Post RSS Feed 
Podcast Feed
RBNZ holds OCR at 2.5% and says will keep it there until second half of 2010 (Update 2)
October 29th, 2009Reserve Bank Governor Alan Bollard has held the Official Cash Rate at its record low of 2.5% and has pledged again to keep it there until the second half of 2010. (Update 1 includes fall in NZ dollar to 71.95 US from 72.7 USc before OCR announcement. Update 2 includes comments from ASB economist Jane Turner and wholesale interest rates falling 10 basis points).
Bollard’s decision not to budge on the ‘latter part of 2010’ forecast for a rate hike surprised many in the markets who had priced in rate hikes from early 2010.
Banks have been increasing their fixed mortgage and term deposit rates in recent weeks to reflect expectations in wholesale interest rate markets of OCR hikes from early 2010. The New Zealand dollar dropped to 72.7 USc ahead of the announcement and dropped to 71.95 USc by late morning.
Wholesale interest rates dropped around 10 basis points after this rates outlook surprise. Banks now face a tough choice to drag mortgage and deposit rates down again if wholesale rates fall further. However, they may be forced to leave both at current levels given hot competition for term deposits and the Reserve Bank’s own direction to banks to fund their borrowing locally through such term deposits.
Bollard argued in the statement below that forecast inflation remained within the bank’s 1-3% target band and tighter fiscal policy would reduce the heavy lifting he would have to do with monetary policy tightening.
“The forecast recovery in economic activity is based on fiscal and monetary policy continuing to provide substantial support for the economy. We think such support remains appropriate. Further ahead, removing some of the current fiscal stimulus is likely to reduce the work that monetary policy will otherwise need to do,” Bollard said.
“In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010,” he said.
Bollard also lamented again the risk that New Zealand economic imbalances would worsen as export growth stalled and domestic housing-led growth picked up.
“The current composition of growth continues to raise questions about its sustainability. These concerns would intensify if credit growth began to propel stronger domestic demand.”
My view – Alan’s big flick pass
Alan Bollard performed the monetary policy equivalent of a flick pass this morning.
Dan Carter, if he was a monetary policy type, would have been proud. It was a deft exercise in shifting responsibility for rebalancing and slowing the economy across the street from the Terrace to the Beehive.
Here’s how he did it.
Firstly, Bollard announced he would keep the Official Cash Rate (OCR) at a record low of 2.5% and said any future rate hikes would not happen until the second half of 2010. This surprised many in the wholesale interest rate markets who had already been pricing in OCR hikes from early 2010. It may force some of the banks to reverse course on their mortgage and deposit rate hikes of recent weeks.
Secondly, Bollard appeared to transfer some of the responsibility for the coming tightening of policy to the government.
“Further ahead, removing some of the current fiscal stimulus is likely to reduce the work that monetary policy will otherwise need to do,” he said.
Maybe Bollard knows something about the current budget thinking that we don’t, but it’s a bit of a punt to assume the government will be tightening sufficiently to slow a rebounding economy. Lags between government spending decisions and economic effects are at least as long as for monetary so Bollard must be very confident about his economic telescope. Let’s hope he has it turned the right way around.
Thirdly, Bollard warned again about the risk of New Zealand’s recovery being unbalanced with too much housing-led consumption growth and not enough export-led production growth. But again he seems much keener for the government to fix it than the Reserve Bank.
“The current composition of growth continues to raise questions about its sustainability. These concerns would intensify if credit growth began to propel stronger domestic demand,” he said.
One reason for any strong credit growth to the household sector is the OCR at a record low 2.5%.
Bollard has previously said he would much prefer the government to change the tax rules around housing investment to help this rebalancing.
Like any good first five, Bollard can rightly say one of his jobs is to ‘spread it wide’. He can also rightly say his sole task is focusing on inflation and the inflation outlook is subdued.
It’s a pity. New Zealand’s economy needs some leadership and he is in the perfect position to provide it with a quick chip kick higher of the OCR or a sidestep into tougher capital rules for banks lending to home buyers.
Go on Alan, have a go.
Your view? We welcome your comments below.
Here is the full statement from the Reserve Bank.
The Official Cash Rate remains unchanged at 2.5%.
Reserve Bank Governor Alan Bollard said: “There are welcome signs that economic activity is growing again.
“Activity in New Zealand’s trading partners continued to rebound during the September quarter and financial market sentiment has improved further. However, there remain significant vulnerabilities and challenges to be worked through in many economies. This process could weigh on global growth going forward.
“In New Zealand the housing market has reversed some of the decline in prices experienced over the past couple of years and a very gradual increase in household spending appears to be taking place. Government spending is also supporting activity. Business spending, however, remains weak and credit growth is very subdued.
“The high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery, and reinforces a bias towards domestic expenditure. After some short term correction it is also likely to see the current account deficit begin to widen in the medium term.
“The current composition of growth continues to raise questions about its sustainability. These concerns would intensify if credit growth began to propel stronger domestic demand.
“Annual CPI inflation is expected to continue to track comfortably within the target range over the medium term.
“The forecast recovery in economic activity is based on fiscal and monetary policy continuing to provide substantial support for the economy. We think such support remains appropriate. Further ahead, removing some of the current fiscal stimulus is likely to reduce the work that monetary policy will otherwise need to do.
“In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010.”
ASB Economist Jane Turner comments on the OCR announcement and its implications:
Our expectation remains that the RBNZ will start lifting the OCR earlier than it continues to suggest (but also later than markets have been pricing in). We expect a 50bp hike in April.
Much of the statement appeared aimed at tempering market expectations that have built in rate hikes from the start of the year. Hence, as in July’s statement, there was very little acknowledgement that the NZ economy is looking in better shape than generally expected.
The statement is also a little contradictory, in saying rates will remain low until the second half of next year yet expressing concern that credit growth might trigger stronger domestic spending. In other words, the RBNZ is saying it intends to keep interest rates low but doesn’t want anyone to borrow more money.
That juxtaposition, and likelihood of continued demand for housing, will increasingly challenge the RBNZ. We expect that the ongoing recovery in the domestic economy will trigger an earlier start to OCR increases than today’s statement suggests.
You may also like to read:
Loading ...
October 29th, 2009 at 9:07 am
Your crystal ball was definitely faulty Bernard, I’d ask for a refund!
October 29th, 2009 at 9:08 am
Usual abrogation of responsibility from Bollard.
In complete contrast – Norway just became the first European nation to change direction in interest rate policy, and are the first to raise interest rates there (joining Australia and India in noteworthy policy changes)>
http://www.bloomberg.com/apps/news?pid=20601087&sid=aG3.vYQ3ZEiw
“It appears that unemployment over the next few years will remain lower and wage growth somewhat higher than previously projected,” the bank said in a statement. “This suggests higher inflation, indicating that the key policy rate should be raised somewhat more rapidly than previously projected.”
Bollard allowed inflation to jump over his target in the period leading up to the financial crash (in fact it was really only the global financial crash that caused inflation to get back within the banks so-called targets). Looks like he is keen to repeat his pre-2008 folly.
Good opportunities coming for savers to send cash over the Tasman…..
October 29th, 2009 at 9:22 am
Chris_j
I didn’t follow Berdard’s saying at the begining of the year and purchased my family home. I am a lucky boy today.
October 29th, 2009 at 9:23 am
“we see no urgency to begin withdrawing monetary policy stimulus”….ie. the RBNZ will do what it is told to do by the banks which intend to keep the bubble inflated by whatever trickery needed and in that they have the full support of the govt. How many times do you need to run over a Kiwi before the stupid bird realises it is being taken for a sucker. The property ponzi economy rolls on and on…closer to the cliff edge…What screams there will be when the topheavy rotten thing drops off the edge and the suckers wake up to an economy with NO margin for safety and NO parachute to slow the collapse.
