Breakfast briefing: First Republic Bank remains under the pump

Business / news

NZ and Aussie dollars languishing after Aussie CPI comes in at the bottom end of market estimates

27th Apr 23, 7:28am by Jason Wong

By Jason Wong*

Yesterday’s notable fall in US equities has been sustained with an attempted recovery failing. US Treasury yields have pushed a little higher, unwinding some of the sharp falls seen earlier this week. The NZ dollar (NZD) and Aussie dollar (AUD) are languishing after the soft Australian CPI (consumers price index) print, even against backdrop of a weak US dollar (USD), with the Euro powering up to its highest level in over a year.

In the US, First Republic Bank remains in the headlines, with its stock price down another 20% as it battles to survive – its likely ultimate demise a reminder that conditions remain fragile in the US banking sector. Of some relief, smaller regional bank PacWest Bancorp, which has also been on the watchlist, is up over 10%, after reporting stable deposits in late March and a rebound in April. Following the 1.6% fall in the S&P500, US equities attempted to stage a recovery, but unsuccessfully, with a solid open giving way and the index showing a modest loss for the day, even with behemoth Microsoft up over 7% following a strong earnings result.

US Treasury yields are up modestly, with the 10-year rate 3 basis points (bps) higher to 3.43%, unwinding some of the 17bps fall seen over the first two trading days of the week.

In economic news, US durable goods orders rose 3.2% month-on-month (m/m) in March, much stronger than expected after a surge in orders for commercial aircraft. However, the data had a weak underbelly, with non-defence capital goods orders excluding aircraft down 0.4% m/m after a downwardly revised 0.7% in the prior month. Core shipments also fell for a second consecutive month. The data points to a weaker trajectory for US business investment.

Germany’s economic ministry raised its 2023 GDP growth forecast for a second time, now 0.4%, up from 0.2% three months ago and the 0.2% contraction expected six months ago. The economic minister said “we now see that a gradual recovery is underway, despite a persistently difficult environment”.

Yesterday, Australian core CPI data were at the bottom end of market estimates and below the Reserve Bank of Australia’s projection, with the trimmed mean at 1.2% quarter-on-quarter (q/q) (0.2 percentage points below the median) and 6.6% year-on-year. The data extinguished the possibility of the Reserve Bank of Australia hiking next week, extending the pause in the tightening cycle. But with inflation remaining uncomfortably high, it kept alive the possibility of some further tightening later in the year. Still, bond futures rallied after the result, with the 3-year and 10-year rates falling 6-7bps in yield terms, but unwinding much of that move overnight.

Domestic rates were much lower across the curve, playing catch-up to the notable fall in US Treasury rates since Monday’s local close before the ANZAC holiday, and with lower Australian rates post-CPI thrown into the mix. Swap rates were down 12-13bps, with the 2-year rate closing the day at 4.92%, its lowest close in a month and back below the rate prevailing before the RBNZ’s shocking 50bps rate hike earlier this month. NZ government bonds saw similar moves at the short end of the curve, but with smaller 9-11bps falls at the longer end of the curve, ahead of today’s tender. The 10-year rate closed the day at 4.04%. Slightly higher US and Australian rates overnight set the scene for slightly higher rates on the open.

In currency markets, the AUD weakened after the soft CPI print and has fallen further overnight to trade at its low for the day around 0.6595. The NZD has followed a similar path and trades this morning at 0.6115, with NZD/AUD at 0.9275, little changed from this time yesterday.

As well as the soft CPI print, weaker commodities have also been at play, with oil down over 3%, with Brent crude trading below USD78 per barrel, the oil market ignoring a notable drop in US crude inventories that would have normally supported prices. Weaker oil prices also see CAD on the softer side of the ledger.

