economy at the moment, and that is why global inflation is
ticking up. And that’s the time to start to get wary.”
And they are getting wary. Last week the Bank of England held the Official Bank Rate at 5.00% but the European Central
Bank increased its Official Rate by 0.25% to 3.5%. Many UK and ECB economists see a 0.25% rise in both early next year.
But it’s not just inflation that’s making central bankers wary. There’s concern about the effect a property crash could
have on financial institutions and the economy.
In its November Financial Stability Report, the New Zealand Reserve Bank repeated its concern that “New Zealanders
continue to be heavy users of foreign savings to largely finance housing.” And it talks about the risks banks and
non-bank lending institutions are exposed to in this respect.
They note that there were three finance company failures this year – all of which specialised in lending on second hand
cars. . But they say “loan defaults are likely to increase in other sectors of the slowing economy, including
residential mortgages. Lending for property development is one significant area for some non-bank lenders.”
The caution expressed is directed to those non-bank lenders exposed to “emerging sector weakness, particularly those
that have been growing their loan books rapidly and have no experience of preparing for, and managing, a slowdown.”
To see this report CTRL + click here http://www.rbnz.govt.nz/finstab/fsreport/index.html
An excellent article by Dr Neville Bennett on www.interest.co.nz discusses New Zealand financial institutions’ exposure
to the residential property market. In particular the different exposures bank and non-bank lenders have to a property
price correction. He concludes New Zealand Banks are healthy under present conditions and that the non-bank financial
company group are diverse, most are sound, and know their niche.
To see this article CTRL + click here http://www.interest.co.nz/bennett-6Dec2006.asp
So will there be a housing market correction?
Spicers latest Wealth management report concludes slowing house prices have reduced the rate of annual increase in net
household wealth to its lowest level in 4 years.
Arcus Investment Management manages funds for Spicers and their chief economist Rozanna Wozniak, summed it up by saying
“The last five years have mistakenly led us to believe that rapid gains from housing have always been the norm. In fact,
the last five years have been the exception.” She went on to say “Fundamentals suggest that further weakness in the
housing market lies ahead.”
In Tony Alexander’s BNZ Weekly Overview last August, he posed the question as to whether one should buy a residential
investment property now or wait. His response “we can’t see anything appearing on the horizon that is going to scare the
bulk of buyers away, therefore one might as well buy now and lock in a five or seven year fixed interest rate” seems
pretty reasonable to me.
In my view the world economy remains strong with places like China and India reaching unheard of growth. The U.S dollar
has weakened recently – the main reason the NZ dollar remains high – but it’s such a large long established economy I
cannot see anything but a soft landing there.
New Zealand is a part of the global economy now and it’s going to take a major correction offshore to move the housing
market down drastically here.
So coming into 2007 I think we’ll see pretty much the same as we did in 2006, including a surprisingly resilient
Over the next year or so I think there’ll be more interest in the National Party’s new found strength with John Key as
its leader - and the policies he will expound.
And hey, have a great break. See you in the New Year.
John Paine B.Sc. Dip BIA Global Pacific Corporation Limited P O Box 3229,
Auckland, New Zealand
Please note that all opinions and statements expressed in this newsletter are indicative of my opinion only. Global
Pacific Corporation Limited issues no invitation to rely on the information contained in this newsletter and intends by
this statement to exclude liability for any such opinion and statement.