October 29th, 2009 at 9:25 am
He should have lowered interest rates. Raising them will just encourage the speculators that flood our economy with the money that fuels the housing market. Keeping them at 2.5% is better than raising them, at least.
October 29th, 2009 at 9:27 am
Alan Bollard is 100% right to err on the side of caution. The recovery is far from widespread and far to fragile to start removing support.
Interesting that the comment today is to “keep the OCR at the current level until the second half of 2010″, this compares to the original “we expect to keep the OCR at or below the current level through until the latter part of 2010″, subtle difference but I’m sure Bernard will find something to gloat about in that. Alan’s probably hedging his bets about with this minor amendment.
(BTW: In the previous comment I was referring to BH’s youtube clip yesterday predicting that the OCR be raised to 2.75% – about as accurate as his housing forecasts!).
October 29th, 2009 at 9:30 am
Alan B says “OK, John Key here are your cards. You play them”
October 29th, 2009 at 9:30 am
go Alan
after squeeling from the sildelines for … years, he’s finally stepped into the game. Speculators of every ilk might be screwed over the next 6 months. Serious new game move – well done.
October 29th, 2009 at 9:31 am
Now,we will just have to wait for the goverments in-action and see if they will help compound the misery!!
October 29th, 2009 at 9:33 am
Bring on the banking sector regulation. Can’t believe I’m actually pushing for regulation.
October 29th, 2009 at 9:36 am
Go easy on Bollard.
When you’re into injury time 30 points down, your options are limited.
October 29th, 2009 at 9:38 am
Chris J
We pre-record various versions of the OCR decision and make them ‘private’ in YouTube until we know the outcome at 9am.
Unfortunately one of the options (2.75%) was left on public and someone found it. We apologise for this and will do whatever we can to avoid this in future. We have apologised to the Reserve Bank.
cheers
Bernard
October 29th, 2009 at 9:39 am
Maybe AB sould follow the Richie Benaud line, then powerdownkiwi:
“Chaps; We can no longer save the game. We’re going to have to go out and win it”, and they did!
October 29th, 2009 at 9:44 am
Guess I get to keep my low short term mortgage rates for another 6 months. Lucky I bought my house back in March against Bernard’s advice. Oh, more Hickey bashing… Sorry!
October 29th, 2009 at 9:45 am
The move in Europe is away from Keynesian stupidity. Running a lose monetary policy to pork some temp growth to sell to the public as something good, is no better than Cullen’s idiocy in encouraging the property bubble in the first place. The economy remains in a critical state of debt. Encouraging an increase in that debt is at best madness. Our problem is too many are too quick to throw too much borrowed money at price bloated property, in the belief that prices will at worst not fall but are most likely to rise…giving a capital gain and a chance to ‘climb’ the wealth ladder. This is a property ponzi economy, utterly dependent on a constant injection of credit and demand. The govt is happy to run with the madness. The RBNZ is doing what it is told to do by the players who stand to reap the harvest of profits from the fools signing up to the ponzi scheme. There will be no investment in the so called productive sector. The balance of trade deficit will blow out. The Kiwi will nose dive. rates will explode higher. Inflation will shoot up. The ocr will have to rise…bloody high. The recession will deepen. Taxes will explode higher to fund the govt waste and stupidity. Incomes will dive. Mortgagee sales will shoot higher. The liar ratings agencies will bow to the truth and boot the banks up the bum. And so rates will rise again. Even English will choke on his statement that it was easy to get 40 billion.
October 29th, 2009 at 9:47 am
It makes me laugh how the Property Bulls are happy that the OCR was left unchanged, as Chris_J says “Alan Bollard is 100% right to err on the side of caution. The recovery is far from widespread and far to fragile to start removing support” ……..hang on, what about all these green shoots, the rampant housing market etc? Do these not count towards a recovery? And on that note, how do increased house prices benefit the economy? All that does is make people feel wealthier, encouraging them to spend more, and that’s how we got in this mess in the first place. Incomes aren’t increasing (as per the report that came out a little while ago) so there’s no extra REAL wealth.
Chris_J, I’m thrilled for you that you perceive yourself to be lucky to not have listened to BH’s advice earlier this year. I personally am glad I did heed his advice. I’m not lumbered with a $400k mortgage, for the privilege of living in a dump of a house. I don’t give a toss about Capital Gains, all I care about is the purchase price – that is what I’ll be paying obscene amounts of interest on.
October 29th, 2009 at 9:47 am
Im incredibly cautious. The Greater depression has not gone away. Im in business, not much but still got a finger in and its getting very ugly. Yet at the same time a friend in Harvey Norman said the weekend sale with 4 years interest free terms was a boomer with huge sales and a lot of stock ‘ran out’. This is a classic symptom of our unbalanced economy. On one hand we have Bridgestone closing a CHCH factory because of rising costs, as much as 30 million in one year, on the other the head of numerous Govt departments including NIWA, we find are now earning over 500k. We have poor savings and record debts and this is not going to magically improve until debts are reduced or destroyed and we come to terms with the 39 billion a year we are paying in interest to mostly offshore banks
As I sat in Harvey Norman talking with my friend a lady in her late 20’s came into the store , barefoot in her pajamas’s to buy a new playstation game(11.30 am and no yummy mummy). A welfare recipient. This country has made many very unwise decisions and one day soon we are going to get to pay the price. I have absolutely no doubts that we are in big trouble really big trouble. Leadership doesn’t look great. The chances of inflating our way out of this mess are remote.
October 29th, 2009 at 9:51 am
just add some serious tax reform in the next budget and nz might be something worthwhile calling home. I gather Bollard wouldn’t have been so bold without the support that was so apparently lacking under Labour.
October 29th, 2009 at 9:53 am
AndrewJ: Most welfare recipients don’t wear pyjamas; they can’t afford them.
October 29th, 2009 at 9:56 am
Logical Dave & sharonv : You guys nailed it ! Spot on . Flush out the speculators . Hand the cards to Key , ” your deal , Jelly-back ! “
October 29th, 2009 at 9:57 am
AndrewJ, I totally agree with you. Most people in this country are addicted to debt. And quick fixes. And not taking responsibility for themselves. How can this end well? It can’t.
October 29th, 2009 at 9:59 am
And as JK pick up the deck, Roger, he will turn to you, and with a smirk, utter, ” Just before I deal the cards, let’s have a discussion about the objectives of the game, and the rules, and the betting ceiling, and then I’ll leave it till after the next tea break before I decide whether to deal”
October 29th, 2009 at 10:05 am
I think Bollard did just the right thing today. By holding firm (and surprising everybody), he’s squeezed the exchange rate down nicely – he’s probably patting himself on the back for that bit!
Bernard’s point that he’s punting back to the politicians may well be right – that’s where the action needs to happen after all, and we all know it. We need to change the property investment equation to make ‘investment’ in non-productive resources less attractive. So instead of saying “Come on Alan” I say “Well done Alan” and “Come on John and Bill”!
October 29th, 2009 at 10:05 am
It won’t end well veedub – but painful and necessary lessons will be learned. There is no ‘nice’ way out of the mess. NZ is just getting there a little later and somewhat now disadvantaged – because they thought they were ’special’ and immune. It could be worse – Iceland/NZ without McDonalds LOL.