The USD is actually modestly weaker on the day on the key indices, with EUR and British pound (GBP) making ground. EUR traded at 1.1095 overnight, its highest level in over a year, before sliding back to 1.1035. The USD was at its nadir after CNBC reported that there doesn’t appear to be a willingness from the White House or Treasury to pressure banks to try to formulate an asset sale plan from First Republic. GBP traded above 1.25 and currently sits around 1.2450. NZD crosses against these are notably lower, with NZD/GBP just above 0.49 and NZD/EUR at 0.5540, a fresh 2½ year low.

In the day ahead, the ANZ business outlook survey is released where we’d expect to see still-weak activity indicators and hopefully further falls in the pricing indicators. The key release tonight will be the first reading of US Q1 GDP, with the market consensus at 2.0% annualised for the quarter.

The easiest place to stay up-to-date with economic events is by following our Economic Calendar here ».

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Source: RBNZ

Source: CoinDesk

*Jason Wong is BNZ's Senior Markets Strategist. David Chaston is away this week.

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78 Comments

by bw | 27th Apr 23, 7:38am 1682537939

A problem for the RBA (and us?) is that their CPI figures show that price rises are escaping into the service sector. That's much harder to reign in than the cost of goods.

"prices accelerated for health (5.3% vs 3.8%) and insurance & financial services (6.5% vs 5.0%)...growing cost of medical services, tertiary education, and domestic holiday travel."

by GV 27 | 27th Apr 23, 7:50am 1682538606

The other, harder thing to measure here is the winding back by customers and by companies. Car insurance, for instance I've seen a 40% increase in policy costs AND a walkback in agreed values on renewals. A holiday at one place instead of another. A trip to the doctor every year instead of every six months. A missed blood test here or there. It all looks the same, across any 12 month period, until there is a consequence no one thought of previously.

Sure, you're still engaging with those industries and in some cases your overall 12 monthly spend is the same. But what you're actually getting for it in those industries is far far harder to quantify. I am starting to think this is as much a case of willful blindness from central bankers and those who are responsible for calculating inflation as it is a practical issue with the measurement itself.

by Audaxes | 27th Apr 23, 8:20am 1682540438

British people "need to accept" they are poorer to bring down inflation, says Bank of England Chief Economist Huw Pill https://trib.al/5nrj59D Link

H/T Snider

by Silvi | 27th Apr 23, 7:48am 1682538482

First Republic Bank offered favourably low interest mortgages to its wealthiest clients. That doesn't seem to have worked out well!

by IT GUY | 27th Apr 23, 7:45am 1682538314

Lots of the Wall Street names are warning about the lack of breadth in S and P and Nasdaq

by whakahokia mai | 27th Apr 23, 8:14am 1682540054

It struck me the other day while mumbling my way through the half remembered words of the Australian anthem at the Dawn Parade on ANZAC Day that we are irrevocably tied to Australia as our big brother and closest ally. I just wish we could somehow leverage more from the relationship than we already have economically. 700,000 of our citizens live there and 70,000 live here. We have clearly lost the battle of attractiveness and ended up becoming a training ground for their workforce. It has always been this though. How much of our much vexed word sovereignty and become some in between state/sovereign nation in order to gain some parity and level out the playing field of attractiveness? Maybe even cast the net wider to the South Pacific Island nations to join the group. A South Pacific Euro Zone maybe?

by The Person | 27th Apr 23, 8:53am 1682542399

What's the GDP of the south pacific nations? I don't think as an economic bloc it will have quite the impact joining a bloc of 450 million people would.

by whakahokia mai | 27th Apr 23, 9:03am 1682543012

I was more thinking along the lines of free movement of labour between the nations for the purposes of education and filling labour gaps from the lower GDP countrie in the Pacific. The teaching and training of these people being the biggest challenge of who foots the bill at their destination countries. Much like in NZ currently we spend huge amounts of money training nurses etc to the advantage of Australia. How can we equalise all this to the advantage of the lower GDP countries where Australia does not feel it is not being disadvantaged.

by OldSkoolEconomics | 27th Apr 23, 8:57am 1682542631

Nz has no attractìon for young professionals vs au our salaries are lower, taxes higher, cost of living and housing more expensive. Jobs are far less interesting here.

