Households repairing balance sheets in 'sombre' market despite late-November pick-up, the National Bank says

Households repairing balance sheets in 'sombre' market despite late-November pick-up, the National Bank says

The general spirit across the housing market remains one of somberness as households repair balance sheets, National Bank economists say in their December property report, adding it is hard to see this spirit changing in the early part of 2011.

“We saw a fillip in housing market activity in November but it’s hard to get overly excited about it. The level of activity is 65% of the average seen over the prior decade. Some support to the property market is being provided by low interest rates and a net migration inflow,” National Bank economists said.

“But the general spirit across most indicators remains one of sombreness with balance sheet repair the prime focal point. It’s hard to see this changing in the early part of 2011,” they said.

Meanwhile, a weak and patchy economy implies that interest rates are likely to remain low for a while yet, they added.

"That was the message delivered by the Reserve Bank last week and we concur with it. While you’d  never want to rule out interest rates moving up in early 2011, it’s hard to see the catalyst. In fact we can see some risk that the next movement in rates could be a cut. That’s a small risk at present but three months ago the probability was effectively zero. The mere fact we can put that on the table is testament to how fickle demand is across the economy at present."

Mortgage rates

"As was the case last month, the 6 month breakeven in 6 months is 6.55%. That’s only 0.20% above the current 6 month rate. While we don’t think the Reserve Bank is in any hurry to lift rates, odds are that there will be one rate rise by the middle of 2011 and hence chances are the 6 month rate will be above 6.55% in 6 months," they said.

"As such, the 1 year rate looks attractive – though less so relative to last month. Similarly, as it was last month, the 1 year breakeven in 1 year’s time is at 6.85%. That’s just 0.40% above the current 1 year rate, which isn’t much. Or put another way, the decision is effectively asking borrowers to decide whether the Reserve Bank will be hiking more or less than 50 basis points over the coming year.

"We think 50 is a minimum, though they will be in no hurry.

"Two year mortgage borrowing therefore also looks reasonably attractive. However, when we compare longer-term fixed rates against their breakevens, we find that the Reserve Bank would have to raise the Official Cash Rate by a long way to make long-term fixing beneficial," they said.

See all mortgage rates here

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

11 Comments

Comment Filter

Highlight new comments in the last hr(s).

Housing market sombre !

Great then let’s talk with the PM,  minister Hide, Brownlee and Joyce about the real economy - production in this country - shifting “Chair Polishers” into real jobs.

Jeez they come out with some crap don't they....." a weak and patchy economy implies that interest rates are likely to remain low for a while yet"....no mention of events in the UK or in Obamaland....in both cases rates are expected to rise and not by a teeny bit either.

Are they saying Bollard determines their floating rate, fullstop...and the fixed term rates?....what rubbish.

The households deeply in debt are barely managing to fund their debt...they are not able to clear their debt...they were 'banking' on rising prices...capital gains....fat chance. The banks are hiding the losses under their carpets....mortgagee sales are being 'managed'....

As English and Key drive the ponzi scheme deeper into public debt...will rates pressure be for going up or going down?....think hard now!

As for expectations that "fickle demand" across the economy is set to explode into a consumer splurge some time in 011....what utter twaddle.

 

Alex , I have 2 Questions about longer term interest rates :

1) What about inflation becoming  factor in the next two years, thus pushing up rates ? 

2) What if the Govt is forced to borrow  at higher rates on the bond market to finance the the budget deficit next year and 2012?  This will have an upward effect on rates and possibly a crowding out effect on the domestic market .

I still think that fixing may be the way to go , especially if inflation creep starts 

Hi Boatman, there's no one right answer on whether to fix or float, and I'm not a mortgage advisor:)

But...The general advice I hear from the sages is it can be good to have a few different rates - ie some of the mortgage on variable, some on two year, some on 5 year or something like that.

If you're in a position to quickly pay your mortgage down or off, then you could take advantage of having some of the loan on lower variable rates. By having the fixed rates you have surety of payments for that time for a certain amount of the loan = better for household budgeting.

The Reserve Bank publishes a survey of inflation expectations, which shows two years ahead in the 1-3% target band:

http://www.rbnz.govt.nz/statistics/econind/j6/data.html

Two-year-ahead expectations have held steady since last quarter, increasing by just 0.03 percentage points to 2.60 percent. The median two-year rate rose from 2.70 to 2.75 percent.