October 29th, 2009 at 10:10 am
veedub – There is much wrong with your slagging of us so called “Property Bulls”. Chris_J and I both bought a house at the start of the year, and we are obviously both happy at the low rates. Firstly, this is NOT because we want the capital gains that you talk about, but because we get to take advantage of the low interest rates to pay back our mortgages now! Secondly, there has not been a “rampant housing market” at all as prices are not really jumping up.
And finally, I feel sorry for you that you think you have to have a $400k mortgage “for the privilege of living in a dump of a house”. Maybe your idea of a decent house is a $1M mansion? My mortgage is less than half that, and I have a nice house with both harbor and sea views in Dunedin. Maybe you should move away from Auckland?
AndrewJ, I also agree. It is very clear that most people in NZ do not have a clue how to save. Everyone buys the latest games, TVs, gadgets etc and run into debt like there is no tomorrow. It is the mentality that people have that is the problem, NOT the interest rates or policy.
October 29th, 2009 at 10:17 am
I just cannot understand how these interest-free terms on whiteware and browngoods just keep coming and coming.
I can only imagine many will simply default after four years – and tell the retailler to come and get the goods – that is if they haven’t been on-sold in the meantime!
October 29th, 2009 at 10:20 am
Osty, fair enough – I should’ve said “pro property” or something. Bulls is a bit extreme! Are house prices not increasing? People on here are already talking about having made a “quick $50k” if they’d bought earlier this year. Maybe I’ve missed something here. Oh, and I don’t live in Auckland! I live in Wellington. Work dictates that we must – well, it certainly isn’t the weather
I have a 20% deposit, most of it saved the hard way. To buy an average house here (without moving out to The Hutt or the Kapiti Coast) I’d need to spend about $500k. I would’t spend that much, no way. So it’s not like I’m settng my sights too high at all. Even if I bought a $450k house, it would cost me way more than what I spend renting. Horses for courses.
My main point is that low interest rates just encourage people to borrow more money (and for some, more than they can realistically afford), not save. And that’s how we got into this mess. Who benefits from more people borrowing more money to buy more houses? The Banks and the RE agents. Not the economy. It’s counter productive in that respect. The damage just gets greater.
October 29th, 2009 at 10:24 am
This is the classic lets inflate our way out scenario. I dont think its possible to inflate our way out of this level of debt.
http://www.prudentbear.com/index.php/thebearslairview?art_id=10302
The first and most important is the return available to saving. If as at present or in the 1970s, deposits and fixed-income investments provide savers with a return that is less than the rate of inflation, then savings rates are bound to decline. People won’t save because they are being penalized for doing so. This is why the expansive monetary policies favored by Greenspan, Bernanke and others are so misguided. A capitalist economy cannot survive if its risk-free rate of return is below or close to zero for prolonged periods, because people will have no incentive to defer consumption and so capital will disappear. You only have to look at the unhappy fate suffered by the German Weimar Republic and various Latin American countries in bouts of hyperinflation to see the result of de-capitalizing the economy in this way.
Argentina is no longer a rich country for this reason. Its people are perfectly industrious and 97.2% are literate, its education system is adequate, its natural resources are abundant, its climate is healthy, yet through bouts of hyperinflation, its governments have de-capitalized its economy. Without a recovery in the savings rate, the United States is heading down the Argentine route to perdition.
October 29th, 2009 at 10:31 am
Veedub
I imagine that you might be shocked, but just imagine what the 4 pillars might now be thinking. It was a one way bet as far as they were concerned – just a tad arrogant. Ironically speculators will be frightened out of their wits now – what is it they now can not bank on?
October 29th, 2009 at 10:34 am
veedub, LOL the average house price in Dunedin is around the $260k mark. Given that the NZ median is around $340k, Wellington is definitely expensive LOL.
It has been a long time belief of mine that the problem is peoples attitude to finances. Yes low interest rates encourage people to borrow more money, however NZ has this level of debt because most people simply do NOT understand how much money they can afford to borrow! The number one rule is to NOT mortgage yourself to the hill to buy a house at the peak of the housing bubble, which many people seem to forget…
The public attitude needs to change. People should NOT buy all this crap if they cannot afford it. People simply do NOT have any will power these days. I sound like an old guy, but I am 27yo, and I only use the CC if I have cash in the bank to pay it off. Screw paying 18% interest on the CC LOL!
October 29th, 2009 at 10:34 am
@Andrew J
I read somewhere last week that a large number of the big name US retail chains simply won’t give their customers creditlines and have pulled/canceled store cards etc.
Many of the big stores were encouraging customers to buy for Christmas on lay-by instead. When you think about it this seems to be a good deal for both the stores (no credit risk) and customers (no high interest rates).
October 29th, 2009 at 10:35 am
What is Bollards job?
What is his job description?
October 29th, 2009 at 10:40 am
The ‘inflate’ and the ‘Harvey Norman’ comments have a common thread – and implication.
Sooner or later, paper wealth has to buy something. There is no longer the global resource stock to exchange the current ‘dollars’ for, at currently expected values.
Yesterday’s ‘top 10 at 10′ item from ‘theoildrum.com’, has some essential reading on this – look for the Nate Hagens piece.
Every time they try to kick-start the motorbike, the amount in the reserve tank will get less.
Until we morph to a fiscal system which doesn’t require exponential growth, we are dead-cat-bouncing in the manure pile.
By the way, I built a rather comfortable (and zero power bill) house for $50,000, four years ago. It can easily be done.
October 29th, 2009 at 10:40 am
If Dr. B had at his disposal another tool alongside the OCR that meant he could direct the rate of loan principal repayment (even fixed rate loans) he could have REDUCED the OCR by say 50 points and INCREASED something I’ve termed the ‘Principal Repayment Rate’ (PRR) by 50 points, or more, say 75. This would have taken the pressure off exporters and pushed back against inflation orginating in the non-tradeables, in particular housing. (Might even start re-balancing the economy.) See:
http://www.interest.co.nz/ratesblog/index.php/2009/10/23/opinion-why-new-zealand-needs-to-follow-singapores-example/#comment-43262
Do you think something like this PRR thing I have described would have reduced or increased the following in the last 10 years?
apparent NZD value
NZD volatility
property prices
national debt
I can understand why many would like to maintain the status quo with the first three, but why would we not ALL want to reduce national debt? Who benefits from keeping that where it is, or keep it increasing?
Anyway, suppose Dr B. had such a tool available at the future MPS where he needs to tighten. If we had a poll the week before, would you vote for him to increase the OCR or the PRR, by whatever amount he deems fit to throttle inflation? I guess in answering this you’ll have to take account of the way you use debt; what tax breaks you get in doing so (interest payments deductible/principal repayments not so); if an increasing OCR is better for your business (lenders, bank currency trading operations, importers, property ‘investors’ – as increasing OCR can fuel inflation by attracting cheap offshore funds.) Or, iif a reducing OCR is better for your business (exporters) or outlook, eg. homeowners – as you might be keen he used the PRR rather than the OCR and see the extra payment simply end up with bank shareholders, rather than go towards clearing your debt, as would be the case with the PRR.
I wonder if the aggregate of OCR and PRR would lead to a lower repayment burden than by just using an OCR, given our i.rate market dynamics, which are principally dominated by fixed rate loans? With inflation better controlled, would savers have too much to be concerned about by changes to buying power?
October 29th, 2009 at 10:42 am
The only way it would be conceivable to leave OCR at 2.5 until 2nd half 2010 is if we have the tax changes the TWG have been talking about in the next budget. This would seriously cool the housing market, dampen domestic spending, NZ dollar would be much lower helping exporters. NZ would grow in a more balanced way from production led exports. And all will be well
October 29th, 2009 at 10:42 am
Well said Wally,
And quite right on the button….CULL-en and Hell-en tarred with same brush.
