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A review of things you need to know before you go home on Wednesday; FHBs losing out, housing saves Fletchers, NZR outsourcing, rent ratio at extremes, LSAP tailing off; long rates jump, NZD slides, & more

A review of things you need to know before you go home on Wednesday; FHBs losing out, housing saves Fletchers, NZR outsourcing, rent ratio at extremes, LSAP tailing off; long rates jump, NZD slides, & more
ID 22702269 © Daniaphoto | Dreamstime.com

Here are the key things you need to know before you leave work today.

MORTGAGE RATE CHANGES
There are no changes to report here.

TERM DEPOSIT RATE CHANGES
None here either.

INVESTORS ROLLING OVER FHBs
More aspiring first home buyers were squeezed out of the housing market by property investors in January, according to the latest figures from property data company CoreLogic. This shows first home buyers' share of the housing market dropped to 22% in January, the lowest it has been since the first half of 2018, while investors' share climbed to 41%.

MORE IN THE COMMUNITY
Two new cases of COVID are in the community spreading from the border worker family originally identified - a classmate of an original case and her brother. Both attend Papatoetoe High School. Test results from 51 close contacts of original cases still unknown. We will have the Cabinet's L2/L3 lockdown decision separately.

IRRELEVANT
Another day, another investor update by a four-pillar bank in Australia with a major presence in New Zealand, and again, almost zero mention (or interest) in their New Zealand operations in this update. That has been the 2021 style of CBA, NAB and now Westpac.

HOUSING SAVES FLETCHERS
The strong housing market has helped propel Fletcher Building's NZ residential construction business to a +130% rise in profits.

OUTSOURCING
New Zealand's only oil refining company says it's made 'significant progress' toward converting its Northland refinery into an import-only terminal, and it looks like it will end refining there. We will rely on other countries to do the dirty work.

HOLDING US TOGETHER
Today's dairy auction saw prices rise by +3%, built on aq +4.3% rise in WMP prices, and demand out of China. These continuing good results (seven of the last events have been positive, raising prices by +21%) mean the recently raised farm gate milk price forecasts are under no threat. At current levels they will be the fourth highest on record. This industry is holding New Zealand's economy together, and relatively stable, during the pandemic.

EXTREME
We updated our rent ratio comparisons by urban area today through to January 2021, and the relationship between rental income and the median house prices remains extreme. Nationally it is just about to toch 30 times (29.9x) and back near its all-time peak of 30.5x in November. For Auckland it is even more extreme at 34x. For Wellington it is 27.6x, for Christchurch 22.2x. The center with the lowest rent ratio is Upper Hutt at 18.2x. Internationally, levels over 15x tend to be regarded as extreme and where many cities consider rent controls.

EXTREME BUT LESS SO
We have also updated our median multiple table for most urban areas as well. These generally eased back from extreme levels and are now nationally where median house prices are 7.6x household incomes. Auckland is 10x, Wellington 7.7x and Christchurch 5.6x. The center with the most affordable MM is Invercargill at 4.5x. When this ratio is 3x, the citry is regarded as having affordable housing - that's nowhere in New Zealand's population centers.

MORE BOND TENDERS, SHARPLY HIGHER YIELDS
Kāinga Ora/Housing NZ tendered $100 mln in bonds today in two maturities. The $50 mln June 2025s was well supported ($180 mln in bids) and resulted in a yield of 0.92%. The $50 mln October 2028s ($142 mln bids) came in with a yield of 1.58% (previously 1.00% in early December). HNZ bonds are rated Aaa by Moody’s, and AA+ by S&P.

CULTURE CONFLICT
The FMA fears Chinese New Zealanders are under-reporting investment scams. And they are hearing that the scammers are telling victims that they "will get in trouble with New Zealand authorities if they report the crime." That may be what happens in China, but our regulator has its work cut out for itself to convince Chinese New Zealanders that that is not the case.

