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A review of things you need to know before you go home on Wednesday; another TD rise, borrowing with abandon, affordability grim, trade surplus down, Westpac shamed, swaps and NZD drop, & more

A review of things you need to know before you go home on Wednesday; another TD rise, borrowing with abandon, affordability grim, trade surplus down, Westpac shamed, swaps and NZD drop, & more

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

MORTGAGE RATE CHANGES
Nothing here today.

TERM DEPOSIT RATE CHANGES
ICBC is the next bank to offer higher long term rates. Their 2 year rate is 1.00% (+10 bps), but their 3 year offer is up to 1.30% (+30 bps) and their five year offer is up to 1.80% (+80 bps).

PERSONAL LOAN RATE 'REDUCTION'
ASB has trimmed -5 bps from its personal loan rate, taking it down from 12.95% to 12.90%.

LURCH HIGHER
More records were smashed in the searing February housing market according to RBNZ data. Kiwis kept up the frenetic borrowing pace for house purchases in February, but first home buyers are feeling the heat and there's early signs of investor fall-off

YIELD SUPPRESSION PLAN
The RBNZ this week plans to buy $630 mln of bonds via the Large Scale Asset Purchase program. This would make it the third week in a row that it's buying slightly more bonds to put downward pressure on yields.

AFFORDABILITY GRIM
We released our February update of our Home Loan Affordability report which tracks the relationship between the cost of a mortgage and take-home pay. It isn't pleasant reading especially for first home buyers. The prospect of home ownership has been increasingly hopeless for people on average wages but the Government's new housing policies should give them hope. (Time will tell and previous Government initiatives haven't achieved anything material.)

A NEW YEARLY HIGH
Wholesale electricity prices are still shooting higher. The benchmark Harwards price is over $437/MWhr today. These are very high levels indeed. The average for the past year, including the occasional spikes, is $133/MWhr. The minimum was just $13/MWhr, and the previous maximum was $372/MWhr.

THE CHINA TRADE KEEPS US IN SURPLUS, BUT A SHRINKING ONE
Our trade balance was positive in February by +$181 mln. But that was a large reduction from the +$551 mln we had in February 2020. That was because imports fell -1.1% while exports fell -8.5%. All this was happening while our trade with China was rising. Our February surplus with China rose to +$381 mln while our previous +$208 mln surplus with Australia vanished to just +$8 mln in 2021. With the USA we raised our surplus from +$43 mln to +$135 mln. With Japan we went from a deficit in February 2020 of -$19 mln to a deficit of -$74 mln.

WEAKNESS IN RISK GOVERNANCE & CULTURE
Westpac NZ has been hit with a public shaming over its culture around how it approached liquidity risk compliance that resulted in 'material failures', failures that lasted eight years. The penalty, other than the public shaming, is that they have to hold additional cash reserves.

ANOTHER REGULATORY SLAP
The Financial Markets Authority (FMA) has directed licensed derivatives issuer (DI) Rockfort Markets to remove or amend misleading advertising statements on its social media channels and website. The FMA became aware that certain statements in Rockfort’s Facebook advertisements, and on its website, created the impression that trading in derivatives was “safe” or had not presented a balanced view of the risks. In fact, trading in derivatives, and in particular CFDs (contracts for difference) offered by Rockfort as a DI, is inherently risky.

DATE SET
The Government has said it will deliver is 2021/22 Budget on Thursday, May 20, 2021.

COSTS INFLATING
The 'flash' PMI for Australia was released today for March showing a survey-record increase in input costs, with higher prices for a wide range of materials and a spike in shipping costs. But new orders are rising as the pandemic restrictions abate, and employment is rising as a consequence.

EARLY ACCESS TO COVID VACCINE
The Government has confirmed "strict criteria" for early vaccinations for people who need to travel outside of New Zealand on compassionate grounds or for reasons of national significance. The compassionate grounds that would be considered for travel overseas include needing to provide critical care and protection for a dependent, accessing critical medical care that is not available in New Zealand, and visiting an immediate family member who is dying. "This does not include reuniting with family, attending a funeral or memorial service, or attending a school or university." The national significance criteria is much looser and may include the upcoming Black Caps cricket tour, for example.

GOLD SLIPS
Gold is trading in Australia, and soon in Asian markets. So far today it is at US$1,726 and down -US$13 from this time yesterday.

