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Opinion: How the stage is set for Kiwi living standards to be forced to change
August 25th, 2009
By Infometrics economist Gareth Kiernan
Over the last five years, New Zealand’s export volumes have grown by an average of just 1.4%pa. During that period, of course, exporters have grappled with a high exchange rate and an international recession. But the growth figure is still the worst in more than thirty years, and continues a trend of a deteriorating export performance since 2003.
Exports aren’t the be-all and end-all for the economy, but their lacklustre performance highlights the need for New Zealand to alter its economic model if we’re to avoid a debt crisis down the track.
The one feature that has helped keep New Zealand afloat over the last few years has been the terms of trade. Put simply, the price of those products we export has risen, while the price of what we import has fallen – so our purchasing power on the world stage has improved. Without the terms of trade lift, our export incomes in recent years would have looked nowhere near as impressive, and the current account deficit would have been much worse – although arguably financial markets would have driven the exchange rate lower to help offset these negatives.
Unfortunately over the last year, the terms of trade has come under pressure as our export commodity prices have fallen. Looking forward, Infometrics is optimistic that some of that decline in export prices will be reversed, and that the prices of manufactured imports will be held down by soft global demand and international overcapacity.
But maintaining a strong terms of trade is only half the equation – growing our export volumes as well would make our external position much stronger. And this is where it’s hard to be optimistic about New Zealand’s prospects.
Our manufacturing sector has come under increasing pressure over the last two decades, due to advance of China and a volatile exchange rate. Between 1989 and 1994, manufactured exports grew by an average of 11%pa. The trend growth rate has slowed consistently since then, averaging just 2.2%pa over the last five years. Prospects for the manufacturing sector don’t look any brighter, with China’s growth set to maintain pressure on New Zealand firms.
Notwithstanding the primary inputs required for the manufacturing sector, achieving an increase in manufacturing production is relatively easy in theory compared to the primary sector. Primary production is much more constrained by stock cycles, the availability of land, weather conditions, and environmental concerns. But if manufacturing is going to continue fading in importance, what hopes do the primary industries hold?
With dairy prices having fallen substantially since mid-2008, the conversion of land to dairy farming has slowed significantly, and so growth in dairy volumes is unlikely to be as strong as we have become used to over the last few years. Indeed, much of the growth in dairy volumes has been achieved at the expense of meat production anyway, as sheep and beef numbers have steadily declined.
Transport costs and the lack of availability of ships have prevented any growth in forestry exports over the last five years. These pressures have eased, but probably only temporarily. As world demand recovers, forestry prices are likely to improve, but exporters will also find themselves struggling against the obstacle of distance that has increasingly inhibited the sector over the last decade.
The Tui and Maari oilfields have generated significant export growth over the last few years, but the typical production profile of an oilfield sees output peak early and then gradually decline over time. Without further oil discoveries, export volumes are likely to shrink, rather than grow, over coming years.
Excluding high-end manufacturing (which has growth potential, but is such a small part of our economy), we are left with services. The largest component, tourism, has struggled to maintain the strong performance achieved throughout the 1990s, with visitors from Australia the only growth market at the moment.
That presents its own problem – an increasing proportion of people arriving from Australia are expat New Zealanders visiting family. Typically they don’t spend much money, so provide less export revenue than European, Asian, or American tourists.
Much comment has been passed on how far New Zealand has slipped down the OECD league tables since the 1950s, and how far our incomes have fallen behind those in Australia. But New Zealanders’ lifestyles generally do not reflect our economy’s relative underperformance. Our spending habits are still in 1950s mode, running up debt on the basis that our incomes will catch up at some point.
Peering out from the bottom of this recessionary hole, it’s hard to see our export sector filling that brief. On that basis, the stage is being set for a realignment of Kiwis’ expectations about their living standards – and the required adjustment could well be a nasty shock for many people.
________________
* Infometrics is an economic information and forecasting company based in Wellington. To find out more, see its website here. This piece first appeared in the Dominion Post.
Tags: Current Account, Current account deficit, dairy, debt, Exports, Gareth Kiernan, Imports, Infometrics, Living standards, manufacturing, oecd, Term of trade
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August 25th, 2009 at 12:03 pm
Should’ve warned us at the top , to take a little sedative , before reading that lot , Gareth . Are we to believe that , as it is unlikely we will change our profligate lifestyles by personal discipline , or by commonsense , the change will be forced upon us by an economic hard landing . …….. . It may be that we have to crash into the fiscal brick wall , to wake us up !
August 25th, 2009 at 12:24 pm
high inflation of food prices will save us, NZ.inc income will sore, and all our problems will be solved
August 25th, 2009 at 12:33 pm
Another profitable Kiwi business , Taylors Group ( laundry services ) , is to be fully acquired by its dominant shareholder , Spotless Grope of Australia . As if we need the NZX ( Weldonia ) to lose any more good firms . And as if we need all the profits of Taylors to pop across the Tasman .
August 25th, 2009 at 12:34 pm
the quickest way to wealth (and quicker way to pay off debt) is to increase debt via LAQC… what else do we spend money on in NZ…. houses… buy yourself a tax rebate…. buy a 2nd house….
sooner or later the rating agencies will start to get frustrated and a downgrade will occur…. that will be the catalyst for change?
its not about CGT or anything else, around 10% of all households own a 2nd house, with 100% debt load to ensure a tax loss…… thats a lot of money being sucked out of the nz system in int payments to foriegn shores, and a reason nzd is so high
wake up NZ….. this obsession with property investment is suffocating us.
August 25th, 2009 at 12:41 pm
hmmm this Steven didnt say that….
RT: This is not anything new….and I think its going to be forced on us….NZ has not had the bad shocks that the US has, they have 2 or 3 times our un-employment….UK, has been in a similar situation…NZ has not seen the impact so no one is changing their habits….look at the credit card spending in NZ per month…US is now seeing a 5%+ saving rate……
August 25th, 2009 at 12:48 pm
Interested: but if ppl are making money….in a way it makes sense for them as individuals….so you have to turn it into a loser for them as individuals…I can only see that happening via tax.
RT: but that’s what happened when the Govn of the day sold off its “liabilities”.. they got a quick one off cash injection which has now affected balance of payments for 20? 30? years….I wonder what the lump sum v 30 years of outgoings balances at….
Why are not mom and pop investors buying shares in Taylors?….is it the dodgy NZX? etc etc….again there seem to be some ppl in a position to make big gains short term for themselves at the expense of everyone else and NZ….until we fix these fundamental errors and omissions we will bleed for it IMHO.
August 25th, 2009 at 12:52 pm
I dont really see how LAQC’s can work with no capital gains.
The ‘loss’ due to interest being higher than rent received needs to be paid outright.