You can do everything we can do here in aus for leisure and have better climate, cheaper travel and bigger cities.

Nz would need to pick an industry .. prob a niche in tech and get very good at it.. to attract those specific workers here.

In my mind NZ is like a big farm and nice place to finish working or retire 0 a career

by IT GUY | 27th Apr 23, 9:11am 1682543500

Jenny Shipley once commented that NZ needed to do just this, least we become a bach destination, where expats return at Xmas and when they retire..... Obviously we decided we where good at selling houses to each other, meaningless reno's etc etc...

Naturally we did this as the capital gains where tax free.... was a great party it was, one to remember for the rest of our lives, now the hang over.

by RickStrauss | 27th Apr 23, 10:36am 1682548568

And in the process we've undermined the main attraction of NZ: that despite the lowest salaries it was a good lifestyle and a good place to raise kids, and doctors, nurses and other critical workers would come here despite the salaries.

Our last few decades of pandering to those feeling entitled to tax-free capital gains has completely undermined those reasons to come here. Now folk see far better equations elsewhere.

by Pa1nter | 27th Apr 23, 11:38am 1682552334

If this were a true statement then NZ would experience negative net migration.

It'll still be a highly desirable place to move to for the foreseeable future. People are just getting confused by the fact NZ has a much wealthier neighbour, and forgetting (or are just oblivious to) the fact that much of the rest of the world is a far less attractive proposition.

by RickStrauss | 27th Apr 23, 11:55am 1682553344

It is true, we are struggling to retain nurses and other skilled staff who can get better elsewhere. Health workers were discussing online recently how the attractions NZ used to have, have been massively eroded.

The fact we can still attract high volumes trying to escape third world conditions doesn't negate that. But merely allowing the existence of even worse conditions in the highly populated third world to excuse our worsening conditions would be foolishness.

by Pa1nter | 27th Apr 23, 12:47pm 1682556469

It is true, we are struggling to retain nurses and other skilled staff who can get better elsewhere.

You know who else is struggling to find Nurses, 3 years after a global pandemic? Everyone.

Health workers were discussing online recently how the attractions NZ used to have, have been massively eroded.

People online being upset at things? Well I never.

What you don't hear, is the majority of people who are fine with things, because they don't need to go on the internet to vent.

by Advisor | 27th Apr 23, 11:58am 1682553490

We're definitely more desirable to someone with a mediocre skillset living in Mumbai or Manila, and will remain for the foreseeable future. The real question is whether we are able to attract the people we need and not economic refugees.

High numbers alone don't mean policy success, we have to check these against qualitative aspects as well. A close look at INZ stats shows cooks, chefs and tour guides still receive the bulk of work visas in NZ.

by Pa1nter | 27th Apr 23, 1:36pm 1682559393

NZ has never attracted a large proportion of highly successful, comfortable and satisfied types. Those sort of people usually aren't motivated to emigrate. We're a destination for people wanting better living conditions, whether it's income, lifestyle, religious or political freedom, etc.

Our migrant numbers are also going to reflect the nature of who's more mobile. People with mortgages in highly tenured positions are less likely to arrive than people with fewer ties, like chefs and hospo workers.

Colonists moaning about other colonists is an ultimate form of irony.

by EdwardD | 27th Apr 23, 10:37am 1682548651

I wonder how many will return to retire here after accummulating a good amount in their Aussie Super funds.

by Northern Lights | 27th Apr 23, 1:07pm 1682557677

There was a representative from the games IT industry recently saying that if NZ supported their industry a bit then they could stop the drain of games developers to Australia and turn that industry from a $400 million industry into a $2 Billion industry. The suggestion has disappeared like a pebble into a stagnant pond. I personally thought that that was quite a good area to put resources into.