EQUITIES FALL SHARPLY
The S&P500 ended down -0.8% on Wall Street in its Tuesday session and wiping out all of Mondays rise. The Tokyo exchange has opened down -1.1%, while the Hong Kong Exchange has opened down -1.7%. The Shanghai exchange has opened down -0.9%. The ASX200 is up +0.5% in early afternoon trade while the NZX50 Capital Index is little-changed in late trade.

SWAP & BONDS RATES SINK
We don't have today's closing swap rates yet. If there are movements today, we will note them here later when we get the data. They probably fell, extending yesterday's drop. The 90 day bank bill rate is unchanged at 0.34%. The Australian Govt ten year benchmark rate is down -10 bps at 1.67%. The China Govt ten year bond is also lower at 3.24% and a -2 bps slip. And the New Zealand Govt ten year is down a massive -18 bps at 1.53% and below the level of the earlier RBNZ fixing at 1.57% (-14 bps). The US Govt ten year is currently down -10 bps at 1.60% as risk aversion sets in.

NZD SLIPS AGAIN
The Kiwi dollar has now dipped below 70 USc and more than -1c lower from this time yesterday. On the cross rates we are holding lower at 91.9 AUc. Against the euro we soft at 59.1 euro cents and a -½c drop. That all means our TWI-5 is now down at 72.3 after these declines today. Driving them are the "uncertainty" factor of what the Government's housing policy will do (or not do).

BITCOIN DECLINES YET AGAIN
Bitcoin has fallen to US$53,728 which is another fall, this time of -2.0% from this time yesterday. Volatility over the past 24 hours has been moderate at +/- 2.7%.

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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63 Comments

15
up

RBNZ: Let's launch QE and low interest rates to stimulate inflation.
Bond market: Yep looks good from where we're sitting, inflation right ahead sir!
RBNZ: Compress that lubber!
Bond market: But you said inflation was goo....
RBNZ: SILENCE! CPI says nothing to see here, carry on, more QE, low interest rates for longer!
FHB: I agree with Bond market sir, massive inflation sir.
RBNZ: No, we believe you only want to purchase Netflix and computer products. Assets are not for you.

It is crazy, but you can’t really include assets like houses in CPI as strictly speaking when you buy an asset that retains value it hasn’t really cost you anything.

What if a tin of baked beans remains the same price for 10 years? Exclude it from the CPI?

In yesterdays scrum, unsure if Westpac's latest housing market forecasts garnered any attention with new man at helm
.https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/New_Zealan...

here is a bit from the westpac press release

"Up until now, the balance of these two forces has been in favour of investors. That’s why we sometimes refer to our approach as an ‘investor value’ framework – it recognises that leveraged investors are the marginal buyer, and their willingness to pay will determine the market price.

Removing interest deductibility tilts the balance dramatically in favour of owner-occupiers, who will now be the ones who determine the market price of houses.

A rough calculation suggests that their average willingness to pay is about 10% below current prices, which suggests that house prices could fall by that much in the long term. That in itself is not particularly onerous – it would bring prices back to where they were four months ago."

a rough calculation! I would suggest owner operators want to pay far less than 10% the market price

18
up

So much twisted logic from the Party of house-flippers (NZ National):

Mark Mitchell said today on the radio that mum & dad investors need the untaxed capital gains to fund their retirement. RMA reform should be enough to tackle the crisis.

If greedy middlemen with deep pockets were to hoard cartloads of agricultural produce causing a shortage of market supply, the solution isn't to relax the restrictions around GM crops in order to increase supply.

28
up

The country is going down a very sick path....

Having seen a few spreadsheets on fb in the last day showing the poor investment positions of most ma and pa residential investors one has to wonder what will happen when interest rates increase...

Taking away interest only loans will be important to stop people getting further in trouble.

I can feel a major correction coming on that will change NZ forever.

The govt is dammed if they do and dammed if they don’t do anything.

National has been instrumental in creating this massive mess

Parents who have helped finance their children into homes risk losing the entire families capital....

There is no easy way forward from here.

12
up

I view a decent amount of rental financials - the position of many is crazy. However as it worked for the previous over leveraged, so the piling in continued. But like all ponzies and bubbles this has to end. When I do not know..perhaps this latest announcement will do it...perhaps not?