You get back around 30% of this loss, but it is still a loss that is real, and if the property is not gaining value then you are slowly pouring your money down the drain.
During the boom (will we ever see such a boom again, with credit now perminately tightened?), yes great idea, esp because rents were going up also so your yeild soon becomes positive, and you can use the cap gains to buy more properties to neg. gear everything again and get a few thou back to even out the losses untill cap. gains and rent inflation set you up for real gains again.
During corrections and recoveries that we are in and will be in for a while longer yet, not such a good plan, and unless you have a decent buffer of wealth and a secure job you could find yourself lossing a lot of money using this approach
August 25th, 2009 at 1:19 pm
@Craig
Its not just the interest being higher than rents, its also about being able to gain cashflow by taking a deduction for depreciation. The investor needs to do his/her sums but there are houses out there than can be cashflow neutral. or maybe just positive Any capital gain is then just a bonus.
Depreciation deductions are of course only a postponement of tax as when the house is sold it is clawed back and taxed at that point. if one holds forever that isnt an issue.
August 25th, 2009 at 1:44 pm
..and we export Kiwis for 10 days plus holiday to Aussie and the rest of the world -
..and they spend thousands of $ -
..and we export talented people all over the world -
..and they learn thousands of things -
..and the help to make thousands of things -
..and they earn thousands of $
..and we import thousands of things -
..and we export thousands of $ -
..and then one day there is no money left to buy thousands of things -
..and we all live in beautiful, alternative Takaka SI -
August 25th, 2009 at 1:53 pm
I keep seeing this over and over, across multi-themed threads: all forum posters are making an error when they say getting rid of LAQC’s will ‘fix’ this supposed property investment imbalance.
The known ‘rort’ to do with LAQC’s affects, I suspect, only a very small number of stupid taxpayers who have put their own house into an LAQC, and are claiming losses on it. IRD have said time and again this is avoidance, in every instance they will be struck down, and IRD is ‘looking’ for them. It was a stupid idea from the get-go to use this structure in this way.
BUT, using LAQC’s for legitimate domestic rental portfolio’s is fine, and not only in property investment, LAQC’s have a logical use across many, if not all, business types, depending on circumstances.
Although my point really is, abolishing LAQC’s is not going to do anything in regards to fixing this supposed imbalance of too much invested in property. If individuals, or more likely, mom and dad, can’t use an LAQC then all they need do is just buy rental properties in their own name (sole trader) or set up a partnership and split the losses – assuming same are being generated – and the losses are still available to offset against their other income in no different manner to an LAQC.
So abolishing LAQC’s will fix nothing vis a vis property investment, but deny many businesses a structure which suits them well, and involves no form of rort of the tax system (it allows a small business – because an LAQC can’t have more than five shareholders – limited liability, but the ability to be taxed more flexibly as, almost, a partnership, and not like Fletcher Challenge. And quite rightly so.)
Right … carry on.
(PS: and introducing a CGT is just as heinous: the solution to NZ’s problems is to radically reduce the size of state, certainly the welfare state, hence reduce government expenditure, and then cut all other forms of taxation, which will never happen so long as our mainstream economists continue to harp on about bringing in yet another damned tax to solve over-taxation in other areas, and no one, NO ONE, is making the call to cull the State.)
August 25th, 2009 at 2:25 pm
Mark : I don’t think people see ending the LAQC’s as the whole solution to our tax and house price problems . It is symptomatic of a distorted tax structure , which needs addressing . The WFF needs turfing out too . As does interest free loans for students . And I would not exempt charities from tax either……..as there are > 20 000 registered ” charities ” in this country . One for every 200 of us ! But as we have a jelly-backed National Gumnut , it is all academic , ‘cos they’re too spineless to make the hard decisions anyway . So at the next election we can vote these wastrals out………and who’re we gonna vote in ………..bugger ! Come back Winnie , we’ll forgive you , we’re that darned desperate !!!!!!
August 25th, 2009 at 2:38 pm
W.Kunz….Don’t romanticize Takaka….its struggling too. As oil prices increase we will all be stuck here, the only way out over the longest hill road in NZ. How long will Fonterra
want to send tankers to and fro? Not much else going on except people making romantic documentaries about our “beautiful alternative lifestyle”. Many hippies have realised their life’s dream of receiving the Invalids Benefit to enable said lifestyle. Must off to watch my neighbor practice juggling and bongo playing and water his green shoots.
August 25th, 2009 at 2:39 pm
There is a growing trend in black market tourism where groups are driven around in vans by a mandarin speaker (for example) who says when stopped “but these are my family member” (which presumably might be the case). These sort of operations can easily undercut the uniformed, union fee’d, certificated operators. If people can’t fit in one van they put on two or three and follow in convoy.
One more point if you work in tourism you don’t get paid over the winter in many cases: you are on call/ less work but not “unemployed”.
August 25th, 2009 at 3:14 pm
minimum US wage NZD $10.58 ph US$7.25 at 0.685
minimum NZ wage iNZD $12.00 ph
average chineese per month is about $200 NZD assume 50 hour week =
$1 per hour….
thats a good worker, who operates modern manufacturing machine, maybe making socks etc
mmmmmmmm
a engineering grad around NZD $1200 per month
masters around $1500 per month or NZD $7.5 per hour
commision earned by avergae realestate saleman selling 500k akl house
15,000 ok some goes in costs and agency fees but that would employ mr sock maker for about…… 300 weeks at $1 per hour….
mmmm
expensive tulips
August 25th, 2009 at 4:05 pm
The paradigm that gareth is using, is not very good, nor does anyone take economics, as a science seriously these days. Maybe the new paradigm will come out of physicalism. I do not know. Keynes ony tried to copy Einstein, and its fallen on it face. So I am going to unwind, to pre keynesian economics, one that does not have a production side, but an ethics.
A friend of mine, with his girlfirend, bought a house for half a million dollars. He graduated from University, however he is not a professional. So it might be fair to say he will earn around 55,000 dollars per year for the next 30years. Maybe grossing 1.6 million, over that time, less tax, making it around 1.3 million. The interest on the loan will be around half a million. So at the end of the day, it would take him his whole life just to build a house. Shouldn’t it only take, a man, a couple of years, to do that??
Not very keynesian
August 25th, 2009 at 4:11 pm
Mark:”NO ONE, is making the call to cull the State.” That’s because the Libertarian view point is extreme and loony to 99+% of the population. The people have chosen to socialise the individual’s risk and expenditure over many people and many decades, its their choice. Yes there should be constraint on the State, but no to destruction. Its quite simple, providing a service via public or private is no different, its still a payment that the individual has to meet….The American health system is a standing classical example of how the private sector is corrupt, has failed, costs more and is crippling a country.