It's really got nothing to do with a capital gains tax and everything to do with the neoliberal outlook of NZ society. How many years is it since Muldoon, think big and the unwillingness of neoliberal govts to 'pick winners'.

Politicians are too scared to 'pick winners' but very brave when it comes to selling off state enterprises or giving council infrastructure to iwi.

Then when there are no productive assets left to get revenue from they go for the only thing left - people's land and their homes.

We are where we are due to a lack of courage, imagination and foresight.

by Pa1nter | 27th Apr 23, 1:17pm 1682558220

What support is needed? Taxpayer subsidies?

How does the government pick a winner when 80% of new businesses don't make it?

by E46 | 27th Apr 23, 4:36pm 1682570172

Sir Paul Callaghan explains

by murray86 | 27th Apr 23, 9:08am 1682543312

Tend to agree and would add that there seems to be an old, very outdated, possibly socialist mindset that remains pervasively that holds us back. At the highest levels of Government and society there seems to be a belief that wages cannot be allowed to climb, even just to keep pace with inflation. This attitude is confounding as it holds back the whole country, not just the wage earners.

by IT GUY | 27th Apr 23, 9:14am 1682543675

I do not understand why the governement does not settle the wage claims of teachers at the same level as they did pensioners and beneficieries? next it will be teachers and nurses leaving for aussie.

by murray86 | 27th Apr 23, 10:07am 1682546858

I was told the other day that in the 70's a teachers pay was the same as a Government back bencher. Today they are very widely apart. The question is why? I'd suggest a teacher has much more responsibility than a back bencher in parliament?Just proves the self interest and greed of the politicians.

by powerdownkiwi | 27th Apr 23, 10:11am 1682547087

The answer is:

A reduction in surplus energy, going into society.

And one cohort has the power to change the settings; one doesn't.

by IT GUY | 27th Apr 23, 10:15am 1682547336

how would you reduce energy, put price up via tax? those who could afford get more?

by gnx | 27th Apr 23, 11:05am 1682550309

Use it smarter, reduce waste

by HSL | 27th Apr 23, 10:28am 1682548097

Nothing to do with energy all to do with self serving politicians. For the exact same reason that a completely deregulated market doesn’t work I.e.if you give a party the power they will exploit it. Actually proves the small government argument though.

by Pa1nter | 27th Apr 23, 11:40am 1682552454

A reduction in surplus energy, going into society.

Surplus energy doesn't go anywhere, and has diminishing value.

For evidence, overfill your gas tank by 10% next time. The surplus is wasted.

by printer8 | 27th Apr 23, 10:35am 1682548507

Murray

As a starting secondary school teacher in the early-mid 1970s my salary ($5500 pa) was half that of those on the chain in the local freezing workers.

by murray86 | 27th Apr 23, 10:57am 1682549843

I recall they were on very good pay and allowances that put them pretty high on the wage scales where I grew up. But I also note that the work was physically very hard and many ended up with health issues as a consequence. Even today I know youngish people (in their forties) with most of their life working at a freezing works and dealing with joint and other issues

by sit23 | 27th Apr 23, 10:48am 1682549312

The reason teachers get less pay than back benchers now is real simple. Most teachers' union reps are wannabe Labour Party candidates. When I was on my kids' school Board of trustees, the teachers complained that their union rep had told them to accept a really crap Government pay offer. I had to point out to them that their rep was a perennial Labour candidate in a safe National seat and was on the Labour party list, quite lowdown. She actually became a list MP for a bit when a few people resigned and died. The union reps look after their future employers, not those people who pay them to look after them. Backbenchers look after themselves. As a result, they get paid far more nowadays, than teachers.

by murray86 | 27th Apr 23, 10:54am 1682549659

I note that today still. Most union reps that I know are beyond utterly useless at representing staff. I have suggested for quite some time that staff and the unions need to grow some 'mongrel', but wallies keep getting elected and then get captured by the organisational claptrap. It is extremely frustrating!

by IT GUY | 27th Apr 23, 10:57am 1682549840

Labour stoped respresenting actual labouers some time ago...