LSAP GROWTH TAILING OFF
The RBNZ has now purchased $45 bln of NZ Government bonds in its Large Scale Asset Purchase (LSAP) program (D3) activity in secondary markets that started in March 2020. But it is winding down the volume. For the past couple of weeks its purchase volume has been "only' $570 mln/week, well down from the almost $1.8 bln/week it started with in April 2020. See chart here. Yields varied widely of course depending on the bond maturity dates, but the mid range got down to nearly zero in August 2020 after starting in March 2020 at about 1% pa. This is now back up to almost 1% again as the reflation impulse re-emerges. In Addition the RBNZ has been purchasing LGFA issues on the secondary market too, but the volumes here are tiny by comparison, now about $20 mln/week. Over this whole period February 2020 to January 2021 the RBNZ's total balance sheet (assets) (R1) have risen from $31.3 bln to $74.8 bln and of course driven mainly by the LASP program. Significant FLP draws haven't happened yet with only $1.14 taken by banks so far of the $28 bln allocated to this program.

UNINTENDED CONSEQUENCE
Ratings agency Fitch is saying that the latest initiative to assist poor countries with their debt stress (and recently adopted by the G20) is likely to have the consequence that they will be rated so low they will fall into sovereign default, exactly what the idea was trying to avoid.

OUT OF LOCKDOWN
Victoria is shifting out of its 5-day lockdown later today.

LESS PRODUCTION
Red meat production is falling
in Australia, down for cattle and lamb, up marginally for sheep.

LOOKING UP
Japanese machinery orders bounced back very strongly in December which makes the surprise Q4 Japanese GDP release of a few days ago more understandable. What is interesting about this latest data is that it isn't being driven by export orders, which is something of a surprise and good for them.

ERUPTION
Italy's Mount Etna is erupting.

GOLD SINKS
Gold is trading in Australia, and soon in Asian markets. So far today it is at US$1790, down -US$32 from this time yesterday, and -US$4 below where it ended in New York and London last night.

EQUITIES UPDATES
The New York markets were flat when they reopened today after their holiday weekend. The NZX50 Capital Index heading for a modest +0.2% rise in late trading. The ASX200 is down -0.7% in early afternoon trade. Tokyo is down -0.8% in opening trade after yesterday's large gain. Shanghai is still closed for the week-long holiday, but Hong Kong is open and in very early trade is down 0.4%.

SWAP & BOND REFLECT GROWING REFLATION TRADE
Yesterday the long swap rates continued their climb further, with the 10-year now its highest since February 2020. If there are movements again today, we will note them here later when we get the data. Today the 90 day bank bill rate is down -1 bp at 0.28%. The Australian Govt ten year benchmark rate is up another +8 bps to 1.41%. The China Govt ten year bond is unchanged at 3.26%. And the New Zealand Govt ten year is up to 1.54% (+11 bps) and above where the earlier RBNZ fix was, at 1.51% (+9 bps). The US Govt ten year is up another +5 bps from this time yesterday, to 1.30%.

NZD HOLDING WEAKER
The Kiwi dollar is weaker today and now at just under 71.9 USc and a ten day low. On the cross rates we are soft at 92.9 AUc. Against the euro we are also softer at 59.5 euro cents. That all means our TWI-5 is down to 73.4.

BITCOIN HIGHER
The bitcoin price has made a fourth run at US$50,000 early this morning at hit US$50,585 very briefly, then fell a sharp -5.4% all within an hour. Since it has recovered and is now back up to US$49,845 and +3.4% above where it was this time yesterday. Volatility over the past 24 hours has been +/- 2.8%.

This soil moisture chart is animated here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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27 Comments

I don't understand the value of that rent ratio. Isn't it more an indication of house prices being out of whack than rents?

The hint at rent control is a bit weird too. 30x means that we're paying half of what we'd pay at 15x, hence no need for rent control.

The hint at rent control is a bit weird too. 30x means that we're paying half of what we'd pay at 15x, hence no need for rent control.

Troll comment? Rental stress is best measured as a proportion of rent to income. Rent is the fee for housing as a consumption good.

Go and read the passage again - the rent ratio is the ratio between house prices and rental income. Nothing to do with the household income of the renters. A higher rent ratio indicates low rents relative to house prices, hence it seeming strange that cities would consider rent control at levels above 15x. Possibly meant at levels below 15x?

Go and read the passage again - the rent ratio is the ratio between house prices and rental income. Nothing to do with the household income of the renters

If you're referring to me, read my comment again. I said rent stress is best measured by rent as a proportion of income.