August 25th, 2009 at 4:14 pm
The American health system is a standing classical example of how the private sector is corrupt, has failed, costs more and is crippling a country.
Yeah right. Wait to Obama socialises it, then you’ll see how a first world health system falls to a third world one, like Britain and we have.
And from some of what I have read, you could not call the US system a fully private system, it is still State run, even now.
The people have chosen…
Tyranny of the majority: precisely the problem
We can have a free society or a welfare state. We cannot have both. I want a free society.
End of thread for me, I’m working.
August 25th, 2009 at 4:17 pm
Brewster: Same goes for fruit picking…if you are prepared to move around the entire country you might get paid the minimum wage for 10 months of the year….hardly a lifes calling.
regards
August 25th, 2009 at 4:39 pm
I am not denying we have to be more productive to enjoy a good standard of living in the future. But the BIGGEST issue is not our lack of productivity, its our immense stupidity ie we BORROW money from overseas to outbid each other for property. This creates massive debt that eats all of our productivity. If we become more productive, given our stupidity, whats the bet we plow this back into housing, thus requiring us to be more productive etc etc.
The real winners from increase productivity are banks, real estate agents and the housing industry. Its that sad. Why dont we fix the leak in our tank before coming up with ways to generate income to pay for the fuel.
August 25th, 2009 at 4:43 pm
go into any high street bank with 200k and ask if you can rasie 800k to buy this boat and go tuna fishing (lets assume you can find quota)
http://www.trademe.co.nz/Trade-Me-Motors/Boats-marine/Motorboats/auction-95769468.htm
mmm sorry sir you need more capital….
ask for a mortgage on an average remuera 4 bdrm house… no trouble sir.. sign here…
how many jobs does the house provide…
do a search on fishing on trademe, sort by price, go past 100 high end costal properties before finding a fishing business (if you can…..)
oh yeah life style business, what a crock, 1.5mil house with fishing tinny hire or the like…
the bubble cant be unwound without extreame pain in nz, 84% of our wealth (hahahaha tulips….) is invested in property…..
what productive role does it play in this country, shelter…. 84% of our wealth is required to provide SHELTER
its crazy
August 25th, 2009 at 4:56 pm
Mark Hubbard, it is as much as anything the addition of being able to offset the losses on a property against your regular income through LAQC. So a sole trader for example cannot make a loss on one business and pay less tax in their mechanics job is my understanding(although accounting is my kryptonite)
Thus the change should be two fold, match the company and top tax rates. Remove LAQC on property investment companies.
Whilst I am a strong advocate for standardised acoounting across all investment classes, frankly tthe insanity that is residential property in this country cannot be deemed along similar lines to other investments.
There is no doubt in my mind that these tulips will bankrupt this country.
August 25th, 2009 at 5:05 pm
So a sole trader for example cannot make a loss on one business and pay less tax in their mechanics job is my understanding(although accounting is my kryptonite)
You’re right on your kryptonite statement, though this is a tax, rather than accounting issue.
You are completely wrong otherwise. If a sole trader has two businesses, a loss from one of the businesses will offset, in his individual tax return (he’s a sole trader), a profit from the other, or waged income as a mechanic. No different to having a loss in a LAQC, and attributing a loss against a second business being run as a sole trader, or waged income in the individual IR 3..
Just about every statement on LAQC’s I’ve seen on this forum has been wrong, per my very first post to this thread.
August 25th, 2009 at 5:24 pm
Mark Hubbard: To “The American health system is a standing classical example of how the private sector is corrupt, has failed, costs more and is crippling a country”, you reply:
“Yeah right. Wait to Obama socialises it, then you’ll see how a first world health system falls to a third world one, like Britain and we have.”
The Americans hate France as a socialist nightmare. Yet the US spends 15% of GDP on health; France 9%. And France (or UK if u prefer) has a better health system overall & better health outcomes than the US. eg better health & longer life. Thru its hypercapitalist system, the health sector in the US is encouraged to do lots of tests & interventions when not actually required. They are encouraged to generate a mythical need thru advertising & then fill that need thru needless operations.
Its hard to believe anyone in the world would set up the US health system as a model for anyone.
August 25th, 2009 at 5:42 pm
Socialist health system in Canada, cross the border and you have to check with you insurance company before being picked up off the road by an ambulance.
And look into the modern health system in the US….The Nixon yrs…it wasn’t put in for the citizens, it was put in by Nixon for profits.
And the Yanks cant get it thru there thick heads
Look up yank in the Websters dictionary.
August 25th, 2009 at 6:03 pm
Interesting to see so much property bashing on this website. Looking at the sharemarkets, bond markets, term deposits and property market over the long term it appears we are bashing the best performing asset class.
Is this the horrible human emotion of jealousy, or tall-poppy syndrome against property investors? Why do you think banks commonly lend 80% against (residential) investment property? Because they know it is a safer investment than someone wanting to buy a tuna boat, business (over half businesses that start aren’t around just 5 years later – per David Cunliffe Shadow Minister of Finance), sharemarket returns are awful, commercial property has shown many rents in 2009 to be at the same levels they were at in 1986, 23 years ago. When you earn 4.9% in a ‘good’ term deposit, after tax and inflation, what do you really earn? I don’t want to knock these asset classes as at least people are saving and I have invested in the sharemarket for a long time (but been very disappointed on the whole, bar my most of my Australian share investments). It is a sad indictment on our country that most NZers seem to have winning lotto as their retirement plan (well done Government on the $189 million NZ Lotto profit this financial year too), which is why over half of us at 65 earn less than $15,000 per year.
Then lets remember that if we want to have a country that looks after its financially weaker citizens, we need to provide shelter to all NZers, to avoid having people living in their droves under bridges, in Parks etc. Housing for all is what the majority of our country wants (and indeed Australia and most OECD countries do). So if property investors aren’t offering this service – then the Government has to buy houses/land/build houses to provide this accommodation. This costs the government money for housing. But our Government makes losses and has to borrow offshore – that’s right – much the same as ordinary NZers that buy their own house or an investment property or maybe even two, in an attempt to try to get more than $15,000 per year in income when they are 65, or maybe retire slightly early at say 60 (dirty concept I know)! They borrow offshore in the most part too.
Lets not forget that many bankruptcies and foreclosures are happening to highly geared property investors too. The market has gone down in several places around the country (coastal property, Waiheke Is, Queenstown/Lakes District in particular have been hit very hard) and in certain areas over 20% losses on capital. The reason most investors are in property is to get a cashflow stream (rent) which pretty much rises with wage inflation. Rents in 2039 will be pretty attractive, just as the increase in rental income from 1979-2009 has been. Over the long term the rental income is amazing.