19
up

National were indeed instrumental in creating the mess but then Labour came to power with the answers,according to them. After having 9 years In opposition and 4 years at the helm it is obvious Labour don't know how to fix it and neither do the Nats.

15
up

at least labour have accepted there is a problem

they would have bought a hundred thousand homes if fletchers could have got their order book out...but no

national is still in denial phase and will be until the thing crashes

mark mitchell's comments let you know exactly what their thinking is...."this wonderful wealth creation machine must continue"....god defend nz when the market goes!

ngakonui gold
Not Labour or National, so what about ACTion Mouse and his lot?

Seymour only credible politician in my view.

.. the current real estate bubble kicked off in the early 2000's , when Helen Clark & Michael Cullen ruled the roost ...

But , according to Oliver Hartwich , the seeds to this mess were sown much earlier .... back to the late 1970's he says ...

15
up

The sooner we have a managed but significant retreat of house prices, the better for the real NZ economy, and the lower the risk of a catastrophic collapse of the housing Ponzi later on. If, in doing so, a few specuvestors go belly up, this is all the better for the longer-term prospects of the NZ economy and society.

Debt is good...cannot be poor with debt. It inflates like a red lead balloon....and sprays all and sundry, when it Pops. ...or so I hear.

I think it was an Italian/Greece problem originally but we copied it magnificantly.........made an even better jobbie.

Many refer to interest only loans as a surrogate indicator of the vulnerability of the investor. If you have a mortgage on your home and a mortgage on a rental, it's financial common sense to maximise the lending on the rental as there is tax relief on the interest, and use any yield to reduce your overall debt burden fast but preferentially on the tax neutral (home) component first. Interest only mortgages allow this to happen. While some may be over leveraged, I'd be hesitant to use the number of interest only loans as a reliable indicator of it.

yeah but the home doesn't earn an income because they live in it...

and the interest only loans have allowed people to pay to much for their "investments"

Yeah I've been seeing the posts/spreadsheets as well. So many sitting right on the very edge...losing interest deduction then any small rise in interest rates and they're underwater.

Why are banks increasing term deposit rates??
Well its because they see an increase in the OCR coming around the corner. So they hare increasing their long term (3-5yr) TD rates now so that comparatively they are more appealing to the market. Ergo more people will lock them in for a long period before banks are forced to start increasing them again as the OCR increases. ie locking in their cheap cash supply now.
Theories?

Anybody who is now thinking of investing in new longer-maturity term deposits is a real sucker (assuming that there is anybody left doing it).
Rates for longer terms are still completely nonsensical given the future prospects, and they have to rise significantly before they can attract any depositors. Banks have started timidly raising some rates, but they have a long way to go before they can change things.
Just look at international bond yields movements in the last few weeks, to see where things are going in the future.

Why are banks increasing term deposit rates??

Because term deposits have reduced by 21$B in twelve months...yes 21$B

Only 13% so far but with more coming off term this might increase at a greater rate.....

How fast do they need to decrease before we call it a run?

How quickly do bank runs actually happen?

The balance in savings accounts have increased significantly but these can be transferred at short notice I would suspect. The ratio between saving and term deposit balances would effect the banks ability to continue to lend at a given level

This is true, but are you factoring in the government just providing them with cash? That is basically what the current scheme offers so they dont even need depositors money.
And in the states, they actually have a 0% reserve policy! so banks dont have to hold anything lol at least we are slightly more prudent over here.

If every thing turns to shit, they will just do a bail in like Cypress.
Not your keys, Not your coins.

23
up

Wow quick listen to talk back radio today and there's a load of property investors fuming about the housing policy announcement, some almost at crying point. People really do think this property game is a guaranteed earner that can't be touched...

19
up

for many its the only hope of having a retirement at the level they have become accustomed too...so its very serious for most

and for many its the only way they can pay the school fees, buy the new tesla, have the holiday, save the marriage, afford the cheese at farro!

unfortunately NZ could have invested in high tech industries to lift our GDP per capita....but we chose the easier and greedier path

This doesn't surprise me (property investors fuming), but I'm hoping that some start selling up so young home buyers have an opportunity to own their own homes. With really low TD rates, retirees like myself will need to think of other ways to supplement their retirements.