But there are THOUSANDS of em here in GODZONE……..not millions of normal working stiffs, like there used to be.
We must breed em…as well as sheep…often called the PUBLIC.
Well, goodbye guys, been nice knowing you.
I shall spend and spend till I have no more.
Then ” Nanny State” can pick up the pieces, though I am not getting any younger and I know how to stretch MY dollars, hard earned…mostly.
An investment is something that you actually make money from and get a RETURN…yes a RETURN…of both income and capital outlay, otherwise why the hell-en would you do it.
I used to do it for a better standard of living for my family, not someone else’s, not to make someone else rich, rorting the systems, instead of genuine productivity.
Too many thieves now.
I am not a CRAFAR FARMER.
Unfortunately I am not a BANK either, just an old fashioned stiff…. a retired TAXPAYER.
Remember, these words…A rort is still a rort, Theft is still Theft, A Ponzi is still a PONZI
No matter WHO perpetrates the THEFT.
There is no good stealing.
There is no just a little bit crooked.
There is no just a little backhander.
Dishonesty is just that….plain and simple.
And we now know who the exponents and CULPRITS are….in spades.
Can we please have a NORWEGIAN based TAX system, where it is all out in the OPEN for each and every person to see how people/entities accrue their wealth.
Including the pollies and rich, banks, you and I…..never mind …Cull-en, Hell-en, Key-nesian, English as I speak, not as a common language, TVNZ, Fonterra, et al….etc…
Because there is something smelly in the corridors of power, farming and a lot of shonky businesses, finance included.
A level playing field. I don’t think so. Best interest of WHO….
Jobs for the BOYS….can you scratch my back…..I gotta big itch…must have new BMW for my ministerial car, cos we gotta hurry to the next snouts in trough engagement…Party, at your expense….by the way there is a VIP TENT…provided by ASB, or WESTPAC, or even KIWI….etc.
Power hungry Sharks, dressed up in Animal Farm Costumes for the MASQUERADE …BALLS.
Not you and I…. HONESTLY. Guys…
Wakey Wakey NZ.
I used to be proud to live here….no longer the case if I/we have to be manipulated and screwed daily.
Back to SHOUTING…and RANTING……….BUT NOT RORTING.
Bernard, about that vote…
Would you vote for these people ever again.
October 29th, 2009 at 10:42 am
Well done Allan, you managed to kill 2 birds and some more with one stone. The dollar dropped so exporters are happy and will keep the recovery on track for the country, you have put the politicians on notice to rein in spending and get their act together. What makes me really smile though is you wiped the smile off the face of the smug bankers who went nuts over the last few weeks driving mortgage rates up in anticipation of a rise in the OCR (they will do anything to make people pay more and make a fast buck themselves inspite of knowing that people are already struggling). Guess now we need to see how the rest of the saga plays out, will they reverse the mortgage rate hikes or again justify it as Cost of Funds. That would be where you could take some accountability. You have my vote Allan on a job well done.
October 29th, 2009 at 10:50 am
Bernard, I guess the lesson there is don’t upload anything onto the web that might embarrass you later – probably best to keep such things on a your PC just to keep them safe (especially in an office full of Dilberts!)
Veedub, I just don’t get the people who saw the start of the year as a bad time to buy. On average prices were probably 10% down from their highs (and their current levels) plus 5 year fixed rates were almost 3%PA less than now (15% saving over the fixed term) – so who didn’t want that 25% discount??
It was obvious with low fixed rates that prices would regain much of their losses very quickly, however my view now is that higher long term rates will stall the market over the next few years – price rises will still occur but expect modest low single digit gains on average.
I am currently of the view that housing shortages will put more pressure on rents than house prices unless construction picks up strongly, the real risk is that by subduing house prices with higher long term rates that 4 or 5 years down the track we see a repeat of the type of price explosions that occurred 2003-07, 1993-97, 1981-87 or 1971-74 (the timeframe would be about right!)
Anecdotally, I advertised a flat for the first time on Tuesday, I normally don’t get any enquiries for flats available right now (post exam time) so I was expecting to leave it vacant to January, but today I have 5 scheduled viewings from all good sounding groups, so I’m not quite sure what’s going on (maybe the shortage has arrived quicker than expected?)
BTW, Osty/Veedub, with about $7m debt fixed back in March, I guess I’ve saved almost $1m in interest payments by taking those cheap fixed rates at 6 to 6.5% for 5 years.
October 29th, 2009 at 10:54 am
Cheers Allan, keep the party going.
October 29th, 2009 at 10:58 am
Osty, your head is in the right space. Your attitude to money sounds responsible, especially for a 27 year old. Man, if I could nab a house here in Wellington for $260k, or even $360K, I’d jump at it. I could possibly get a small unit for around $360k, but would have to sell most of my stuff in order to fit in it.
October 29th, 2009 at 10:59 am
Sorry guys Bollards speech hasnt caused the dollar to fall – check out the Aussie dollar drop at the same time – its all on the back of a stronger $US.
Interesting to see just how green our economists are in that most were all keen on the economy recovering and interest rates needing to go up – these guys need to get out in the real world and see the real pain thats happening at the coal face! This down hill slide has still got a long way to go given the huge amounts of bad debt that are still rolling out around the countryside.
October 29th, 2009 at 11:04 am
The markets don’t really open with the start of play in NZ. Wait and see what the next 24 hours bring.
October 29th, 2009 at 11:04 am
this is all an exercise in semantics.
firstly the housing market is only showing cardiac murmur in the main cities….go to provincial area like hawkes bay etc and you’ll find wonderful modern homes for under 500K.
i sold out of the stock market in all my blue chip shares in october 2007 and divested myself of a lot of good investments because i saw the Depression Mark I coming…..cash was and still is king!
my point is that there is an even bigger Depression Mark 2 busily sharpening up it’s fangs in the States, U.K and parts of Europe as no lessons have been learnt over the last 18 months.
the meatbags and goldsachs on wall st. and the banking industry generally are at it again as if nothing ever happened.
without going into deep economics; something very bad is coming globally and much so for nz ….within 6 months.
take it or leave it!
October 29th, 2009 at 11:08 am
Chris_J – clearly the beginning of this year was LESS of a bad time to buy, comparitively speaking. But even then (and I was looking, hard!), in Wellington, the asking prices were still too high. The debt level I’d have to take on was too great. If I, or hubby, lost our job it would’ve spelt disaster. We don’t work hard to be slaves to a big mortgage. Look at this way – just because a Lambourghini is discounted by 10% and cheaper interest rates are offered in order to buy it, is it a good buy? To my mind, no, it’s not. It still means I have to outlay all my savings and take on masses of debt. And what’s it getting me that I don’t already have? I already have a car that allows me to get around (just like I rent a house that allows me to live somewhere) so I’m not achieving anything really. And in this case, the house I rent is far superior, and cheaper to live in, than the house I could afford to buy. And I get to save the difference.
October 29th, 2009 at 11:08 am
You could be right, exRural Banker:
“(ANZ) New Zealand division recorded a near three-fold rise in credit provision charges to $889 million, due to “general deterioration across the book”, resulting in a 32 per cent decrease in profit after tax for the unit.”
October 29th, 2009 at 11:09 am
try this link elves !
http://www.gmo.com/websitecontent/JGLetter_ALL_3Q09.pdf
October 29th, 2009 at 11:09 am
Chris J,
Good work on the interest rates. You’re obviously pretty savvy when it comes to this, so how do you see low interest rates affecting the property sector? Are we heading back to boom times? Is everyone invited to play or will it be restricted to only smart people?