The way forward is not to punish property investors by banning LAQCs (or having a CGT), as that will have a ripple effect of reducing investment in property, seeing many businesses appoint contractors rather than employees, give “unproductive” lawyers extra revenue through complex company/trust structuring to get around laws, put on more pressure on the Government to borrow more and more funds abroad to pay for housing to accommodate its financially weakest citizens.
The path forward is for New Zealand to overhaul its tax system to encourage its brightest and best talent to stay in NZ. Eliminate Working for Families (middle class welfare and Government dependancy), charge interest on student loans, evaluate what tertiary courses are producing a return for the country rather than having them for the sake of having them (how many sociology/psychology majors in their BA degrees work in psychology). If Working for Families were eliminated the top personal tax rate would be just 23% – and more money in most kiwis pockets to not need WFF. Lets cut the company tax rate to 23% and win back Lion Nathan, Nuplex and numerous other companies. We would actually not “lose” much tax at all.
With all the transfer pricing and international tax arrangements big corporates do (refer http://www.stuff.co.nz/business/personal-finance/2731814/Dicing-with-the-tax-man for what the banks do), they would find NZ have a lower tax than many over countries and as a result we might actually get favourable tax transfer pricing and see Australian, UK companies etc pay more tax over here.
NZ needs to innovate and actually has a proven track record of fine innovators (including Ernest Rutherford) – the person who can make vehicle fuel from sea water will be an extremely rich woman (or man). Why can’t this person be a Kiwi? That would shut Al Gore up too – as sea levels rise we can lower them via mass produced fuel.
Lets focus on being positive and trying to not tax tax and tax everything. Punish certain people (property investors is not productive). Rewarding as many people as possible through lower tax rates and a better outlook is. Don’t we want a New Zealand that rewards taking risk with a return; a country that provides basic necessities of life to its weakest citizens.
August 25th, 2009 at 6:22 pm
“that will have a ripple effect of reducing investment in property” well at least this bit was correct. The ripple effect would bring down the price of property to a level where the low income families can afford to buy their own home without having to hand over the bulk of their income to the bloody bank. Have a wee think about that JP , when next you try to tell yourself what a great job the property speculators have done.
The sooner English slams speculators and developers with a hefty CGT the better.
August 25th, 2009 at 6:25 pm
JP,
“Why do you think banks commonly lend 80% against (residential) investment property?” – one reason is the capital adequacy requirmenets are a lot lower for property. The govt needs to address this. And why were banks in the US prepared to commonly lend 105% against a property?? banks cant make bad decisions can they? They are excellent assessors of risk during a bubble, we all know that.
“we are bashing the best performing asset class” – the issue is whether there are any fundamental factors justifying the great performance of this asset class. if there are not, then we must be in a bubble.
“So if property investors aren’t offering this service – then the Government has to buy houses/land/build houses to provide this accommodation. ” – if there were not so many property investors/speculators maybe prices would not be so high, then people would not need to rent. And if you believe the press re shortages it would seem investors are NOT doing their job and building enough propeties. they are merely crowding out existing stock.
“The way forward is not to punish property investors by banning LAQCs (or having a CGT), as that will have a ripple effect of reducing investment in property,”
This is not punishing investors, merely removing a right that should ever have existed in the first place. Give a kid sweets for long enough and a feeling of entitlement will start to become ingrained … that is what we have now. Do homeowners get to claim losses on their house?? Do savers get a free ride from the taxpayer??
“Lets focus on being positive and trying to not tax tax and tax everything. ” No lets try and treat ALL investment classes evenly. So either remove tax on savings or bring in blanket CGT including the family home. As for tax credits, if we are to keep them, the onus should be on a business to show how the business can quickly become profitable so as to cease to be a drain on the taxpayer. A 4% yielding rental will rarely be able to show this.
As for being positive – positive for who??
August 25th, 2009 at 6:32 pm
Interesting piece in light of Infometrics latest views on 24% increases in house prices.
How does that view equate with the concluding view of this piece:
“the stage is being set for a realignment of Kiwis’ expectations about their living standards”
I’m not sure it does equate
August 25th, 2009 at 7:07 pm
JP – I dont have the time nor energy to properly address your misconceptions. It is the kiwi way to bash public and private property from a very young age (think back to your tertiary education).
Everyone else – the government will not solve our housing problem. The crap, overpriced, inefficient houses will take care of that soon enough. With the help of hefty interest rates.
Economic-pop-culture drivel.
August 25th, 2009 at 7:13 pm
This analysis seems to assume no future constraints on energy or natural resources.
I suggest that Gareth read this: http://www.theoildrum.com/node/5638 – then I’d be interested to know his views.
August 25th, 2009 at 7:19 pm
@Matt in Auck – one of the elements of our medium-term view is that the NZ economy is potentially in for a crisis if we don’t take care about our debt levels, improve the returns from our capital investment, reduce our infatuation with housing, pick up our export game, etc etc. At the moment there is a correction of sorts occurring given the recession of the last 18 months and the effect that has had on spending, investment, house prices, etc. However, compared to much of the rest of the world we are getting off lightly, so it looks highly possible to us that, as economic conditions start to improve, NZers will return to their delinquent ways – hence a surge in house prices over the next 1-3 years. Our most recent set of economic forecasts presented to clients include a “crisis” (credit downgrade, fall in the currency, etc) in 2013. Of course I wouldn’t stake my life on the timing, but my point is that the timing of the house price rises and the realignment of expectations is not concurrent.
August 25th, 2009 at 7:28 pm
Gareth – thanks for the insightful response, I was playing the Devil’s advocate ot some extent.
So would part of your 2013 crisis include a long overdue house price correction?
Surely if we are living beyond our means then a 24% increase in house prices would be ultimately unsustainable given house price to income ratios are currently stretched and incomes are unlikely to increase much over the next few years
August 25th, 2009 at 7:58 pm
The excellently balanced and insightful ANZ weekly report continues to be very cagey about property, whilst acknowledging a recovery of sorts seems to be occuring (but is of questionable sustainability):
http://www.anz.co.nz/resources/e/0/e0caef804f5172f38d0cdfbd27282cdf/MarketFocus-20092808.pdf
Gareth – you seem more bullish about property’s prospects than ANZ???
And Gareth – you might be able to answer a question I have posed previously: Is this the first time there have have been significant gains in real house prices in a time of rising unemployment and recession? It seems very abnormal
August 25th, 2009 at 9:28 pm
Gareth – you recently primed the housing market pump with that property price rise prediction!