I agree that the suggestion that cities consider rent controls once the house price passes 15x the rent seems weird. For a better perspective on that ratio click through to the NY Times: 'One way to figure out whether to buy or rent is to look at the rent ratio: the purchase price of a typical house divided by the annual rent of a similar house. A number above 20 means you should consider renting. A number well below 20 makes a better case for buying.' (So that, at a pinch, would be Upper Hutt and Invercargill.)

Perhaps David could elaborate, it doesn't make any sense to me, at least.

I don't understand the value of that rent ratio. Isn't it more an indication of house prices being out of whack than rents?

Comparatively, yes. It's a possible indicator of a large credit-driven asset bubble.

Yeah. Extreme divergences between house prices and rents.

Fantastic analysis of Japanification from Lyn Alden. Some interesting points raised about the difference between base money and broad money. While Japanese QE and public spending has been off the charts, the private sector has actually been paying down debt and saving. Compare that to the Anglosphere where the broad money is spent like that from a wallet of a drunken sailor. Worth taking time to go through this.

https://www.lynalden.com/economic-japanification/

Interesting article thanks.
Sharemarket and property bubbles at the same time, now doesn't that sound familiar?

In 1944, the US led other countries in putting together the Bretton Woods system, in which most currencies were pegged to the dollar, and the dollar was pegged to gold.

In 1971, however, the US defaulted on this system, rendering the dollar no longer redeemable for or fixed against gold. After that, all currencies rapidly fell vs gold, and along with oil embargoes, this played a role in a big commodity boom and period of high global inflation that persisted through the 1970s.

In the aftermath of this default, the United States created the petrodollar system from the mid-1970s and onwards to keep the dollar in the center of the global financial system, which contributed to the formation of structural US trade deficits in exchange for maintaining global power projection:

Is the US about to default again?

This video claiming a regional US electricity generating capacity deficit signifies an infrastructure provision policy normally associated with banana republics.

I don't think they will default, but will find that foreign parties increasingly lose interest in taking USD for real stuff. The logical conclusion of the default that started in 1971.
Oh - USD... Hmmm...got any crypto, silver maybe?

There could be an element of dodgy dealings which lead on to the scams..... hence the non reporting.

House price-to-income multiple
When this ratio is 3x, the city is regarded as having affordable housing - that's nowhere in New Zealand's population centers

It gets a lot worse when you consider 'net' household income instead.

That's because income of every NZ household member is taxed individually with no joint filing tax benefits that couples/households in most other tax regimes enjoy.

Good point.
It's also worse because of NZ's high cost of living (ex housing) on many things.

I know a couple in Hungary, during the Russian occupation, who divorced to reduce their family tax liability.

It gets a lot worse when you consider 'net' household income instead

Honestly, it should ONLY consider net income.

12
up

OUTSOURCING
New Zealand's only oil refining company says it's made 'significant progress' toward converting its Northland refinery into an import-only terminal, and it looks like it will end refining there. We will rely on other countries to do the dirty work.

Seems to be this governments main goal. Ban "Dirty" activities in NZ so that we dont undertake them here with strong regulation and guidance, but ship it off shore to places that have absolutely no environmental standards. Virtue signaling at its best. EG banning our oil and gas industry, closing our refineries, shutting down Tiwai point, Regulating our Primary industries out of existence.
So short sighted.

Fewer well-paying manufacturing jobs in the country, less value-added activity and less tax revenue, larger merchandise trade deficit; for virtually no change in global emissions.

Yes and no.

We should be capable, and we sure as hell have been making that ever-harder since the run-up to '87.

But BAU is doomed, near-term, and just what it is we need to be capable in/of, is therefore up for discussion.

Very old refinery up against brand new in Singapore --cheaper to import than refine here. Purely private company decision - nothing to do with the Government.

Bullshi7. Its was refurbished not long ago.
Do you think the Singaporean govt has nothing to do with its refineries? Or that this govt has no place in encouraging business here?

Its an indication of how small our market is , compared to most countries . If it wasn't for international jet fuel sales , it probably would have closed long ago . Not that I think having our own refinery is a bad idea,

Bollocks..refurbished is far from brand new...do some research and look at price of imported fuel..

And the New Zealand Govt ten year is up to 1.54% (+11 bps) and above where the earlier RBNZ fix was, at 1.51% (+9 bps).

Crown indemnity for large scale asset purchases programme stood at $1.068 billion at the end of January 2021 when the 10 year note yield was 1.134%.