This week we have leart rich pay 9% tax rate, 50% of nz get more back then they pay...

That means us few in the middle are carrying a lot of weight , some are choosing to goto Aussie.....

A Day of reckoning is coming, it will be forced on us by international rating agencies.

by GV 27 | 27th Apr 23, 12:09pm 1682554191

That 9% includes unrealised capital gains, I wouldn't put a huge amount of stock in it. As those underlying assets walk back ( as many have since the study period ) that figure will get far less sensational. I'm guessing you won't hear about it if it happens.

by Rob Reid | 27th Apr 23, 12:41pm 1682556079

Yes, revenge of the rating agencies is something to fear. I would not be surprised if a series of computer glitches unexpectedly stopped us publishing balance of payments data for a few years.

by Fossil Lover | 27th Apr 23, 12:31pm 1682555491

The socialist mindset can be summed up in one word. 'Bureaucracy'. There are more bureaucrats, experts, consultants, environmentalists, etc. than workers. NZ is like living in a giant penitentiary and to try to do anything you are totally controlled; from the clothes you wear to the places you can go. Democracy is gone, replaced by a fascist system of control.

by Baywatch | 27th Apr 23, 12:59pm 1682557182

What have they made you wear today Fossil..tin hat?

by JimboJones | 27th Apr 23, 9:40am 1682545252

I reckon for NZ to succeed we need Auckland to succeed. Unfortunately Auckland is going backwards these days, the car obsession we have does not gel well with young professionals. A walking and cycling bridge over the harbour is considered the most ridiculous thing in the world, meanwhile other cities are taking leaps and bounds in these areas especially after Covid showed the way. We have a mayor who wants to fix Auckland through even more car dependence and closing the cheque book. Building cycling infrastructure invokes hatred. Our biggest political party hates the idea of any kind of rail. So NZ is doomed to be a farming and retirement village unfortunately.

by GV 27 | 27th Apr 23, 10:02am 1682546577

Fixing Auckland is easy. We must be the only city in the world that can't fit trams down streets that used to be narrower but were literally designed to accommodate trams in the 1900s. You just have to be prepared to tell people they don't own the space in front of their street/shop/house and to store their private property on... their property.

Until that happens, and until you accept you need to do it, you have to have things tunneled or grade-separated which is expensive, and then someone latches onto a project and then tweaks it until it becomes a sunk cost of their own pet project that they actually want to build. Classic case of this is the Harbour crossing. There's no need for it to be a tunnel. For what a tunnel will cost us, you could have a rapid transit network covering the entire region.

But yea, move the Port, raa raa raa, there's too many cones on the road! Baldrick's poem summed it up well: "Boom. Boom. Boom. Boom."

by Advisor | 27th Apr 23, 10:16am 1682547382

Auckland has a GDP per capita only 22% higher than the rest of the country. That's barely remarkable for the commercial capital and business hub, especially in a highly urbanised country such as ours.

by sit23 | 27th Apr 23, 10:53am 1682549596

Not sure. Let all local government keep GST, for example generated in their areas, and see how prosperous, and GDP productive areas like Auckland and Wellington are. They suck money left, right, and centre from those areas actually running at a profit, and then pay some clown to say how well they are doing compared to those areas that actually make us a bit of money.

by JimboJones | 27th Apr 23, 10:58am 1682549910

True but we are talking about high paying jobs to keep people in NZ instead of Aus. I'm thinking IT, financial, etc.

by Advisor | 27th Apr 23, 11:42am 1682552543

I concur and that's the point I am making as well. For a small nation in the South Pacific, we need high-value service exporters to support high-paying jobs in our cities.

The majority of large corporate employers in Auckland are focused on domestic markets (Fletcher, Mainfreight, Spark, Mercury, etc.). meanwhile much of our export value is generated in regional NZ (agriculture and tourism).

by Pa1nter | 27th Apr 23, 11:48am 1682552913

You've highlighted a fundamental issue:

- NZ has environmental advantages that allow it to compete globally in agribusiness and other sectors that can exploit these natural advantages.