August 25th, 2009 at 9:42 pm
what productive role does it play in this country, shelter…. 84% of our wealth is required to provide SHELTER
its crazy
thats the problem for some its not investment its about providing a house for their kids…. but the laqc and complicit gummint are distorting the cost of houses via their tax arbitrage….
the fishing boat is way more productive for nz as would be a software house, recruitment agent etc etc….
the cost of this rort is the huge outflows of INTEREST and the higher ocrs needed to COOL the house market… lower ocr = lower nzd…
its not really rocket science… ring fence tax losses against future profits from property and its the first step to solving a simple issue.
avg nz wage in akl i believe is 56k 75k avg house income (AKL) avg akl house price is 500k barfoot data no a good multiple ….
August 26th, 2009 at 8:38 am
For goodness sake stop obsessing about LAQC’s. Tax losses are available to property investors through other forms of ownership.
The incentive to run a negative gearing program was exaggerated by the absurd 39% tax rate.
Taxes are inefficient. Taxes create inefficiency. More tax is never the answer.
Interested, you’re advocating increasing the govt’s tax base. Nice idea. Not.
August 26th, 2009 at 8:41 am
Every now and then a breath of fresh, freedom, air. Cheers Mitch O.
August 26th, 2009 at 8:57 am
@Gareth Kiernan(infometrics)
Are you batting for both teams?
- prediction of 24% increase in 3 yrs and partnership with Mike Pero
- impending crisis in NZ
Why was there no warning in the 24% price rise write up about someone buying in 2-3 yrs may welll endure lot of pain?
August 26th, 2009 at 9:43 am
Mitch O,
Agree re the LAQC thing – its the ability to offset tax on a long term cash flow loss that is wrong regardless of the vehicle used. This is not about MORE taxes, its about LESS tax credits. We ALL pay incomes tax, some get to offset it thats all. When the people offsetting are the ones outbidding homeowners who can not offset interest costs then there is a problem. My theory is that that those claiming losses on rental property should have to prove why they will quickly become profitable. Otherwise this is a long term drain on the taxpayer.
August 26th, 2009 at 12:04 pm
Chandra
not just those buying in 2-3 years time may endure pain, but those buying now, quite a few I suspect will be banking on the capital gains the likes of Infometrics are predicting.
Suppose prices do increase 24%, but then say fall back another 15-20% with a crisis. Investors buying now would be hit pretty hard, given that most investors now would be buying into property for capital gains rather than rental yield (which is poor)
August 26th, 2009 at 1:49 pm
Mitch O Says:
“For goodness sake stop obsessing about LAQC’s….”
It seems every subject comes back to property, as if the whole of the NZ economy hinges on property…not production, not employment, exports etc
The property market is long term as an investment…It has been the target of speculators recently, and any market that is hit by speculators eventually returns to norm…share market crash.
Like the sharemarket after the crash, speculators got burnt thats the way it works, end of story….and like the share market the property market is going to take yes, maybe even decades to ‘recover’ or rectify aback to affordable.
Property is no long a speculative market and the NZ economy is not going to hinge around it for a long time…at the same time home buyers, who are just that, are looking to a roof over their heads, and a reasonable return over the next decade or so, which will happen at about 6.5% per yr
What the hell property has to do with kiwi living stands …and every subject that comes up, I just do not know.
Those who havnt over leveraged, not speculated don’t really give 2 hoots..
What they are concerned with is employment, wages, savings, production, and these are the things which should be of concern here.
August 26th, 2009 at 2:09 pm
“What the hell property has to do with kiwi living stands … I just do not know” Steps, you do know you know!
August 26th, 2009 at 2:39 pm
Yeah whats up Steps,
Things a bit quiet down at the yard today?
The last thing we want to tell the unemployed is that they’re in for a summer of discontent.
Jobs are NOT being Created in NZ this is the delema facing the growing legions of UP.
gov is borring like mad to keep them quiet but this canot go on forever. , see above graph.
Anyway I’m not telling you things u already know please don’t be offended by my post,
i myself know of several friends that are UP like i guess a lot of NZder’s do wright now and help out were i can.
August 26th, 2009 at 3:45 pm
………what the hell property has to do with kiwi living stands …
A lot Wally. The majority of Kiwis are involved in constantly inflating properties prices. The Real Estate market is a big industry here in NZ, but after all doesn’t do much to make us wealthier as a nation.
As other countries demonstrate we only achieve better results with more productivity & manufacturing. This should be encouraged.
August 26th, 2009 at 3:52 pm
Hey don’t pick on me, I was having a poke at Steps.
August 26th, 2009 at 3:59 pm
Recipe for income John! Pay attention son. Flog the fresh water from the Manapouri tail race by the shipload to the richest Arabs. Could be a cool twenty million each load there boy. Now you pop off and tell some sod to do the planning.
August 26th, 2009 at 9:56 pm
Keeping NZ quality & living standards: Why does the NZ Government & private Industries not work on plans to build a solar- panel system, which would be able to produce at least 30% NZ’s power use ?
August 27th, 2009 at 7:30 am
Sorry W.Kunz : It is just not cost/efficient to install solar panels . Even on residential homes , even with a Gumnut subsidy . You’d be better to pop your solar-panel money into the bank to gain some interest . Only need a tiny return to beat the financial return/saving from the panels .
Now , of greater interest ( yet still mightily expensive ) is the series of giant concave mirrors that a European consortium wants to set up in Morrocco , to concentrate sunlight , and superheat water molecules . Amazing .
August 27th, 2009 at 8:06 am
The standard of living will change. Govt is set to screw more tax from the peasants and the banks got in first to suck out as much in interest as possible. I wonder if they will slap GST on mortgages and rent. Now that would really bring about change.
August 27th, 2009 at 9:21 am
Growth, growth, growth, that’s all we hear from economists.
To infinity and beyond LOL
August 27th, 2009 at 10:10 am
Kunz old bean, forget the solar crap and think geothermal. Place sits on top of so much hot rock, we have oodles of energy down there. The real question is who pays to do the drilling and plant build. The public are being screwed by the banks and set to be slammed by the govts tax grab and bloody angry about the huge fat payments to power company directors who sit on their collective bums doing nothing but work out how to organise their next big fat rise in fees. Contact !
August 27th, 2009 at 10:33 am
Geothermal is another great idea – Wally. Of course solar based systems are returning a profit long term. The government and private industries should now join the worldwide trend and consider renewable energy, which could develop into a manufacturing industry here in NZ.
Or do you consider importing again and again- well ???
August 27th, 2009 at 1:55 pm
@Matt in Auck
Apologies for the slow reply – I’m on holiday
) We are more bullish on house prices than ANZ and have recently (unintentionally) had a bit of a stoush with them because of their dismissal of any supply issues around housing – they think there’s no looming shortage of housing, whereas we do due to low levels of building activity due to lack of house building activity. They’re more worried about deposit requirements, finance constraints for buyers, etc… Trying to forecast (or guess!) what’s going to happen, it’s a fair enough stance to take I guess.