Cheers,
JC
October 29th, 2009 at 11:14 am
veedub – “Most people in this country are addicted to debt”
and
Osty – “It has been a long time belief of mine that the problem is peoples attitude to finances”
You are both correct, but this is nothing new and not specific to just NZ.
It is often quoted that out of every 100 people, by retirement age only 1 will be wealthy. 4 will be financially secure, 5 will continue working, not because they want to but because they have to, 36 will be dead and 54 will be dead broke.
If you’re in the unlucky group that die, there’s not much you can do about that! (although many will be self-inflicted by poor diet etc). However, of the remaining 64 it’s really the choices you make through your life that will determine which group you end up in.
The difference between the financially secure and the dead broke at retirement age is that the first group have assets & equity, the second group have no assets & only liabilities. The assets don’t have to be property but quite often are.
It doesn’t matter what interest rates or policies are implemented, the same people will end up broke.
October 29th, 2009 at 11:14 am
Rob of the North – I don’t wish hard times on anyone, but you’re so right. Lessons have not been learned, not in most cases. That can only mean one thing. The punishment gets bigger. There is only so much money available to “buy” our way out of trouble, it has to come from somewhere and that resource will get tapped out. Even printing the stuff has consequences.
How I’d love to move to Hawke’s Bay. At least they get sun. And better houses for less money. All this talk gets me dreaming about chucking it all in and hitting the road again…..
October 29th, 2009 at 11:18 am
Rob of the North – I love Point 5:
5. Over-spenders and Under-savers
To celebrate the overwhelming consensus among
economists that U.S. individuals have been
dangerously overconsuming for the last 15 years, we
have decided to encourage consumption and penalize
savers by maintaining the aforementioned artifi cially
low rates, which beg everyone and sundry to borrow
even more. The total debt to GDP ratio, which under
our heroes Greenspan and Bernanke rose from 1.25x
GDP to 3.25x (without even counting our Social
Security and Medicare commitments), has continued
to climb as growing government debt more than
offsets falling consumer debt. Where, one wonders,
does this end, and with how much grief?
Well and simply said.
October 29th, 2009 at 11:19 am
http://www.scoop.co.nz/stories/BU0910/S00741.htm
“Debt at highest levels since 2002″
October 29th, 2009 at 11:22 am
JC – of course everyone can play, it’s just that most have to play as tenants. And if they’re out of work ones?
Can you see the current regime topping up his (CJ’s) mortgage indefinitely, via accomodation supplements?
In a globally sinking-lid scenario, it don’t work. I wouldn’t be leveraged for quids ….
October 29th, 2009 at 11:28 am
Key has been saying himself that he expected Bollard to keep rates low for a significant period of time and hasn’t had the cheque book out to the same degree most governments have. I would see him as the most fiscally responsible leader and astutely aware of NZ’s debt position.
The most likely explanation is that Key and Bollard are actually talking, aware of the future intentions of both monetary and fiscal policy and working together.
The benefits of reducing fiscal stimulus while keeping interest rates low are clear:
1. lower debt burden for the government
2. lower interest rates to repay the current debts
October 29th, 2009 at 11:34 am
I actually think it is the Govn’s job to fix the imbalances and not the RB’s….The RB can really only move everything up or everything down with the tools they have…
For me successive Govn’s have side stepped the re-balance issues, everything from the mid-1980s fixes that should have been done to the finance and equity sectors but were not, right up to today with BE and JK afraid to do a thing to the housing stupidity as its going to cost them votes….
I dont see why Bollard should be the whipping boy for the Pollies inadequacies and our own greed.
regards
October 29th, 2009 at 11:35 am
what a git
October 29th, 2009 at 11:43 am
Hmmm…after all this do I keep my mortgage rates on variable/short term and hope that the banks may lower their long term interest rates after this OCR decision….or will they keep them as is or hike them again to “recover costs”???
October 29th, 2009 at 11:46 am
@Kate: Im gob smacked at 4 years interest free….but in some ways it makes sense…if the finance companies are stopping taking in cash because no one is borrowing, then making the terms even easier makes sense….so this way they get a cash flow for a long time is that bad?. I can but assume there are good profit margins here for the retailers, pity we dont see strictly cash discounts as an alternative.
It would be nice to see what future information / predictions the retailers have, ie are they afraid of deflation? so the whiteware/TVs they buy today wholesale is 20% cheaper in a few months?….punters might find that if deflation really takes off then the $2000 TV they got day is $1500 or even less in 6 months time….yet they are stuck paying the 2k….
regards
October 29th, 2009 at 11:59 am
@powerdownkiwi: “Sooner or later, paper wealth has to buy something.” Exactly….I agree. Until 2007/8 paper wealth was multiplying out of context of a real economy….now it has to come in from the rain….or get turned to pulp.
“a fiscal system which doesn’t require exponential growth” ditto…quite why ppl cant see this as disastrous at some point in the future I dont know. Its a strange phenomena but one ppl seem to fall into every time….smoking is a classic, “I need my fix now I wont get lung cancer in 40 years time….” Debt is going to do the same thing to GDP and economies, just when some other bad things are happening, ie peak oil, AGW, baby boomers retiring….all ppl are going to be a lot (net) poorer IMHO….incl me….
October 29th, 2009 at 12:06 pm
Harvey Norman has a 4 year interest free credit sale and then the taxpayer will have to bail out the finance company that financed them into it. The government guarantee of finance companies is fatally flawed and allows the “Harvey Normans” of this world to encourage spending.
October 29th, 2009 at 12:10 pm
Well done Dr Bollard.
To me the cause of our problems is our overgrown public sector, it is simply too big and too well paid. The housing bubble was an effect not a cause. I actually have a lot of respect for the Reserve Bank, they are very serious about their job and try to be very clear and open in their dealings with us.
I’m not convinced John Key is spineless as some have suggested. I think he is trying to make substantive change below the radar, just as Dr Bollard did by making the banks borrow more onshore. The next budget should be interesting indeed.
October 29th, 2009 at 12:19 pm
@Sam the man: “The only way it would be conceivable to leave OCR at 2.5″ not true, we could have a second recession or even a depression….
BTW when is the budget due? April/May? So maybe Bollard is saying he’s waiting for the Govn to do nothing before he acts…ie he’s gone from end of 2010 to second half…..second half is 1st June….
regards
October 29th, 2009 at 12:19 pm
$$$
October 29th, 2009 at 12:20 pm
Jonkey went into the 2008 election with a ” me too ” to all of Labour’s expensive ” packages ” to assist their chosen few . Until he proves otherwise , I will continue to refer to him as Jelly Key . Even Bob Hawke , prior to being ousted by Paul Keating , was dubbed ” old jelly back ” by the Australian media …………. And Key ain’t a patch on Hawkie ! Bob got on with the job , and reformed the Ozzie banking system and introduced their successful superannuation scheme . As lame as Don Brash was , credit to the guy for having his own ideas in 2005 , and for directly disparaging Clark & Cullens’ ” packages ” as the rubbish that they were , and still are .
October 29th, 2009 at 12:22 pm
Let’s assume AB knows what he’s doing.
Let’s assume that we are all ill informed.
If you don’t know what is going on it’s all about money.
Thus:
Alan rings John:
AB – what you want me to do?
JK – Keep the rates low, I need dump my properties, and my friends too…
AB – OK you have 6 months to do so, is that enough?
JK – Perfect, you’ll have my party position….
Is that probable…..?!?!?