- NZ has such a tiny capital and labour market that it's unable to compete globally as a service exporter.

At best, our cities can provide value add to our rurally derived industries.

by mfd | 27th Apr 23, 11:53am 1682553207

I have mentioned this before, but there are two small companies I'm interested in here in Christchurch, both traded on the Unlisted market, Syft and Pharmazen. Both are niche tech firms reliant on exports. Both recently raised capital and had to look outside of New Zealand to do so. NZers are apparently too busy buying rental houses to support our local exporters who want to grow.

by Pa1nter | 27th Apr 23, 11:58am 1682553497

Plenty of export firms attract investment funds, but usually for established firms making reliable profits. NZ has a limited pool of investor funds willing to take long term, non-profit making positions.

by HouseMouse | 27th Apr 23, 10:17am 1682547421

I would put investment in health and education well above transportation.

by JimboJones | 27th Apr 23, 11:07am 1682550475

I am not necessarily talking about transport, I am talking about making Auckland a city that young go getters want to come live in or don't want to leave. The main reason that skilled NZers go places like London and Sydney isn't wages (in fact I know a lot of people that earn less in London), it is to live in a real city that has a good vibe. And the main reason skilled people will come here is because of the lifestyle, not to increase their wages. Auckland is great in terms of natural beauty, but in terms of it being an interesting liveable city there is a long way to go. The right side of NZ politics want Auckland to fulfil the 1960's dream of motorways and car parks, but other cities are actually ripping those mistakes out.

by Fossil Lover | 27th Apr 23, 12:39pm 1682555950

I believe for NZ to survive we need agriculture to survive, become energy dependent, flip flop our account and investment deficits and build a border wall south of Auckland and see if you can survive as an independent.

by Beanie | 27th Apr 23, 2:32pm 1682562744

I think it's not out of the question that the South Island will be a separate country within 50 years. The speed of change in NZ it could happen much sooner. Why?...because the South Island exports more than it imports and so would enjoy a higher standard of living. Also it generally has a more traditional set of values than what the North are rapidly moving to. Eventually some populist figure will point these out to Mainlanders and it will be all on.

by GV 27 | 27th Apr 23, 9:25am 1682544344

It hasn't always been like this though. Traditionally Australian living costs for every day items like food and other things were higher. That changed slowly about 15 years ago when it was like-for-like and now NZ has high living costs, high prices on comfort living items like TVs etc and on top of that, our wages are being rapidly undermined by changes in living costs and the inflation component we aren't adjusting income taxes for.

We shouldn't kid ourselves, this is an extremely recent development. It has also come with a prolonged period of gaslighting whenever you bring up this change in relative economic affairs. We're in this mess because we chose to keep letting governments get away with the path of less resistance. But let's all enjoy our 3% matched Kiwisaver when we retire in a high-cost country when the Australians are angling at 12% in a country where the basics are cheaper and cheaper by comparison with each passing month.

by sit23 | 27th Apr 23, 10:55am 1682549708

Google Westpac superannuation theft. A lot of their clients won't be doing that.

by JimboJones | 27th Apr 23, 11:09am 1682550590

"about 15 years ago" - is that around the time when the ComCom decided a supermarket duopoly was a really good idea?

by iami | 27th Apr 23, 12:07pm 1682554035

And Aldi started in Australia.

by Audaxes | 27th Apr 23, 8:27am 1682540840

Biggest Treasury Buyers Turn to Swaps to Flee Price Swings

by Audaxes | 27th Apr 23, 8:39am 1682541594

Treasuries yielded around 3.66% on Wednesday, about 70 basis points higher than equivalent swap rates.