Re your question about real house prices vs recession/unemployment, I don’t have the data in front of me. But most forecasters think the recession ended in June/September quarter, and real prices aren’t quite rising yet. So it’s not quite concurrent. Remember that the rising net migration in a recession is also unusual – but then on this occasion our growth and labour market performance is better than most of the rest of the world, not worse.
@Lara: it’s very rare for anyone to actually listen. I was talking about the scope for a housing market correction as early as 2004 – four years later… I guess I’ll make the most of my brief opportunity to play God and influence the world *tongue in cheek*
@chandra: beyond the scope of the report I’m afraid. In terms of our forecasts and presentations to clients we have talked about it extensively, and indeed some of the radio interviews I did following the release of the QBE report did touch on the negative side-effects for the economy of another house price surge. So it was gratifying that some of the media were intelligent enough to get beyond the “house prices are going up so that must be good” mantra.
August 27th, 2009 at 2:03 pm
Kunz old bean, the solar stuff is too expensive and does not last forever.I know because I have it installed. Play with it by all means but it really is for boat or campervan. The way to go is straight down, might as well follow the economy.
August 27th, 2009 at 2:35 pm
Roger I do understand your industrial printing machine is certainly not made here in NZ, but then we can’t even manufacture European standard “Double glazed windows/ doors” and other important products here in NZ.
Because of reasons described above (26.8.09 3:45pm) it is about time to develop some sensible strategies to be more self sufficient and less depended on other countries. Therefore developing a manufacture culture/ industry with possible export potential is essential.
We cannot afford to just import everything. As a nation without a strong manufacturing industry we will not getting wealthier. If we like or not our standards of living will decline rapidly.
August 27th, 2009 at 2:47 pm
to W.Kunz
” ..we cannot even manufacture European standard double glazed windows…”
We cannot even manufacture single pane security glass, which is now required by law supposedly, as I have experienced recently when I needed to reglaze a 1,7 high in wood frame entrance door. Was told, it all comes from overseas……
August 27th, 2009 at 2:54 pm
Yeah the old manufacturing sure has taken a good kicking. Trick is to go with stuff that doesn’t come wrapped in red tape. Oh, we don’t make any of that either. I think we still have a tyre manufacturer rolling along. They’ll kill it off with red tape, just you wait and see.
August 27th, 2009 at 3:48 pm
W.Kunz : How far do we take this argument ? If every nation followed your plan , no one would trade , no need to , because of self-sufficiency . And yet we must import many things due to cost efficiency and resource imbalances around the globe . Sounds great in theory , Walter , but not really practical . The things we do cheaper and better than other nations are our trading base . Why ignore them , ‘cos you want to fight a battle with the Chinese in manufacturing speciality glass , Dan Carters undies , or figurines of Chairman Mao ? Dude , you’ll never succeed at getting into Dan’s knickers , ahead of some sweat-shop ladies in the PRC !
August 27th, 2009 at 4:17 pm
@Gareth Kiernan
“However, compared to much of the rest of the world we are getting off lightly, so it looks highly possible to us that, as economic conditions start to improve, NZers will return to their delinquent ways – hence a surge in house prices over the next 1-3 years. Our most recent set of economic forecasts presented to clients include a “crisis” (credit downgrade, fall in the currency, etc) in 2013. Of course I wouldn’t stake my life on the timing, but my point is that the timing of the house price rises and the realignment of expectations is not concurrent.”
In your house price rises prediction based on the theory of ‘pick up where we left off’ do you take into account the negative effect of no capital gains (in fact capital losses) in the past 18 months?
Most people who study house prices look at it from a cycle perspective, because as they go up in value, peoples equity increases, and they can buy more, fuelling the demand side. When this stops the opposite happens. Around half of NZ houses are owned by property investors who use increased equity to buy more houses, without the increased equity, no new demand from this dominate group of buyers.
Once an upward trend is broken the priced in value of ‘certain capital gains’ is also lost. You need to include as a factor this priced in value being lost, and the fact that homeowners in NZ have had there income over the last year slashed compared to the years 2002-2007 due to the 30-40k capital gains all of a sudden becoming -30k; a 60k change in income.
And unemployment taking another 50-70,000 people out of the demand side also doesn’t seem congruent with your view, especially when a big deal is made about the 20,000 new immigrants predicted, a number much smaller than the loss of workers due to rising unemployment.
How experienced are infometrics at house price prediction? Do you have a track record in this area?
Do infometrics have any links to the real estate industry?
August 27th, 2009 at 4:21 pm
W.Kunz, Gurtraud… NZ does not manufacture glass! except bottles, and some niche arty stuff.
However, decent DGU (double glazed units) are being produced out of imported glass.
Safety glass is produced in NZ, albiet out of imported float glass (ie. normal).
Gurtraud, if you still need to glaze your 1.7 high door, I could recommend a few glaziers who could do it for you, at a price…
August 27th, 2009 at 4:41 pm
What a list of samples Roger – some kind of surprise packet – sorry I do not understand this mentality.
After writing many articles I recognise in general the difference in culture is far too obvious and therefore this is my last comment/ article about the issue – productivity/ manufacturing.
August 27th, 2009 at 5:16 pm
I have to share this with everybody. Picture a National Bank senior exec at a crisis meeting held for dairy farmers. Reported in the current Straight Furrow mag.
“A particularly sensitive issue with many farmer clients, he said, is that of personal drawings. The average personal drawings of over 300 New Plymouth branch dairy farm owner clients in the 07/08 year with his own bank were $92,000 but 65 percent of clients drew more than $100,000
” I couldnt care less what they spend as long as they are aware of the consequences.
“One of the consequences in the times we are facing now could be that it puts your business in jeopardy
” A recent farming publication said that personal drawings on a farm of $40,000 was like townies getting $90,000 . Some figures quoted by one of my staff members said that 4 percent of people in Taranaki earn between $50,000 and $70,000 and only 4 percent earn over $100,000. Yet 65 percent of our clients spent over $100,000.
“Whats important to you? Keeping your kids at Auckland Grammar? They are the choices that you are going to have to make. Its not pretty for any of us.
Ah hell, looks like dairy farmers are being warned to cut their standard of living.
August 27th, 2009 at 5:26 pm
Farmers Weekly headline “Share Clawback Looms”
“Fonterra is heading for the second big share redemption shock to its balance sheet in two years with falling payout and a harsh winter expected to hit this seasons milk production hard.
Fonterra lost a hefty $600 million in equity after post drought share surrenders last year when milk production nosedived and another significant surrender was looming…Fonterra had revised its milk production forecast from a 2-3% increase to flat or a small gain….pasture covers have been very light and many farmers have not been able to afford to feed their cows adequately….the knock on effect is lowered milk production this season.
