Editors choice comments
I have to say I was surprised to see so many people still buying in Auckland from September last year when the data coming out showed a trending down in prices. Don' t people read the news. Don't they take advice. If the current trend continues you will have a reasonable number of people in negative equity, especially first home buyers who bought last year. Sucked in by agents, the Herald and its daily support of the real estate industry, brokers, valuers, and everyone else who lives off the industry.
Does monetary policy in a very small country like NZ have any effect at all on inflation? We have a property bubble propped up by foreigners and immigration plus tourism holding up the economy, along with internet shopping determining prices of consumer goods, surely it's the rate at which the rest of the world can borrow that is more relevant.
Toppy has nailed it in this case (finally!).
Refer housing bubbble of the 2000s in the US. Interest rates left too low for too long, igniting a housing bubble - the rest is history. Some would say that we are seeing echoes of that here already.
Those who blithely spout about the horrors of deflation need to distinguish between CPI deflation and asset price deflation. In the case of the US, fear of CPI deflation led to a bubble, and massive asset price deflation down the road. The latter turned out to be far worse than the former.
Steady state CPI, or outright deflation, is actually the...by: Brutus Iscariot
You are right that low interest rates are a symptom, but i think they're more a symptom of a previous policy error, "taking the easy way out" and postponing the day of reckoning.
Too-low interest rates keep zombie firms in business, contributing to overcapacity that ironically suppresses inflation in turn which leads to a vicious cycle. See what overcapacity has done in the oil market, and i'd argue that is in large part due to free money.
It also forces people into riskier asset classes to make an acceptable return on investment, leading to asset bubbles and creating instability in the...by: Brutus Iscariot
Finally even the banks are admitting the Emperor has no clothes. Inflation targeting worked when there was inflation to target but it has resulted in massive debt levels. Who would have thought that reducing interest rates would lead people to borrow more?
Time for Mr English to actually do something. Reducing income taxes (including corporation tax) and introducing a bank levy sounds like a good idea to me. A 1% per annum levy on their total loan book of $404,356,000,000 would provide a useful $4,043,560,000 towards tax cuts elsewhere. Where's the harm?
the author does not address the misallocation of extra money going into inflating asset prices and not into consumer spend.
we only need to look at the dairy industry to see how farms prices shot up, debt was taken on to expand production and grow supply but then demand fell away. maybe if the interest rates had been HIGHER farmers would not have taken on the debt and been more prudent with their plans.
ZIRP has distorted the markets by removing risk and reward, now its all reward borrow and invest in assets because CB are falling over each over to see who can create the most cheap credit
The PTA and the purpose of monetary policy is inflation not asset prices. House prices are only a small driver of inflation. If there is a risk to banks from asset prices these should be addressed through prudential policy not monetary policy. The RBNZ is wrong to risk deflation and all that flow from it for prudential policy reasons.
by: Country boy
ag lending has increase $4b in the last 12 months. most I'm guessing would be to fund cash-flow. banks by capitalising interest, extending credit, and not provisioning losses realistically, are compounding the problem.
with each month that goes by, potential losses increase exponentially.
there must be a few nervous rural lenders around, bank bosses, the rbnz guv. not to mention all the other parties caught up in the ag sector.
i suspect the rbnz is putting a fair bit of pressure on the banks behind the scenes.
apart from stress testing rural portfolios i suspect there is talk about...by: kane02
It is obvious that the RBNZ does have a tightening bias, in all circumstances, and in all parts of every cycle.
Is this a historic heritage from the NZ Brash era of tough inflation fighting, or is it an external influence pressure from the World Bank/IMF etc?
Only when the RBNZ's hand is completely forced, e.g. The large Christchurch earthquake, or the GFC1, or completely dominant deflation data will they cut rates.
Mr Fiennes is making an assumption that is hugely flawed -"Deposit insurance blunts incentives for banks and depositors to monitor and manage risks properly." He assumes that the average depositor is knowledgeable, equipped and has the time to adequately monitor the banks for the level of risk each poses so that he can then protect his funds. In this case he is clearly proving that the Ass in this assumption is himself as the current systems leave average kiwis with little option but to use a bank. He also forgets that it has long been an identified issue that financial literacy is an issue...by: murray86
Dear Toby Fiennes
Cut the crap, your argument that Kiwi depositors monitor their banks is typical of a country where
its regulators FAILED to monitor its Finance Companies resulting in a loss of over $5,000,000,000:00
5 Billion dollars Toby!
With a populist Prime Minister who comes from a investment banking background it remains very strange indeed that Mom & Pop NZers should be expected to "Monitor Banks" themselves in order to
keep the NZ banking system in good shape!
Banking in Canada I receive up to CA$100,000 protection & Australia AU$250,000
As NZ is largely a Australian branch...by: downunda
It does work like that, but only for Harmoney who take a bite out of principle repaid as well as interest paid. If you lend out money which is repaid early, you pay fees even if you earn no interest.
This makes it particularly galling that Harmoney are so keen on 'top ups' where they cancel the loan and re-issue a larger amount. For the initial investor, it counts as an early repayment and potentially means a loss, while Harmoney get to double dip on fees. Definitely an area for improvement there if they want to keep investor money rolling in, it's nice when the company's interests are...by: mfd
A justification speech for trying to defend the RBNZ continuous failure to reach its target inflation. Worse an attempt to shift its original inflation target because the RBNZ can't reach it.
I can't recall the All Blacks asking to make the goal posts wider to have a better chance of scoring.
He has taken the "she'll be right" adage to a level I've never heard before. I'm fearful of what the next pearls of wisdom will contain. Almost Pythonesque.
Clearly we should be doing a lot more with our milk than just selling it as WMP. I bet Lewis Rd Milk, Green Valley Milk and Puhoi Valley are having no such problems
Arguably the banks are doing better. Lower interest rates means a given income stream can support a larger loan. As the value of bank loans to NZ goes up the interest payments take a larger share of the societal surplus. Wealth flows to those who would relend it, rather than to those who would spend it or those who would build productive capacity with it.
Total bank claims on New Zealand now total $404,356,000,000,000.http://www.rbnz.govt.nz/statistics/tables/s7/
This is a road to nowhere.
I heard this morning that a farmer I know of has been asked by his Bank to sell his Fonterra shares, pay off some debt and go to Open Country. What concerns me is the fact it is a third generation farm, it is being run well and the wife works full time off site to supplement income. If the Bank wants to force the issue with this kind of farmer what are they going to do with the sharemilkers and newbies on the scene. Watch this space.
30% equity is no barrier to seasoned property investors. Recent capital growth in Auckland (20% + in one year) has dramatically improved debt to equity ratio. On a related topic, debt servicing costs have dropped dramatically as well making it extremely easy for investors to purchase more property. Oh I forgot to mention that rents are increasing as well, that makes it easier as well.
Auckland actually is a net contributor to other regions infrastructure, its all the petrol exercise taxes, a great portion of which gets paid in AKL.
Could get hard to find willing 'investors' as that is what OBR has made depositors, to keep funding losses in NZ farm and housing markets.
It gets to a point where just getting your money back is a relief and I for one am not going there.
There is a report in the Sydney Morning Herald that house prices in Sydney have dropped 3% in value over the December quarter, the largest drop in some time. This could not possibly happen of course in Auckland as we are special. Prices will only continue to go up.