On that second point, govt is actually basing its own predictions that its costs of borrowing will fall, despite the fact it will be increasing its borrowing at least in the short term. And English is also worried that a deterioration in Europe will cut off our credit line...yet they're still expecting costs to fall

http://www.interest.co.nz/news/nz-govt-debt-wont-worry-agencies-until-it-hits-30-gdp-and-it-will-only-reach-285-pm-key-says

This is Key speaking to Andrew Patterson on Radio Live in the weekend. Key tried to guide a single to third man and put Bollard on strike instead:

 

Patterson: But aren’t you also counting on being able to reduce that deficit as a result of the government bond rate declining, when a number of economists have said in the last few days that may not be a realistic assumption?

“Well there’s a lot of different factors there isn’t there," Key said. "No one really is sure. It’ll depend on what yields are like. What we do know is Alan Bollard had originally written into his bond curve predictions, I think, or certainly the market estimates were, a 1-1.5% tightening in 2011.

"He [Bollard] then scaled that back to 1% and I think now he’s saying that is less likely. So there doesn’t look to me to be a lot of upward pressure on interest rates," Key said.

"That doesn’t mean we don’t pay more on the international markets, but certainly domestically there’s not a lot of upward pressure on interest rates," he said.

Only when recession hits back badly by middle of 2011 – young Kiwis like you Alex wake up and say shit – jobs issues especially within the production industry are now far more important then stats/ rates, % etc. in the real Estate industry.

As a “Kiwilad” to do just one’s duty without vigorously demanding our parliamentarians reforming the economy is rather a disappointment for me.

Depressed much? - might pay to keep away from sharp objects, tall buildings and poisonious substances today.

It's a bit arrogant to assume "kiwilads"  would care whether your disappontied or not.  I'm disappointed they let you have access to the internet under the terms of your parole.

Good time to be in shorts - shorts, sticky here in Kaikoura 30 degrees. Yeah - just be a good boy – maeh !

If you wait to see the problem it will be too late Boatman...we will follow the uk and obamaramaland and both are seeing them rise no matter how much BS is heaped on the market.

You should be paying back the principal fast as....failure to do that is certain serfdom.

 

Mate, there is a sombre mood everywhere I go. I have only come across one or 2 businesses who reckon they are "recession proof", everyone else has had record low turnover, and everywhere I look shops are disappearing, with "to let" signs blossoming. Even in my immediate circle of friends I know several people who have lost jobs. The resilience in house prices is the absurd thing, in the circumstances.

I frankly do not believe statistics that say we are in flat or low economic growth. Adding government spending into GDP dollar for dollar is one of the most foolish tricks that has ever been allowed to be played with economic statistics. Government spending really IS "low quality", most of it does not have to justify an appropriate level of benefit like in the rest of the economy.

We are in a recession that really started years ago, thanks to the RMA and the Local Govt Act, Working for Families, higher real income taxes, and Punitive anti-Employer workplace law, to name the most significant few things. This "REAL" economy, which shrank a quantifiable 12%, was concealed for a while in a "bubble economy" based on consumption based on mortgage re-fi debt. Michael Cullen basked in "bubble" tax revenues, and found things to spend every last cent on, thus digging his successors into a perfect hole - something that Kiwis remain largely ignorant about.

If we are unanimous that the "construction" sector of the economy is now a dead goose, then we either have to replace it with something other than borrowing, or cut our cloth to suit our new economic level. It is pointless arguing about the reasons WHY the construction sector is a dead goose if we are not prepared to confront the consequences of the fact that it WAS a significant driver of the economy.

If there is demographic justification for abandoning "construction" as a viable part of the economy, and we cannot bear to allow mining, and we must stifle all potential new export industries with overpriced land and red tape, then we had better start working out what spending, especially government spending, we can do without. Or are we as stupid as those Greeks who riot, murder, and set fire to buildings when confronted with any harsh realities, like spoiled brat children?

I have proud memories of David Lange, "the great communicator", taking the unpleasant truth to the nation, and pulling together a sensible, mature consensus at least for a time, about "means", living within them, and the options facing the nation. I see little evidence of any similar kind of national maturity in NZ today.

Demographics is more than just superannuation liabilities. Colin Clark's magisterial 1967 book, "Population Growth and Land Use", analyses numerous positive feedback loops in economies as populations are rising, that go into reverse when the population growth levels out or falls. This is far more significant in its economic effects, than resources like oil becoming scarcer and more expensive.

