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Auckland housing heading back to boom territory as investors sick of low deposit rates turn back to property, BNZ's Tony Alexander says

Posted in Property
Tony Alexander, BNZ

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."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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18 Comments

Heading into boom territory -

Heading into boom territory - music to all our ears!
Surely all the grey dullards around here are sick of low returns in the bank - get out there and into some Auckland property asap.

Sorry, not yet Mr SK Man.

Sorry, not yet Mr SK Man. Sooner or later, everybody is going to remember what we were taught in the beginning; Cash is King. The period when that is prevalent is when I will spend mine. Gee, you wouldn't be started to sweat there would you?
PS: Jousting with you is all fun and games; no malice or anything.

you replied - obviously

you replied - obviously meaning you are a grey dullard.
have been sweating today - but only due to exercise!
if ur in cash now - you are missing out - admit it.

Nope because only fools act

Nope because only fools act as if there is no risk...
http://www.youtube.com/watch?v=c0KYU2j0TM4&feature=relmfu
regards

Property bad, shares good -

Property bad, shares good - you'd have done much better if you'd not invested in property, but instead a low risk managed fund like unmm... Ross Asset management or something.

In summary: The general

In summary: The general populace, bored of small returns in bank deposits decides to gear up and gamble the lot on a property bubble, making the banks less safe

Cash; Very few have it in

Cash; Very few have it in first place, or seem game to retain during this ridiculous scramble for AKL property. Supply and demand applies to everything eventually.

Note Alexander's take on the

Note Alexander's take on the OCR and that of the BNZ research team headed by Stephen Toplis:
http://www.interest.co.nz/news/62063/bnzs-stephen-toplis-says-case-growi...
Cheers
Alex

Any big banks out there keen

Any big banks out there keen to offer 5% for 7 year fixed mortage rates ? Come on big banks lets have some good long term rates.  We never seem to get good deals on 7 year rates.  Any special mortgage hobbit deals this Christmas and over the next year for long term rates would be most welcome.

Back in March 2008 the RBNZ

Back in March 2008 the RBNZ did a paper study on........ A structural approach to the understanding and measurement of residential mortgage lending risk  ...
 The Project was named...........TUI...goodness me.
I would after reading the attached papers only hazzard a guess that  the risks and concerns since the publication have magnified accordingly to 2012 maniacle lending behaviours.
For those who care to read it, I'd be very nervous about leaping to property  as your Eldorado, I'd be downright scared shitless if your leveraging to do so.
 A point of interest is the RBNZ's nonchalance given the historicals in the data...
 Here it is..TUI..Ha.....
www.fdic.gov/bank/analytical/cfr/2008/jun/Project_TUI-Final.pdf
Worthy of viewing in context  to the above is the IMF paper on Bank Capital Adequacy in Australia (inc N.Z.) big four........http://www.imf.org/external/pubs/ft/wp/2012/wp1225.pdf
The question for a little further down the road is who is holding the risk on the potential for growing nonperforming loans.

Now here is a list of 19

Now here is a list of 19 reasons why prices in Auckland in particular are going to keep rising. Enjoy, or despair, depending upon whether you own or wish to own Auckland property- And ask yourself – where does the greater number of votes lie? With those wanting to get their foot on the ladder, or with those who already own property? Hence no big legislative changes. As the Americans say, turkeys don’t vote for an early Thanksgiving
1. Auckland did not enter the 2008 recession then late-2008 into 2009 global financial crisis with an over-supply of property. Shortages of personnel constrained house construction from 2004 through 2008.
2. The shortage has become worse in the past four years and last year annual consent numbers were at a four decade low.
3. The government is explicitly aiming to grow Auckland’s population as a means of achieving “agglomeration” benefits for economic growth which accrue from high interaction amongst economic players.
4. Despite the biggest global financial crisis since the 1930s NZ house prices only fell 11% at their worst and now sit on average above 2007 levels.
5. Removing the ability to use LAQCs to offset housing investment losses against other income has produced no flood of properties onto the market.
6. Removing the ability for property investors to deduct depreciation expense has not produced any flood of property onto the market.
7. Over the past four years young people have put off their normal household formation (leaving home, buying their own house) because of worries about mortgage availability, falling house prices, employment, and ability to raise a deposit. Now those four years worth of people are entering the market and looking to “catch-up” on their purchase.
8. Construction standards in New Zealand are always rising (watertightness, earthquake strength, energy efficiency) and this boosts construction costs.
9. A big fall in apprentice numbers in the past five years coupled with the loss of skilled people to
Australia and older trades people leaving the sector rather than get licensed means labour-related construction costs will rise and labour will not be available to build houses even were more land available.
10. Banks are not going to step back into the property development sector left bereft of funds from the closure of finance companies.
11. Poor growth prospects in the next few years for Western economies mean their and our interest rates will remain at low levels for many years. This means low borrowing costs for home buyers.
12. Low returns on bank deposits mean older savers in particular will be seeking extra yield through investment in residential property either directly or through a yet to appear wave of property investment vehicles. (Be in no doubt. They will come.)
13. The migration cycle appears to be on the cusp of turning and if the housing market has performed so well with net outflows over 3,000 in the past year the implications of positive gains are clear.
14. The nature of net inward migration is changing toward greater numbers of people coming from Asia and with Asia’s middle class booming in size potential inflows of wealthier people are large.
15. The NZ unemployment rate of 6.8% is likely to fall quite quickly over 2013 as the construction sector booms on the back of the rebuilding of Christchurch.
16. The aging population will produce a decrease in the average house occupancy rate and therefore a need for more houses for any given population size. People will retain their old homes with many bedrooms to allow visits by grandchildren, gyms, home offices, home cinemas etc.
17. The government has announced its efforts to improve housing affordability (lower prices) and they are minor and unlikely to have a noticeable impact if any for many years.
18. Any credibility people may have assigned to those who have been predicting big price declines simply because prices have risen a long way and now fallen sharply in some other countries has gone out the window. Few people will now listen to their price decline views.
19. Members of the Opposition believe monetary fairies can make the exchange rate settle permanently lower by forcing interest rate cuts and printing money while letting inflation therefore go up. Given the non-zero possibility that such economically ignorant policies get introduced it is worth getting inflation protection by investing more in property – not less.

Tony has spoken. Now go and

Tony has spoken.
Now go and spread the word of the Lord.

So looks like 10% plus price

So looks like 10% plus price increase for Auckland real estate for the next two or three years - median Auckland house price perhaps $800,000 by 2015.
 

Why the link activate is not

Why the link activate is not working in transfer I do not know.....should be active...?
ah well, just paste em if interested.

christov: if you want to

christov: if you want to paste a link that automatically activates you should prefix the URL with HTTP:// instead of WWW.
 
http://www.fdic.gov/bank/analytical/cfr/2008/jun/Project_TUI-Final.pdf
or
http://fdic.gov/bank/analytical/cfr/2008/jun/Project_TUI-Final.pdf

 

Cheers for that iconolast , I

Cheers for that iconolast , I should have remembered  , but been gone a while so uh well eh....