October 29th, 2009 at 12:24 pm
@RT: not to me….well it depends on how much its “overgrown” etc etc….the centralist view (from me) is yes it probably is a bit…Libertarian view is way over…I suppose…
regards
October 29th, 2009 at 12:33 pm
@stp: No….I dont think so. In fact I think Bollard wont be on JK’s new year’s party list, he’s just handed the problem to JK & BE to solve in the budget….and I think that’s the rightful place….JK & BE we voted in directly, JK & BE should front up and carry the can, success or not….Bollard would just be the whipping boy if this goes wrong….Personally I think its way more likely to go wrong than right and its the external factors that will do it…so JK and BE have done nothing, effectively trying to hand it to Bollard, and Bollard I think has banged right back across the net….
October 29th, 2009 at 12:37 pm
Asked at Harvey Normans… they cannot legally give cash discounts better than that on offer via 4 years interest FREE… Common idiots, nothing is FREE…
So that is the crux of the matter.
That is the CRUX of the problem, That is why cash buyers cannot win a better deal.
Go figure…That is why prices are so high for goods from China, India, etc…the very places we were supposed to get cheap prices, when we outsourced all Manufacturing…
Get the picture…A four years interest free TV would be exponentially cheaper if you paid cash…and were ALLOWED to…
DUMB…huh.
But so is anyone who THINKS they are getting anything INTEREST FREE.
October 29th, 2009 at 12:38 pm
Roger W – don’t fall for that nonsense. Even if there were no government spending whatever, the real lid of resource-supply (particularly the energy needed for everything) is still sinking.
No good arguing about ownership of deckchairs – learn to use a lifejacket.
October 29th, 2009 at 12:39 pm
I think some people are speaking way too soon!
It’s where we are going that is the problem … it will take 10 years to figure out what is happening today.
Buying a house! Great today or yesterday … but remember what one pays is actually your after-tax income and doesn’t include inflation. e.g. 5 year loan rate near 9% is actually approx. 2% for tax and 1% inflation = 12% of your working hours income (rather than what you pay after tax).
So, to make money then. For a 30 year loan, on 300,000 you would spend roughly 900,000 to pay it off. Hosue prices need to grow at 4% pa, ha ha and then one would only be even! To make money, this needs to be more like 6% + pa.
STOP spending tomorrows money today, and spend todays money tomorrow.
Forget about today, it’s where we are going that matters
October 29th, 2009 at 12:47 pm
@Sore-looser:
I went into Powerstore a couple of weeks ago, when THEY had the 4 years bit on the go. I also had my ‘cash deal?’ question answered “that it would be against the law….Until next Monday”, the kind salesman said. “Then the offer is off, and I can do a deal with you then.’
Good things come to those who wait…….
October 29th, 2009 at 12:49 pm
Steven Says: “It would be nice to see what future information / predictions the retailers have, ie are they afraid of deflation? so the whiteware/TVs they buy today wholesale is 20% cheaper in a few months?….punters might find that if deflation really takes off then the $2000 TV they got day is $1500 or even less in 6 months time….yet they are stuck paying the 2k…”
Errr, Steven, what are you talking about? Most technological products such as TVs, Computers and Gadgets are already subject to deflation. Any LCD today will be a lot cheaper in the future. Deflation is NOT a problem like some will make you believe, and it is already a part of many markets.
This is exactly why I would never put a computer or LCD TV on HP to pay it off. By the time you pay it off, the item is a worthless piece of crap. Pay for these such items with cash, or go without for 6 months until you can.
October 29th, 2009 at 12:49 pm
@Sore-loser: I dont think its legally obliged I think they are just saying that….unless its a commercial contract they have with the sole importers (say Panasonic) to only sell at the list price….Ive heard it said that in effect the sole importer dictates the price to the retailer(s) and so they all have the same price, or cant sell the goods of that brand…
and,
It would only be cheaper if you got a cash discount….if say over 4 years you got a 4% pay increase per annum and inflation was 3% per annum then its more sensible to go interest free all else being equal…?
Right now though I think its better to either pay cash, or do without, anything else is loony IMHO keep yourself liquid and flexible….4 years payments is 4 years payments you may not be able to keep in a highly volatile situation.
regards
regards
October 29th, 2009 at 12:58 pm
“Bank of New Zealand is urging customers to prepare for sharply rising interest rates and to take a conservative approach to borrowing in the next few years.” stuff.co
Statement this morning! “sharply rising”….”next few years”…
October 29th, 2009 at 12:59 pm
Osty: an example, clothing retailers get in so much winter clothing, but by late autumn the prediction is its going to be a mild winter, so they start to offload clothing early knowing they will otherwise be stuck with it.
Of course deflation is bad…its when goods drop in price as opposed to value and your employer also expects to give you a 10~20% pay cut…….Then debt becomes harder to service because the payments are a bigger part of your income….
October 29th, 2009 at 1:02 pm
Osty – a thought. Moores Law runs into the problem of molecular cross-talk. Go the other way, and you have to dissipate the heat, same problem.
Meaning all reductions of product costs require room to happen within finite parameters.
I suspect Steven is one of the growing band who understand that everything you see, buy and do, requires energy, and cheap energy at that.
Those days if not gone, are going.
It’s not so much whether the TV will be relatively cheaper or more expensive – but whether you will bother with it at all.
Other uses for the increasingly contested dwindling supply of dwindling quality energy, will simply be more urgent.
October 29th, 2009 at 1:05 pm
@Wally: I think that was up last night….and be careful of looking for what supports your point of view to the exclusion of other things. It is an interesting piece though ie its negative….all I tend to see in the main stream is positive articles from banks, Pollies economists etc….now a I see a negative piece urging caution….so in the real world is this slightly bad or really bad….
regards
October 29th, 2009 at 1:09 pm
Inflation is not good for everyone as Deflation is not good for everyone. The problem is we live in a world where we only know inflation. To expect inflation to be the predominant force forever comes with the ridiculous assumption that prices only go up and what ever you buy today will be worth more tomorrow and so on for infinity, hence this bloody great bubble hanging around our necks like unexploded ordinance.
October 29th, 2009 at 1:09 pm
My dear readers one and all… Never, never PAY RETAIL.
That includes PROPERTY, today, yesterday, whenever.
James…you are a bright boy.
(just a saying…if you are young……I do not mean to be condescending, about age.).
If the TAX situation is amended then future income and all else will be moot, but it is all out of OUR hands, BOLLARDS, KEY, OBAMA, O’ HELL-en, CULL-en, BUSH-ed,
They and their ilk are root cause, not answer.
This is a WORLD problem, and we are the PRAWNS……mere fish food.
The next phase is COMMERCIAL.
Now that really will be huge.
Want to bet a DOLLAR.
Just think how pissed the Investors were who lent money to NZ in last few weeks.
October 29th, 2009 at 1:24 pm
Yes Steven, I try to find articles that point to everything being oh so sweet and nice but gosh darn, the truth keeps popping up. I suspect the bank statement got past their humbug fence…maybe the humbugger boss had left for the pub!….I would like to see the data to show the level of residential mortgage liability of the banks…any ideas where it is?
October 29th, 2009 at 1:26 pm
Well done Alan, guided by astute and logical economic analysis; not influenced by a shoal of reef fish mis-reading economic reality.