Still time to sell at moment if you think it will crash many mugs looking to pay top dollar and some at moment to cashout your profits.

Yes they sound like spoilt kids throwing a tantrum. They are really saying 'we are not paying tax, we will increase rents then na na na na, we are not paying tax. Meanwhile TD holders pay their tax.

Ironically increasing rents will mean paying more tax.

Nifty, was thinking a interest rate that's 2%higher would really make some cry. Interesting times.

Based on some of the spreadsheets I've been seeing on facebook property investment pages, a 2% increase with the loss of interest deductions, will see them underwater.

Don’t forget the inevitable rates and insurance increases!

I have been reading the wise common taters here on interest.co. Totally contradictory predictions. House prices going to go up, down, or sideways. Rents bound to rise, or not.
Nobody knows. I think it could go anywhere.

Prices are quoted in $$$$$ terms.

Given the amounts being debt-injected, why would you value a house in $$$$$ any more? So yes, in $$$$ terms it could go up, down or sideways. But if you have a house, you have a house. If you don't, you don't. And if the bank 'owns' a lot of it and you can't keep up the payments - you don't either.

The bigger problem is that a lot of 'incomes' are dependent on the house-betting. Tradies being a classic example, baristas another. Lotta things just won't happen when horns are pulled in, and the effects cascade on down the feeding-chain.

I find it amusing that Mr Orr has been trying so hard for months to depress the NZD to no effect but the first signal the government makes that they’re going to do something about the property problem and the NZD drops 5% in 2 days.

Yep, and what does that tell you VOO ? Why do you think the NZD has dropped since yesterday's announcement ?

Well, the immediate reaction is likely to be a response to uncertainty. If it sustains I’d say it’s a recognition that property trading is a (concerningly) significant component of the NZ economy; the quip that housing is our economy comes to mind.

Exactly

A fair bit of property investor misery porn on Facebook at the moment.

Hi everyone, long time lurker, first time creating a post here.
I've been pondering the interest deductibility change yesterday and this morning and its hit me really hard. My family came to New Zealand 25 years ago with basically nothing because they wanted more freedom and a better life for me, their only child.
After working hard and saving hard for most of my life trying to get ahead and make the most of the opportunities my parents have given me I'm now facing an extra tax bill of around $15K a year for doing the same thing I've been doing for many years. My family has never had a leg up from anyone, never been on the benefit or received any help from the government for buying our first homes. Always paid our taxes and contributed as much as we could to this country.
I ride an ebike to work, I make my own dinners and lunches as often as I can and I even do work on my own cars to try and save money. And yet somehow the government just decides overnight they can undo all of that hard work and just decide to take all of that money away? I'm not sure how that is fair at all. Unfortunately I have to have a mortgage and I can't pay it off overnight. Its going to get even harder now to pay it off.
I'm sure there are other people in similar or worse situations than myself but it definitely feels like a big kick in the guts for trying to succeed and make something out of life.
My question is what can we actually do about this? It seems odd that its so sudden and there's been 0 consultation or process followed. Don't they have to do multiple readings in parliament and take feedback on board for any law change? What's going on?? We need some action here.

17
up

Cry me a river...

15
up

Yep, me heart bleeds....... not.

Trying to get ahead (second time I've seen that in the last couple of days) - of what/whom?

Oh the tragedy!!!....

“Oh, the humanity,” – Herb Morrison

... sounds like a skit from Monty Python : " there were 120 of us , living in shoe box in middle of road !" ...

... " ... cardboard box ? " ...

" Aye ! "

.... " ... you were lucky .... we had to live in an old rolled up newspaper .... " ....

13
up

I read that too....his parents had bought an investment property as well

and they cant understand why this has happened....

Have some sympathy for him, he uses an E-Bike...If that's not sacrifice then I don't know what is...

10
up

Perhaps he avoided smashed avocado on toast too...sounds like a spoilt and self entitled single child 'prince'

What a load of rubbish, it has been talked about for months as an effective way of cooling the property market. I had discussions with Treasury last year about the prospect of exactly what has happened, and they confirmed then that it was one option on the table,

Where have you been , in a cave without internet?.

This is great news for all those investors, who have never borrowed a cent, and paid tax from day 1, suddenly a level playing field has been created. Perhaps its tilted a bit in favour of the non leveraged investors, because they dont worry about insurance, no need to without a mortgage.