Less milk, less export receipts, less money all round, lower living standards????
August 27th, 2009 at 5:44 pm
Farmer Will
Got any shares in PGGW,NZFSU ?
http://www.stuff.co.nz/business/2808309/PGG-Wrightson-loses-66-4m
August 27th, 2009 at 5:49 pm
W. Kunz,
I hear what you are saying
If you go and ferret around Steve Keen’s web site he occasionally puts a link out to economists who write heretically about globalization….
Or maybe go and read some Post Autistic Economics.
Maybe one of the reasons Americans hate the French is because Post Autistic Economics holds that neoliberal classical economics is a form of autistic science. Emperors hate being told they have no clothes.
Yet the neoliberal classical economics is the version that appears to have the Western world, and America in particular, in thrall.
Your voice is one of reason. From a bunch of neoclassical economic theorists viewpoint you are probably being unreasonable.
There is a quote along the lines of “It is the unreasonable man that changes the world.”
I would encourage you to continue to be reasonably unreasonable. I enjoy your posts.
August 27th, 2009 at 5:52 pm
Farmer will some good articles on this site, thanks to someone on a thread yesterday
http://www.converge.org.nz/watchdog/20/02.htm
August 27th, 2009 at 5:52 pm
W.Kunz : No offence meant . Enjoy having a wee spar with you . But NZ has never had a great manufacturing industry , nor a history of exporting manufactured goods . We , in our short colonial history , have relied on primary produce to earn our keep . Latterly , we have added tourism to the mix . We cannot compete with low wage , massive economies , in more geographically advantaged countries , such as China , India , Vietnam , and co . The question for us has always been how to add value to those primary products , before we export them . For example , rather than export frozen sheep carcasses , export frozen lamb meals/or ready to use lamb meat packets .
My best wishes to you , good sir . Roger T.
August 27th, 2009 at 6:08 pm
Walter : As Gibber says , continue to be reasonably unreasonable . We enjoy your posts . And why not set an example for us all . As a Swiss national , living in sunny Kaikoura , set up a unique manufacturing operation there . Cuckoo clocks with a crayfish motif springs to mind ! Every hour a red crustacean springs out of the trap door and snaps claws to the chimes . ………. . Reckon you’d dominate the market with that one !
August 27th, 2009 at 6:18 pm
Roger, crayfish don’t have Lobster claws! He would have to use crabs.
August 27th, 2009 at 6:26 pm
Thanks for the links Andrewj. Did you read the bit about Uruguay farming systems ‘fudging’ the accounts. Haha, their word. Oops.
So where is PGGW heading eh. 125 mil owed in December becomes 200 mil owed in march. Excuse me… say again!
Have you read the beaut letter to the editor, straight furrow, about suicide….. great advice, dont watch or listen to the news, talkback etc. I think internet should have been added to the list. I never worried so much since I had the net. Life used to be bliss, ignorant bliss.
August 27th, 2009 at 6:28 pm
Wally : I stand corrected ! But the Swiss/Kiwi angle has me intrgued . How about chocolate fish . But none of that gooey marshmallow muck in the middle . Real Kaikoura caught blue-cod fillets , coated in Whittakers finest 70 % cocoa-butter chocolate . A delicacy to tempt the taste-buds of connoisseurs the world over !
August 27th, 2009 at 6:41 pm
Too much red tape Roger. He’d do better taking guided tours into the high country. Not so many beaurocrats in there but plenty of pig and deer.
August 27th, 2009 at 6:47 pm
Farmer Will
Even Bernard has to take a week off. Ive cut my internet time back, I read
http://theautomaticearth.blogspot.com/
keep an eye on Mish and telegraph. Otherwise I try and avoid the Rural Press etc. all a bit depressing. Its filtering through all the Junk to get the good stuff that takes time. The big difference is through the net you can get whats really happening not some media rubbish that we have become used to.
I wonder if Mr Hubbard is going to be the new Cornerstone shareholder I think he already has an option at $1.50 looks a bit steep after today.
The reality with banks is this
This bit using the Govt Guarantee
unless it can attract new capital with which to acquire more and better assets.
Big question who’s capital will these finance companies risk?
http://www.converge.org.nz/watchdog/20/04.htm
August 27th, 2009 at 7:55 pm
Gareth
Thanks again for the reply, its nice when contributors can respond, unlike some who just seem to “post and forget”:)
Regarding real house prices – I thought they have been rising since early in the year? (I thought close to 5% depending on who you listen to). So rising prices have been concurrent with recession and growing unemployment – again a very odd situation I would have thought.
Re: supply of housing – its interesting the contrasting views. I think one of the main planks of ANZ’s views is that there was a slight overbuild during the boom relative to population growth which means we don’t have a shortage despite the low build rate over the last 12 months. Also I think they say there will be regional differences, which seems to make sense. In particular supply in Akld is tighter due to the fact that Auckland attracts more immigration than other centres
Are you able to comment on where you think house prices will go in your projected 2013 “crisis”?
August 27th, 2009 at 7:56 pm
Yes Andrew the msm is there to appease the mainstream, however when one becomes unappeased and heads to the real story, ie internet via the joe blows who track the real info down, and we find out what is really happening, then it becomes depressing because things are definately not so rosy. Green shoots n all fail to impress. As in this topic, lifestyles heading downstream. Our futures look a bit crappier than I expected.
August 27th, 2009 at 8:18 pm
AndrewJ and Farmer Will – as guys positioned in the rural sector you seem to be struggling to see green shoots.
As one in the development-related sector, so am I. I thought we might have been seeing some a month or two back, but it seems like they were false signs.
I’m struggling to see where the optimism is coming from. Tourism looks pretty bad too. I’m not convinced we are out of the recession yet, despite the spin from some.
August 27th, 2009 at 8:23 pm
PGGW looks nasty; combine that with SCF and dairying woes and the South Island economy looks like making a hard landing. Let’s hope John Key manages to keep all the balls in the air.
Meanwhile bloodthirsty old Ambrose E-P in the Daily Telegraph is worth a look: read “Can the souffle really rise again?” He puts the green shoots in Europe in context.
It’s also worth noting that all the recent year-on-year stats are coming off through-the-floor record lows bases so they can’t help but show green shoots. Gving two-year comparisons would be more truthful (are you listening REINZ?)
Sorry my computer skills don’t extend to giving the link…maybe someone else can help?
August 27th, 2009 at 8:31 pm
Of course we will be out of recession. Right on Ruru. Lets say country A in 2007 grew at 3%, 2008 -8% 2009 2%. Two percent growth on top of a 8 percent loss is still going backwards on 07 figures. So the msm tells us Country A is out of recession it grew 2 percent Yay, green shoots, we live again. All Bullcrap.