October 29th, 2009 at 1:29 pm
@Powerdownkiwi:
1) “but whether will bother with it at all” – yes…
2) “Other uses for the increasingly contested dwindling supply of dwindling quality energy, will simply be more urgent.” – yes….very much so.
and not just me….as a Greenie-ish, little bit left little bit libertarian sort of ….I think the Libertarian’s also see this….from their perspective (and to a degree mine) the “real” danger of AGW or more importantly peak oil is the ever increasing impact Govn will have on our liberties and freedoms as it has to allocate dwindling energy resources for us….Govn’s wil have to regulate and police in a ever draconian way to ensure social stability….”sorry 80kmh speed limit as that saves enough diesel/petrol to guarantee pak-n-save gets enough fuel to get food on the shelves so you can eat….” You can only get a tank full every 2 months, walk, get a bike or take the bus to pak-n-save…
We rely on exports….
Another Q: what happens if (when) exports are too costly to ship? so exports collapse…how will we buy fuel from abroad? LOL, Globalization is toast in an era of expensive energy….So we will have to turn the milk solids into bio-fuel locally….how do we afford the $ to import the plant to do so? What happens to the Internet? its a massive user of energy, yet effectively its now the world’s library. ie if you dont have a fridge then you pickle or salt, can anyone remember how their grandmother did it? I cant! etc etc….my end point is just where will we revert to on the energy consumption graph/curve per capita?
October 29th, 2009 at 1:44 pm
Osty – fresh from stuff.co.nz about Wellingon house prices – “The average house price in Wellington has fallen 3.5 per cent to $538,000″………..so aiming for a $450K house is, as you can see, below average. And still unaffordable on two incomes.
October 29th, 2009 at 1:49 pm
@Wally: LOL….yes that would be an interesting point….ie the banks telling ppl to be careful so that the future defaults for them are minimalised….ie ppl have more reserves…that’s such a neat answer…
ie what they really mean and not what they say, I so trust them to have what’s best for you at heart…..not.
October 29th, 2009 at 2:14 pm
Nice job Alan.
This is how the game should be played, good for most of people and the country.
October 29th, 2009 at 2:16 pm
Steven – I suspect that shipping is actually very fuel efficient, and will outlast almost anything.
The question is not whether we can export either – as long as we price our food exports below the cost of invading us, we should be sweet.
The question is how we power that agriculture, and what happens to the rest of our aging infrastructure. Just remember that roads, pipes and packaging are all oil-based.
Cuba is the best clue to the latter, and worth some imvestigation.
I suspect we will be in ‘triage’ mode (the paramedic approach – keep the vitals going, work from there…)
Interestingly, energy is one argument for real-estate prices going up (relative to other things). A building represents a ’sunk’ supply of energy, and therefore a second-hand store of a scarce resource. We call it ‘embedded energy’.
October 29th, 2009 at 2:38 pm
@Powerdownkiwi: There is the comment that the price saving in making chinese steel with cheap chinese labour and shipping it to the USA only makes sense when bunker fuel is cheap. Ditto our NZ advantages in year round grass production to make milk products gives us an advantage only as long as that difference isnt absorbed by transport costs….
Yes shipping might indeed survive, per kilo of transported goods it is indeed cheap…but I argue its the net difference that counts.
In terms of invading, it would be pointless invading if they then cant get fuel cheap enough to ship the confiscated goods/food back home (where ever home is) against using the fuel at home to make the food….same argument as above…but I guess scorched earth policies of the robber baron era are possible simply take it for free, of course next year the ppl are all dead so there is no food produced at all. so the invasion force has to go home….
In terms of invasion I think the biggest likelyhood of invasion is ppl migration where they migrate looking for food….NZ cant be walked to and they’d need fuel to get here…so in extremis I guess we are safeish…maybe being at the end of the world isnt such a bad thing after all.
Cuba is a fascinating read…so many different aspects there…like food scarcity how the Govn regulated the food….Libertarians would have a fit!
October 29th, 2009 at 2:46 pm
powerdown – “A building represents a ’sunk’ supply of energy, and therefore a second-hand store of a scarce resource. We call it ‘embedded energy’.”
For what point? Aside from shelter or burning the timber for heat (assuming a wooden house) how is that energy useful? As an energy store it is hardly usable.
October 29th, 2009 at 4:11 pm
As a building, obviously. The replacement of which will get increasingly more either expensive or problematic.
October 29th, 2009 at 5:31 pm
AB made the best decision for the current economic climate.
It also put a lot of egg on the faces of the banks that think they run the country. They are all suffering a severe case of loss of face that will dent their credibility for some time
There are a lot of businesses and property owners out there that will go to the wall if interest rates rose 2-3% in the next 18 months.
A 12 – 24 month window will give stressed businesses the time needed to reduce debt and restructure
The tax benefits that investment property enjoys at present will be shortly addressed by a different tax regime
We arent anywhere near out of the woods regarding this worst recession for 80 years.
AB has made the only sensible decision that was available to him, contrary to what all the so called experts thought or were predicting
The next thing that has to be hauled into line are the insane credit terms and conditions that are again popping up, such as (3 years interest free then 36 months to pay) that is trapping the gullible into a debt trap that was one of the original reasons we headed into this recession.
October 29th, 2009 at 6:36 pm
Alan obviously made a good decision today. The decision is the best for the country. Well done.
October 29th, 2009 at 8:09 pm
hurls1 says “There are a lot of businesses and property owners out there that will go to the wall if interest rates rose 2-3% in the next 18 months”….if they rise only by that much I will eat my toast with jam. I expect them to pass that level and keep going.
October 29th, 2009 at 8:11 pm
Sore-Loser: you’re right, we’re living in crazyland. Even PGG Wrightson are offering farmers a “buy now and don’t pay until February” deal on rural merchandise. A lot of this product will be sold on 10% or less margins…so, effectively they’re not even covering their working capital. And all this from a company that is borderline bankrupt! The NZ motto seems to be “if in a hole, dig deeper”.
October 29th, 2009 at 9:48 pm
ChrisJ you have got a massive amount of debt!! your decision to fix at 6.5% for 5years might not of been such a good idea you could of floated at 5.5% to pay as much of that 7 million debt off as possible before you start having to pay over 8% (the better decision would of been to sell everything and have cash in the bank) I would hate to know what your situation will be in 5 years when the tax rebates have stopped and property values drop 10-20%, rents stay the same and and you start having to pay 9%+ interest rates but I guess you don’t think that will happen.
October 29th, 2009 at 9:59 pm
The overall feeling from reading comments on interest.co.nz in the last 3 months is that the economy is doomed and we are heading for another recessionary phase – it’s just a matter of time.
Therefore it is a given that Bollard will cut before he increases.
Floating mortgage interest rates will stay down and go lower. The banks will be unlikely to find anyone who wants to fix in the next 12 months while floating rates appear to be the best bet.
Bollards announcement will perpetuate the housing resurgence and NZ median house price will break records over summer.
The exchange rate will remain strong and head rapidly to 80 cents or 90 cents USD as the USD is going to collapse.
So forget about increased OCR – Bollard has no choice but to leave it where it is or lower it!
October 29th, 2009 at 10:07 pm
Bollard didn’t need to increase them, they were going up anyway, obviously he was going to sit back and wait.
October 29th, 2009 at 10:12 pm
Ha ha ha to all those who thought Alan would tighten in January. Good on him for realising the best way out of this mess is an export led recovery. The housing market can do whatever. Lets try and get the dollar down first then worry about inflation.
October 29th, 2009 at 10:22 pm
Kieran, thanks for the concern, but whose floating rate is 5.5%? ASB’s floating is about the lowest of the big banks at 5.75% and I’m fixed with them at 5.9% for 5 years, personally I can’t see any logic in not having fixed (and there definitely wouldn’t be any break fee anyway!).