Think of it this way, you buy property, your run the business at zero income, due to deductions, all the time getting capital gains tax free, and surprise surprise, there are people out there who think you are a parasite, and need a bit of blood sucked out of you instead of the other way around.

15 k a year of extra tax, equates to 45k of interest, equates to 1.5mill of borrowings, or roughly 2.5 - 3 mill of property at current prices, assuming you didnt buy anything yesterday, sounds like 4 to 8 houses, depending where in the country you have invested, plus you have a real job, give me a break mate.

He's paying $15k a year in interest on his investment property? Is that a multimillion dollar McMansion in Wellington?

Oops. I see DIYMan did the right calculation. The 15K is the 33% tax, so the initial interest had to be $45k a year. That far exceeds the $6.5k a year I'm paying for my home.

12
up

Watchout investors if you think about increasing rents to bail out from this tax change.
I have a feeling a group along the lines of renters lives matter will form and gather momentum very fast.
Next 12 months will be interesting to see this playout.

Isn't there something in the tenancy laws preventing excessive rental increases?

If landlords increase rent in a manner way out of whack with rents in the area, the tenant can go to the tenancy tribunal.

From tenancy.govt.nz

-Landlords decide how much to increase the rent-
The law doesn’t limit how much landlords can increase rent by. It does say how it must be done, and what the tenant can do if they don’t agree with the new rent amount.

-If the rent is too high-
If a landlord is charging a lot more than is being charged for similar properties in the area, the tenant can apply to the Tenancy Tribunal. The Tribunal could make an order for the rent to be reduced. The tenant will need to have evidence that their rent is a lot higher than rent for similar houses in the same area.

You just wait. They'll be collusion between the landlords and property managers in an area so they all increase their rents at the same time. Sh**ty thing to do? Yes. Illegal? Probably not.

The rent on my CBD apartment dropped from $525pw pre-Covid to $425pw now. I did have an alternative - leave it empty. Simple supply and demand. OK most of NZ isn't like Auckland CBD but why would any tenant accept a rent rise just to balance the property owners investment? Property investors will stop investing; house prices will come down; permitting renters to become first time home buyers. The new policy may not be good for me but it is good for NZ.

Lapun, nice.
See my comment above. If landlords propose outrageous rent hikes tenants can go to the tribunal, and have a good chance of success. I hope tenancy rights groups are on top of this.

Re the home loan affordability report - will banks even lend if a mortgage is consuming 42% of after tax income? Surely with a stress test of 5 or 6% interest rates they usually wouldn't?

Jacinda Arden says that their is no Silver Bullet, accepted but in absence of silver bullet should have gone with pellet of interest only loan to control speculative buying but did nothing, though she did mentioned in her announcement but it again the same story - waiting for advise and will do another announcement on interest only loan in future - Why ?

Action is important and that too timely action.

https://www.newshub.co.nz/home/politics/2021/03/housing-crisis-social-me...

12
up

I think you need to give them a break. In the scheme of things they announced some quite big changes yesterday, which National would never entertain.
Do they need to do more? Of course, but it was a big step yesterday.

I too agree that acting on interest only loan would have had better result as was the need,as cheap and easy flow of money to speculator is one of the main reason as it allows them to buy at premium and removal of interest only loan is bound to have an affect on speculative purchase, may be will not affect every speculator but will affect many and those who are still able to speculate will have to think twice before buying.

DTIs for investors remains the elephant in the room. Govt and RBNZ pass the parcel....

National were quick to say they would reverse the BLT extension and removal of interest tax deductions, but are property investors a big enough group to get National into power if they are bought this way? Or is it a case of Labour not only losing those that don't believe enough was done FOR them, but also losing those that believe too much was done AGAINST them?

Credit where credit is due, this is actually quite a good article by Tony Alexander:https://www.oneroof.co.nz/news/39159

The Australia dollar has declined significantly against the US$ over the last week, which suggests that there are additional factors besides the housing announcements behind the decline of the NZ dollar -

https://www.xe.com/currencycharts/?from=USD&to=AUD&view=1W

The US$ has risen against the Euro also.

https://www.xe.com/currencycharts/?from=USD&to=EUR&view=1W