By Alex Tarrant
Auckland's housing market is shifting back into boom territory as investors dissatisfied with low deposit rates shift back to property, while consumers in the rest of the country seem intent on controlling their spending, BNZ chief economist Tony Alexander says.
In his latest Weekly Overview, Alexander said that a recent run of disappointing data - unemployment and retail sales particularly - would still not shift the Reserve Bank to cut the Official Cash Rate.
He warned cutting interest rates now would encourage "even more ageing investors to quit low yielding bank deposits for residential property investment vehicles [which] will not only hasten and enlarge the housing boom-bust but eventually destroy the wealth of many unsophisticated and unlucky people."
He believed the OCR would be left on hold until 2014. In terms of mortgage rates, Alexander said he would either sit floating or fix for one year at 5.25%, but would also keep an eye open for a discounted long term fixed interest rate.
Data showed New Zealand's post-GFC recovery had yet to find its legs, Alexander said.
"But a construction boom looms and that will forestall any additional monetary policy easing here while keeping the NZD strong and likely rising assisted by investors liking our export product base," he said.
"Meanwhile the Auckland housing market is shifting into boom territory assisted soon by a wave of investors discontented with low returns on bank deposits and eager to find property exposure."
Yesterday, ANZ cut a chunk of its term deposit rates to market lows ("pity us savers," Alexander wrote in the Weekly Overview), while earlier this week the ASB investor confidence survey showed rental property leading the way for a bounce in confidence over the last quarter.
No cut, Auckland housing, quake rebuild
"Many of the data releases in New Zealand recently have turned out on the much weaker than expected side and this just reinforces the caution we’ve been advising regarding the strength in our economy," Alexander said.
"People seem to still be intent on controlling their spending (outside housing in Auckland) and businesses remain cautious in their hiring. This then is a continuation of the situation we have seen for over three years now – namely ongoing uncertainty and complete lack of insight into when cautious attitudes will change, leading to less than expected strength in economic activity," he said.
Last week it was the turn of the Household Labour Force Survey which showed job numbers falling an unexpected 0.4% in the September quarter to sit unchanged from a year earlier. This week it was the Retail Trade Survey which showed ex-auto spending after adjusting for inflation and seasonal factors falling 0.3% during the September quarter.
The retail result therefore was in line with the sometimes wobbly Electronic Card Transactions monthly series which showed nominal seasonally adjusted core retail sales falling at an annualised pace of 0.1% in the three months to October.
"Do these weak numbers mean the RBNZ will cut the official cash rate soon? The probability of a cut has risen. But we all know that just around the corner lies an inflationary surge in construction spending associated with the rebuilding of Christchurch, catch-up house construction in Auckland, infrastructure activity, water-tightness corrective work, and earthquake strengthening," Alexander said.
"Therefore the chances remain low that the RBNZ will ease monetary policy again. But the data do reinforce the point that while the next change in monetary policy is likely to be a rate rise, this probably won’t happen until 2014," he said.
"I remain on the pessimistic side of those forecasting growth and deriving interest rate forecasts and see myself staying there for quite some time – though growth will clearly lift next year for some obvious reasons.
"But there will be an offset to the construction upturn from the high and probably still rising NZ dollar crimping exporter returns – especially for manufacturers – plus tightening fiscal policy (when will they get around to delaying the surplus target one year?) and wealth losses associated with the PSA outbreak affecting Kiwifruit, plus all our cash flows being constrained by rising insurance premiums," Alexander said.
Why won't the RBNZ cut?
"First, the housing market is rising already and will become a source of inflationary pressure from next year so cutting rates now and encouraging even more ageing investors to quit low yielding bank deposits for residential property investment vehicles will not only hasten and enlarge the housing boom-bust but eventually destroy the wealth of many unsophisticated and unlucky people," Alexander said.
"Second, there is no evidence that businesses are refraining from investing and hiring because interest rates are too high. In fact decades of research shows the biggest influence on businesses is their confidence and that is fine currently," he said.
"Third, for those arguing that relative interest rates are key currency determinants and because our 2.5% rate is above some foreign rates our NZD is high – think again. Since September 2011 the extent to which Australia’s cash rate sits above our own has shifted from 2.25% to 1.0%. But rather than rising against a less interest rate supported AUD the NZD has fallen from 79.4 cents to currently just over 78. Currencies are being driven by factors other than interest rate differentials currently."
Fix of float?
On the all important fix or float question, Alexander said:
"I would either sit floating or fix for one year at 5.25%. But I would also keep an eye open for a discounted long term fixed interest rate in order to get some certainty about my cash flows during these continuing uncertain times and because at some stage interest rates will blip up. But we do not appear remotely near that point yet so borrowers look like facing good conditions well into 2013. Pity us savers though."