Who’s stopping tax rebates? The discussion at the moment seems to be about ring fencing losses which wouldn’t affect me as all of my income is property related. Anyway cashflow is my main goal and based on near zero price inflation by the time the mortgages come up for renewal, the existing portfolio should return at least 35% on remaining debt (I’ve owned many of the properties for up to 10 years, so many are already paid off), at best (with a few disposals) the existing portfolio will be debt-free (barring any new acquisitions) so higher interest rates won’t be a concern. However I will safely assume neither property values will drop 10-20% (in nominal terms) nor will interest rates be perpetually 9%+ as you suggest.
Having a strategy to repay the debt is key to leveraging investments. Taking on debt without the ability to repay would be mistake at anytime – capital gains are a bonus, not a repayment strategy.
October 29th, 2009 at 10:25 pm
Guys – you’re making a really big assumption that a failed recovery (which I suspect as well) will result in lower rates for a long time. Understand the global situation..there is a massive risk of either inflation or deflation depending upon which policy mistake the Fed, BOE etc will make when they come to withdrawal the liquidity that they have massively injected into the system in the past year
We will import the consequences, and I’m betting its inflation – what does the RBNZ then do, kill us with inflation or higher rates ? its always the latter, and its called stagflation, something terribly nasty if you are clinging to floating rates.
October 29th, 2009 at 10:27 pm
Did you know there are over one hundred submissions to this blog between the hours of 9.00am and 5.00pm. I presume most of you are at work ( could be wrong). Are we all contributing to the low productivity/ low wage cycle. Was me Sir I didn’t do it. Justathought of course, feel free to abuse me.
October 29th, 2009 at 10:32 pm
Mike – couldn’t agree more.
There is no need for an increase in OCR given that the Banks are already increasing their mortgage rates. RBNZ could actually decrease the OCR in the next round or in future announcements if Kiwi dollar rise further. Right, take care of the currency and get the export/tradeable sector going, and hope that the Banks’ movements to increase their rates and tightening their lending modes/assessments would help to slow down the housing market. It appears that the latest news from Dominion Post is that Wellington’s property prices have dropped. Seems, not many are picking up that news. Isn’t that working nicely for RBNZ at least for now.
Any comment on the latest report on the fall of house prices in Wellington?
It says”….The average house price in Wellington has fallen 3.5 per cent to $538,000, with the corresponding section value reducing 4.4 per cent to $258,000….”
October 29th, 2009 at 10:43 pm
Haha Ludwig you don’t real believe PGG is running on less the 10% margins do you?
anyway
Just something for everyone who believe there will be 30% drop in property and interest rates over 10%. To me it seems like a total contradiction. If prices do start falling people will feel less well off and they will spend much less this will drive prices down all across the economy === deflation, if there is one thing Central banks don’t like more than inflation I would thing it be deflation. So as soon as prices start falling OCR must fallow, now we have seen that rate at around the 6 % increase sale prices very quickly.
Am I right? Or can some please tell me a scenario where we can have falling prices, increasing rate and high inflation at the same time?
October 29th, 2009 at 10:47 pm
Grandy, I commented on the falling house prices in Wellington on another post. As a previously potential buyer in Wellington (but no longer, have given up) it would appear about right from what I’ve witnessed in the last 9 months or so of intense looking around. Some properties are still asking way over RV and most of those tend to sit on the market for ages, 9 months and counting in some cases. A lot more houses have come onto the market in the last few weeks too, some more realistically priced compared to others, but the numbers still don’t stack up for me. For me to buy an “average” house I’d have to take on about $440k of debt – ahhhh, no thanks. So I lowered my sights to a below average house but I’m still considerably better off renting. Some RE agents still phone me to tell me about new listings but I’m no longer interested. Some other sucker can take on the debt instead.
October 29th, 2009 at 10:53 pm
Haha interesting point “just a thought”, kinda funny when the comments are often complaining about NZ’s lack of productivity.
I was rapt when they banned Facebook from my work, it used to get on my nerves seeing people sitting there refreshing pages every 5 minutes to see what other people wrote.
Although in saying that I wouldn’t want them to ban this site.
October 29th, 2009 at 10:56 pm
veedub – agree, renting is logical at least for now. Just keep watching the happening and developments in the US, UK, Europe. The unemployment and the currencies situation is very concerning everywhere. We can’t be better off as we need the jobs created from the tradeable productive sector to get us out of debt/recession etc.
News from the US is not too great recently ie. unemployment, drop in new house sales, drop in confidence etc. The question is are we fundamentally out of the woods? just take a look at the report from Treasury today. There was also some news today about a timber company in the south is closing and some 45 jobs are gone. Did you hear anything about that?
October 29th, 2009 at 11:44 pm
veedub – why do you have to buy in Wgtn City? A co-worker has just bought a 4 bedroom house on the lower slopes of the Western Hutt hills for $330k.
15 min drive to The Tce and on a bus route. Probably quicker to get to central Wgtn than Seatoun, Island Bay or Karori.
October 30th, 2009 at 8:22 am
Chrisj If your focus is on cashflow then well done you would be an exception to the rule but with $7Mn mortgage your portfolio must be highly leveraged. The task force is discussing a risk free rate of return tax which would mean paying tax on all your equity, a land tax or a CGT either way I don’t think you will escape having to pay some form of tax considering the governments balance sheet and all of those options will lower prices. If you are gambling on a horse with that amount of debt for prices staying the same/going up plus low interest rates in 5 years then I hope for your sake your horse wins because if it doesent and prices fall and interest rates are high you could find yourself with negative cashflow and negative equity forced to sell. I personally don’t like the odds.
October 30th, 2009 at 8:24 am
NevilleWC – you are right. We have looked at houses both in Hutt City and up Poriua/Whitby/Kapiti way and you definitely get more bang for your buck there. And ironically, we haven’t even looked in Seatoun, Island Bay and Karori. We’d ideally like to buy in the northern suburbs (Ngaio, Crofton Downs, J’Ville, Churton Park) and funnily enough those are the exact suburbs that held their value the most. When we eventually decide to buy (I’ve lost interest for the time being) maybe we should take a look further afield.
October 30th, 2009 at 9:22 am
Tawa house prices have dropped 10% in the last 12 months – maybe you should look there veedub – quick train access to city. Lots of bank workers live there!
October 30th, 2009 at 9:25 am
veedub – Here’s a good one in a top street near the train station http://www.realestate.co.nz/1173995
October 30th, 2009 at 9:38 am
Kieran, I’m only a bit over 50% leveraged which I don’t think is excessive. I now pay CGT anyway unless I’ve owned a property for 10 years and I really don’t think those other taxes (land or equity tax) are that palatable for the electorate – just think who is going to be paying the bulk of a land tax if private households are exempt: commercial tenants (businesses directly not commercial landlords), farmers and residential landlords. The first two are already struggling and residential landlords (since this would be another business expense) would be able to claim even more tax deductions until the increase in taxes was eventually passed on to tenants through higher rents.
There’s no way I’m gambling here, if things aren’t perfect in five years, they will probably look different again in seven, eight or ten years anyway. Getting out of bed in the morning is a bit of a gamble too Kieran! (Which I guess everyone loses one day!)
October 30th, 2009 at 12:53 pm
Chris sounds like you have done extremelly well over the last 10 years with 50% equity you are in a much better position to take a loss than most. My guess would be the majority of Investors buying now are 85%+ leveraged with with negative cashflow relying heavily on tax refunds and hoping for 5% capital gains. I agree taxing them isn’t going to be very palatable and neither is higher interest rates low rents and prices dropping/stagnating. I would say you are gambling on history repeating itself when there are a number of things happening that we have no precedent in history for like low fertility rates, aging baby boomers, peak oil, massive debts and being the poor cousin to Australia.