The fixed-rate payer receives floating interest, and is said to be long or to have "bought" the swap. The long side has conceptually purchased a floating-rate note (because he receives floating interest) and issued a coupon bond (because he pays out fixed interest at periodic intervals). On the other hand, the floating-rate payer is said to be short or to have "sold" the swap. The short side has conceptually purchased a coupon bond (because he receives fixed interest) and issued a floating-rate note (because he or she pays floating interest).

The principal or notional amount is never physically exchanged (hence the term 'off-balance sheet') but is used merely to calculate the interest payments.

So an IR swap is an agreement between two parties to exchange a stream of cash flows calculated as a percentage of a notional sum calculated on different bases.

Liquidity in this case means lack of market maker commitment to engage balance sheet capacity to execute the price making function. If balance sheet capacity (the real money in the system, therefore liquidity) is systemically impaired, as in a crisis, or a crisis that doesn’t really end, then to get dealers to give up their precious balance sheet capacity and engage on the other side of a swap someone would have to pay a hefty premium to make it worth it (risk-adjusted) for the dealer to do so.

by nktokyo | 27th Apr 23, 9:05am 1682543101

Heard from a mate that a building apprentice at her place just lost his rental to social housing and the mob have been moved in. Parties and burnouts. The young man is now planning to go to Australia.

Intended consequences.

Hopefully the journalist I called can get the story printed.

by Pa1nter | 27th Apr 23, 9:21am 1682544091

In slightly less sad news, Peter Zeihan is still promoting NZ on YouTube

https://youtu.be/gjFtI-fjrG8

by The Person | 27th Apr 23, 11:28am 1682551712

That kikorangi sure is a damn fine blue. Now if only we could figure out how to make camembert with the taste and texture of camembert.

by The Person | 27th Apr 23, 2:08pm 1682561288

Is it just me or does Mr Zeihan come across as quite ignorant of the NZ dairy industry in that, nz domestic market aside, we have failed to move much value add, hence his inability to buy Kaipiti (a fontera aquisition) cheese in USA. And the vast bulk of NZ diary is infact sold as comodities; milk powder, butter etc, just like his USA counterpoint?

by Pa1nter | 27th Apr 23, 2:24pm 1682562289

Could be your ignorance about the complexities of distributing refrigerated niche products at scale internationally.

It's more profitable to deal in fast moving commodities with fewer SKUs.

by The Person | 28th Apr 23, 9:39am 1682631598

> It's more profitable to deal in fast moving commodities with fewer SKUs.

But that just reinforces my point, as Zeihlan was suggesting we had mastered distributing refrigerated niche products at scale.

by gnx | 27th Apr 23, 11:35am 1682552133

I know I posted it yesterday but it’s still on my mind….

how nuts is this….who is lending $500k for someone to lose money.

from yesterday fb property page

”Hi fellow investors! I've just bought a new build townhouse which will get me an annual rent of $25k. My annual interest only expense will be $35k. So I'm assuming I don't have to pay any taxes, can someone please confirm? Is there any value in still hiring an accountant?”

Can Simon Bridges at the Chamber explain modern business theory to me….I’m so bloody lost as to how this works? Maybe Michael Riley at the EMA can explain. Or Kirk Hope….?someone must know because so much has been lent on this basis. And many of the businesses that belong to these organisations rely on this working out.

Is interest only just another name for insolvent! Do you still have to pay creditors back?

by IT GUY | 27th Apr 23, 11:38am 1682552313

None of the spruikers will argue you here, this is the quiet bit that we are not ment to say out loud!

The only way this investor gets out with a profilt is capital gain.

Made a lot of sense back in the LAQC days while you could bank cap gains with no brightline, and offset losses against PAYE tax...

also forgetting

Rates
water bills
maintenance
tenant damage
property management fees
insurance of house and possible damage

Now the business is technically insolvent without owner topping things up, I do not get subsidising the tennant for capital loss.... this business is going to simply build an ongoing tax loss until the property is sold at a capital gain (Which may not happen and will need to be shared with IRD if inside brightline).