I am only saying what I do here, not to argue for "more growth", but to try and alert people to the kind of tough political options we are going to have to confront, that will go way beyond superannuation liabilities. The end of growth, either planned or unplanned, means serious recession and falling income, not equilibrium at the "status quo".

The development of free markets and the creation of wealth requires, along with
a culture that encourages trust and co-operation; "connections" via transport
and communication, between potential participants in exchange and trade. These
connections can be the result of proximity (through density), as well as by
roads and other transport infrastructure.

There is a limit to how much density is achievable as a substitute for transport
infrastructure, because the production of low-density rural areas, especially
food, has to be transported to the workers in urban industry. There is actually
a correlation between the "density achieved" in urban areas throughout history,
and the provision of roads.

Population growth is one way in which densities are increased, and "demand
pressures" result in rural land being used more intensively and efficiently.
Population growth disturbs a certain "status quo" that might have existed
previously, where rural production levels were regarded as "satisfactory" to
both the producers and the consumers of the produce.

As population densities increase, and rural production increases, a number of
efficiencies are realised.

There is increased competition, and reduced oligopoly, monopoly, and monopsony
exploitation.

Increased specialisation becomes possible, because of a viable number of
customers for the products of the specialist. "External efficiencies" are
realised by increasingly networked producers.

Economies are realised in infrastructure, social institutions, and government.
Roads, bridges, harbours, etc, can be utilised by increasing numbers of people
without capacity increases being immediately necessary. The same goes for
churches and clergy, courts and lawyers, hospitals and doctors, other
professionals, government bureaucracies, public buildings, educational and other
institutions. This also allows for important advances in sanitation and health.

Labour productivity growth occurs, and less additional "capital" is required for
each additional unit of output. The utilisation of land and resources previously
underutilised, is a "substitute for capital".

Nevertheless, return on capital increases, AND capital formation is also
increased. A rising population results in increasing returns to existing
investment, encouraging more investment. Less investments "go bad", because
there is a rising number of customers for whatever products or services the
investor and his competitors provide. More production capital is utilised (and
even worn out) before it becomes obsolete.

The products that result from new investments, inventions, and efficiencies, are
easily absorbed in a rising population; as are the redundancies and relocations
that might be necessary. Younger people, of which there are more, are more
mobile and receptive to change. The increases in wealth creation and demand,
make society more amenable to changes in employment patterns as the result of
advancing technology and methods. There are more valuable "positions" to go
around, so that change is less regarded as a threat by those occupying positions
of advantage.

Younger people tend to accumulate capital, while older people tend to "draw down
on it". Larger families result in pressure on the parents to save more, and on
the children to provide for themselves because their inheritance will be split
more ways.

(Note: Julian Simon added a further thesis to Colin Clark's: that a higher
population includes both more inventive geniuses, and more people to purchase
and enjoy the fruit of those creative geniuses).

A high proportion of government spending is inflexible to rises and falls in
population. This spending is more efficient if population is higher. Much
government spending is extremely difficult to reduce even when falling
population justifies it.

If population is falling, there is much greater pressure on politicians to cheat
by inflating the money supply, as the fewer numbers of young simply cannot
sustain the taxation levels necessary to keep the government running, apart from
the burdens of caring for larger numbers of elderly.

Younger people are rendered less able to save, capital is "drawn down on",
returns on investment decline, more investments fail, investment declines.

Population increases demonstrated beneficial effects in Holland in the 1500's,
Britain in the late 1700's, and Japan in the late 1800's. Holland and Japan were
economic successes while importing most of their food. A LOWER percentage of the
workforce in agriculture, correlates to wealth increases. These increases in
population and in wealth, result in a freer, more mobile society.

Ancient Rome in its decadent phase, illustrates the effects of falling
birthrates, including increased taxation burdens and monetary debasement.

Declining populations, in ancient Rome and in Europe in the 1400's, brought
about a simultaneous shortage of workers, and yet lack of demand. Many people
clung to their source of diminishing income, becoming protective and demanding
restraint of competition; others had serfdom imposed upon them by the
government, their freedom to relocate and change their livelihoods being
removed. These seemingly contradictory effects are the result of a reversal of
the "virtuous cycle" described earlier, that occurs when population is
increasing.

France, in the period from from the revolution onwards, also illustrates economic decline
consequent on falling birthrates.

In underpopulated lands, and where population is falling, the people themselves
become more "protectionist" in sentiment, and more vulnerable to illusions
regarding "planning" and regulation of production and prices. This only worsens
the vicious circle of decline.