Matt in Auck. I saw the most realistic article in the straight furrow today. A senior bank exec telling it how it is. First time the msm had it right in a while.
August 27th, 2009 at 8:37 pm
Matt
My friend is dumping all his houses in NZ. Going to Northern California where he is getting nice houses with swimming pools for 90 k, return looks Ok. He is braver than me but only way he has ever made any real money is in housing he worked for years for peanuts. traveling made him realise how crazy expensive is NZ. I think he will find USA hard, lots of taxes etc. I was hoping he would find something better to invest in but all he has done for 10 years is houses. My thoughts are that this recession is going to last for years.
My daughter just flew back from States on Air NZ plane nearly empty offering San Fran to AKL for $499 one way to try and get bums on seats. The share market scares the cr*p out of me anything with debt id get out of fast. Im worried that our $ will collapse and our standard of living will be corrected downwards fast.
August 27th, 2009 at 8:48 pm
Farmer Will
I think you will find those drawing are before TAX. The days of farmers growing their own veg,killing their own meat and going to town once a fortnight are history. Farmers confused DEBT with MONEY and they are about to learn the difference the hard way.
August 27th, 2009 at 8:49 pm
@ruru
I think the raw QV index values should be given rather than the year on year change. This site is one of the few that show some raw index values, although they are not QV index values that account for the type of property sold.
Index values could remain constant from one month to the next, yet because a year ago the value was dropping at record rates, the new months ‘year-on-year’ figure will improve dramatically.
There are many people out there that think property prices have gone up over 5% this year alone because the January ‘year-on-year’ value was -10%, and Julys ‘year on year’ value was -5%, so they WRONGLY think prices are up 5%.
House prices are actually only up 1.3% on the bottom QV index values of April. If they were shares, and you saw the share price plummet 10% then flatten and rise only 1.3% you would not be thinking it was in anyway a rebound.
Here is a graph I got emailed from QV, don’t know if you’ll find it elsewhere I certainly couldn’t:
http://img191.imageshack.us/i/qvindexvsk.jpg/
August 27th, 2009 at 9:15 pm
Thanks for the graph Craig: I like the five-year spread because it gives a real picture: there’s the house price “recovery”.
By the way have you noticed that the mainstream media often has absurdly short time frames in their graphs these days, rendering them meaningless. A reflection of the Playstation generation of reporters that are feeding through to the newsrooms: low attention span (after three days they are demanding resolution -”closure” – of a story because they’re bored with it no matter how many layers there are in it), bugger all sense of history, and a numbing down that enables them to publish pictures of blood and guts so lurid I hide the newspaper from my children.
A digression there, as is the old NZ property prices hook: my point is that NZ’s core actvities are feeling the weight of a shaky world economy and our customers don’t look like they’re coming right any time soon.
Yours etc,
Colonel Blimpess
August 27th, 2009 at 9:30 pm
Ruru – don’t get me started on the quality of journalism in this country! Enough to drive any thinking person to contemplating emmigration!
the NZ Herald – apart from 2-3 decent journalists – is garbage and I used to think the Dompost was OK until I picked up a copy today and was sorely disappointed.
TVNZ’s news is junk, TV3 is hardly any better and its nauseatingly leftist slant on everything makes me want to puke, especially that donkey Campbell
August 28th, 2009 at 10:56 am
@Craig:
>How experienced are infometrics at house price prediction? Do you have a track record in this area?
We’ve been going for 25 years and have been doing building and propety forecasts for almost that entire period. In terms of our forecasts, our primary focus is building activity (that’s what most of our client base is ultimately interested in), and house prices are an important input in determining where building activity will go. There is cicularity/feedback, however, and at this stage of the cycle, building activity (or the lack thereof) is, in our view, influencing the house price outlook. However, I don’t disagree that finance/equity has the potential to be a constraint in the coming upturn.
Do infometrics have any links to the real estate industry?
None whatsoever, apart from writing the occasional piece of independent analysis for the few who don’t just want to recklessly talk up the market in fits of self-interest.
@Matt in Auck:
QV’s quarterly index (in our view the most reliable measure) fell in nominal terms over the March quarter. Don’t have June qtr numbers yet but a small real rise is possible, given QV’s comments with their monthly index that prices have risen over the last three months.
I’ll concede possibly some inconsistency in our 2013 “crisis” given that we don’t have house price falls. We estimate that residential building activity will remain below underlying demand until 2012, creating a significant shortage of housing – this systemic shortage is contingent on finance constraints and a lack of developers willing to re-enter the market. In traditional times, it’s hard to see house prices falling without an oversupply of housing. I guess, though, that if we’re talking about a crisis then “odd” things could happen, particularly if we think housing is still around 30% overvalued heading into 2013.
August 28th, 2009 at 11:31 am
Thanks Gareth. Here is another question for you.
I remember Westpac commenting some time within the past year that there is not an undersupply of housing (ie. in agreement with ANZ), that if there was an undersupply then we would have seen more upward pressure on rents. Rents, as you probably know, have been pretty flat the last 2 years.
Surely this is a strong argument? If there were people queuing up to buy houses and there weren’t enough to go around there would be an offsetting increase in demand for rentals, pushing rentals up?
Would be interested in your view on this.
September 2nd, 2009 at 9:10 am
Matt, my understanding of the rental market is as follows:
Last year we had the accidental landlord phenomenon whereby people who couldn’t sell their house (for their desired price) chose to stick tenants in it for 12 months and see what the market was like in a year’s time. In some cases these people were headed overseas so the net effect on the rental market was an increase in supply of accommodation with no change in demand -> rents stagnated.
As far as I’m aware that phenomenon has largely disappeared. However, over late 2008 and early 2009 property managers were strongly advising landlords to keep rents down because of the weak economy and labour market, people’s (in)ability to pay, and the heightened risk of suffering vacancies. This advice was predicated in part on what had happened in the real estate market (obviously many property managers are aligned with estate agencies). Landlords were receptive to this message because their interest bills were falling away so cashflow was becoming less of an issue. I’m not sure if property managers have changed their tune yet, but I imagine they’re starting to (although probably still pretty cautious at this stage given recent unemployment figures).
We only estimate the over/undersupply of the housing stock on an annual basis (March years) and estimate there was still an oversupply at March 2009, so don’t disagree with the sentiment of Westpac. The issue is that it is moving very quickly towards undersupply now. On our estimates of underlying demand we have taken a conservative view towards the occupancy rate (number of people per dwelling) due to current economic conditions, but as the economy gradually improves this will translate into pent-up demand – which should translate into higher rents. The labour market is the constraining factor on this.