Residential Investment IS DEAD with either good capital gains or positive cashflow after tax.

by JimboJones | 27th Apr 23, 11:50am 1682553002

So lets say he needs to top it up $20k a year after other expenses. And lets say the brand new house depreciates at $20k a year as it ages. He basically needs the land value to increase by $40k a year just to break even - before inflation! And that is assuming he doesn't have to pay tax on the rent (does anyone know if he does being a new build?).

I guess the future is a bit rosier (if he makes it), interest rates will probably go down and rents will probably go up. Over a very long time frame he could do OK without significant capital gain.

by IT GUY | 27th Apr 23, 11:54am 1682553260

This is called parking the bond in the long book, rather then marking it to market and booking a loss. SVB did just this.

If this man has to suddenly sell at a time when prices are weak there may be a liquidity event.

by nktokyo | 27th Apr 23, 11:42am 1682552540

I know that post. He signed up to buy a place off the plans a couple of years ago. Since then building costs went up $50k, interest rates doubled and rents have flatlined because they built a shedload of townhouses in Christchurch. He just got caught by sillily buying at the peak and extrapolating current costs and interest rates forward. Lucky for him he has a job and will pay the property off as soon as he can. The losses will eventually turn in to rental profits, particularly as building crates and immigration continues and his mortgage goes down, and for a few years he will get to offset past losses.

Anywho, this new normal is why nobody else is building now, except for KO, who don't have to make commercial sense because you and I pay the shortfall to house the 3.x% unemployed.

by IT GUY | 27th Apr 23, 11:50am 1682553023

Got it, so he has borrowed $500k at 7%, to buy an investment that looks a lot like a $500k bond paying about 4.3%...

There will be 10s of thousands of these out there right now. Hard conversations will be required.

by JimboJones | 27th Apr 23, 12:28pm 1682555333

It’s probably worse than that, he probably had a deposit too (isn’t it 40% for investors!). In which case he’s borrowed 500k and invested 300k of his own for a place paying 3.1% (assuming 25k income after expenses).

by nktokyo | 27th Apr 23, 12:29pm 1682555343

Maybe. Or there are guys in Auckland chipping $200/pw extra on their mortgage because they bought a rental elsewhere as Auckland homes were out of their price range, instead of spending and investing elsewhere. They'll be able to afford it.

by JimboJones | 27th Apr 23, 11:43am 1682552635

"So I'm assuming I don't have to pay any taxes, can someone please confirm?" - probably should have looked that up before buying the house...

by Pa1nter | 27th Apr 23, 11:44am 1682552669

I know I posted it yesterday but it’s still on my mind….

Let me help you out a bit. Comments and advice gleamed from any public forum, whether it's about property, crypto, or shares, is going to be littered with false logic and delusional thinking.

by IT GUY | 27th Apr 23, 11:58am 1682553505

Lets add what real estate agents tell you and also property investment company sales people.... in fact you where better off listerning to the DGMers since Nov 21

what happens if he and many others from the 10's of thousands decide they need to sell all at once.

by Pa1nter | 27th Apr 23, 12:03pm 1682553823

in fact you where better off listening to the DGMers since Nov 21

True, but generally you are better off ignoring DGMers in general terms.

by redcows1 | 27th Apr 23, 12:29pm 1682555345

Ingore us at your peril.

We will be proven right .

One day.

by JimboJones | 27th Apr 23, 12:34pm 1682555678

Bernard was the original DGM. Anyone who did the opposite all those years back would be absolutely loaded right now.

by Pa1nter | 27th Apr 23, 12:40pm 1682556006

Heh. They're the equivalent of a fat parent disuading their kids from a healthy lifestyle.

"Come, join us on the sad arse side!"

by Nzdan | 27th Apr 23, 2:08pm 1682561332

NZ Property Investors Chat Group? Pretty sure I got turfed from there, I tried to find it with a smurf Facebook account but it's hidden.