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Farm prices and sales volumes have collapsed in the last two years as the withdrawal of easy bank lending has dried up farmers’ appetites for capital gains, fresh figures show.

The slump in the number of transactions is expected to ripple out through the rural and provincial economies, given the surge in lending and activity through 2006 to 2008 helped drive spending on coastal and provincial residential property.

The national median farm sale price was NZ$1.045 million in the three months to February, down 40% from the NZ$1.75 million seen in the three months to February 2008, Real Estate Institute of New Zealand figures show.

There were 11 dairy farm sales in February and 34 in the three months to February, which is down 78% from the 158 seen in the three months to February 2008, which was seen as the peak of the dairy boom. A sharp drop in the forecast Fonterra payout and a much more rigorous approach to farm lending by banks has triggered the collapse.

REINZ President Peter McDonald said there were “still reasonable levels of inquiries for all types of farms, but they do not seem to be resulting in completed transactions.”

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By Bernard Hickey

Commonwealth Bank of Australia’s New Zealand operation, ASB Bank, has reported a 10% fall in underlying profit in the September quarter as lending margins contracted and bad debt charges more than tripled. New ASB Chief Executive Charles Pink forecast a tough period for banks and the economy in the years ahead as individuals and companies ‘hunkered down’ to de-leverage in the wake of the Global Financial Crisis (GFC).

“I don’t see when we’re going to get back to double digit lending growth,” Pink told Interest.co.nz in an interview.

“I think the GFC has bought a significant change to the world and New Zealand. People are deleveraging rather than leveraging and companies are de-leveraging rather than leveraging. People in companies are hunkering down,” he said.

“We probably will see low single digit lending growth going forward, which is not the world we’ve been used to in the last 10-20 years globally or in New Zealand.”

ASB’s underlying profit in the three months to September 30 fell 10% to NZ$85 million from NZ$94 million in the same period a year ago, driven by a fall in its overall net interest margin from 180 basis points in mid 2008 to 160 basis points a year later and an increase in loan impairment charges, Pink said.

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Rabobank announced it would cut its its variable base rate for rural loans by 1.5% from February 13 after the Reserve Bank cut the Official Cash Rate by 1.5% to 3.5% and asked banks to pass on lower wholesale rates.

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Reserve Bank figures show banks lent an extra NZ$395 million to farmers in the month of December despite signs of a sharp slowdown in the key dairy sector and complaints from farmers that interest rates were too high.

However, lending to non-farm businesses fell NZ$68 million in December and mortgage lending growth to households was anaemic again at NZ$159 million or 0.09% from the previous month.

Credit growth to farming is still running at over 22% from a year ago, suggesting banks are either still confident in the outlook or have yet to reign their lending managers back in despite a more conservative stance in other sectors.

The full details in the sector credit figures are here.

There is also the possibility that heavy stock building of commodities in warehouses by Fonterra may be responsible for the sharp growth in rural lending as Fonterra pays cash to farmers for their milk but has yet to receive revenues from the commodities processed from the milk.

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Reserve Bank figures show bank and non-bank lending to the household sector was NZ$170.72 billion at the end of March, up 10.8% from a year ago, but up only 0.5% on a seasonally adjusted basis from February. This was the slowest seasonally adjusted monthly growth since September 2001 and is consistent with signs of a sharply slowing housing market and consumer spending.

However, actual net new lending for the month was NZ$NZ$1.18 billion, down just 45% from the same month a year earlier. That compares with a 54% fall in the value of real estate transacted between March of 2007 and 2008. The combined national loan to value ratio increased from 45% in March last year to 54% in March this year.

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