90 seconds at 9 am: Risk rising

90 seconds at 9 am: US confidence and house prices disappoint; Moody's warns on debt limit; oil down, UST 10ys fall again; Fonterra result awaited; NZ$1 = US$0.828 TWI = 77.2

25th Sep 13, 7:31am by David Chaston

Here's my summary of the key news in 90 seconds at 9 am, including news that risks are rising in America.

A closely watched US house price index rose 12.4% in the year to July, but that was slightly less than what markets were expecting.

At the same time consumer confidence is down - and a little more than was expected - in September.

Together, they are indicating nervousness about the strength of the US economy, a nervousness that is growing as the September 30 debt limit 'cliff' approaches.

For US investors, risk is less attractive these days.

In fact, Moody's has warned that a failure to raise the US debt limit would be credit negative for the United States. Overnight, US credit default swap spreads pushed out quickly by a third to almost 30 bps, their highest level in four months. (For reference, New Zealand CDS spreads are currently at 44 bps.)

The political jostling over the US debt limit extension will rise up the news agenda in the next week, reducing risk appetites worldwide.

In late Tuesday trading in New York, the Dow is falling - off marginally - oil is down markedly and is now at just US$103/barrel, gold is steady, and the UST 10 yrs yields are down again, now at 2.66%. Bonds are back in the frame as nervousness creeps back into investor sentiment.

Yesterday's bumper rise in the 2014 Fonterra payout forecast - along with similar announcements by Synlait and other dairy companies - failed to register on the NZ dollar. We will see what today's Fonterra 2013 result brings and we will have that for you later this morning. Yesterday, Fonterra's share price fell as investors absorbed the impact on the firms results as the payout to farmers rises.

(Update: The Fonterra 2013 result is out. After tax profit is NZ$736 mln, up 18%. The 2013 payout is confirmed at $5.84 per kgMS plus NZ$0.32 dividend per share. This is up NZ$0.04 on the last estimate, but down 4% on 2012.)

The NZ dollar starts today lower by a whole cent at 82.8 USc, 88.2 AUc, and the TWI is at 77.2.

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

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19 Comments

by Boatman | 25th Sep 13, 9:48am 1380059295

With all the Hoohaa about the LTVR , I see in the Herald , Mr Cunliffe proposes removing the independence of the Reserve Bank by forcing it to renege on the LTVR requirements for first time buyers .

This is major stuff , as the Reserve Bank , like the Crown, is legally independent of politics and the RBNZ's independence allows it to make the tough decisions that politicians will never make.

Methinks Mr C is getting a little carried away with himself .

by steven | 25th Sep 13, 10:38am 1380062327

Bugger, and here's me thinking I might vote labour for the first time in my life.

HC screwed it up and left this mess and now Labour wants to continue it.....great.....just great.

Herald link,

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11129586

Seems the vote buying is paying off,

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11129578

regards

by Kate | 25th Sep 13, 10:54am 1380063245

.. here's me thinking I might vote labour for the first time in my life.

What was it about them that had you thinking positively about their leadership/policy before this announcement?

by steven | 25th Sep 13, 11:42am 1380066144

Nothing much, but I detested JK more. Labour just seem to manage to shine with economic incompetance....

regards

by Kate | 25th Sep 13, 12:05pm 1380067550

So how is it incompetant to exempt first home buyers from the LVR limit?

I would have thought the bigger risk to the stability of the major four banks has to do with the borrowers using unrealised capital gains on other properties as a means to borrow more with no deposit.

Do you think FHBs are the major threat to bank stability?

by steven | 25th Sep 13, 12:35pm 1380069317

first para meet last para. Yes, when they drive up the prices and when in a x2 bubble which we are in, yes definately.

Its incompetant if they dont understand the leverage effect as per, Steve Keen's work. He explains it far better than I can. But I'll try, its one of leverage and repeated leverage up the price ladder driving up prices. Parker is the finance guy, he should be on top of this.....but then he deny's peak oil etc according to PDK....so, yes incompetant.

If you have to ask this then I think you should be taking a hard look at Steve Keen's work rather than just jumping in. I mean if you think not, at least justify why not with reasoning as a counter.....then at least I have something to go study.

2nd para depends a) on the numbers and how hard nosed or not the repeat borrowers are in buying more property. a) are the numbers big compared to FHB? Id suggest not, 5%? b) So I'd expect a proper, business oriented professional landlord to be making a living/gain on income, ie not be negatively geared hoping/praying for capital gains windfall rather than nieve FHB and/or gambler with $s in their eyes......

regards

by Boatman | 25th Sep 13, 12:30pm 1380069003

Kate , of course FHB's are not a risk to the Banks , these young buyers are a risk to themselves if rates go up again , as they will .

There are so many complications when it comes to special rules for certain classes of buyer:-

It will distort prices in the FHB market , as they will be easier to fund with no money
Do you cap the amount borrowed , at say $400k .If so then everything will be on the market for $400k
How do you manage the FHB book ?
Who is an FHB ? .I am in my 50's and have owned 4 homes , none of which were in my own name, so do I qualify as an FHB if I buy one in my own name .
If my sons/ daughters partner has previuously owned a home ( in a prior marriage) are they now disqualified as FHB 's .
Do Chinese or South African migrants, who are part of the problem , and who have owned property in their home country get treated as first home buyers?

by steven | 25th Sep 13, 12:40pm 1380069620

um...if FHB's who have say a 95% mortgage find that there is a 10 or 15% price drop they are then in neg equity.

The flow onto the bank is the asset the bank has the ownership papers of is now not worth what the bank lent against. This means the leverage the bank was using is now far higher and may even mean the bank is insolvent if the loses outweigh its deposits, at least this is my understanding. If this is right the bank is insolvent/bankrupt...which is what happened in the US/UK etc...

So I would most definately not agree with you.

regards

by Kate | 25th Sep 13, 2:19pm 1380075563

It will distort prices in the FHB market , as they will be easier to fund with no money.

Rubbish. A person with no mortgage but plenty of capital in their own home can easily buy another property now with "no money" at all. All that person needs is a security over the existing property they own. No deposit and no money. So if there is such potential to "distort" the market from FHBs - there is absolutely the same potential from the 68% or so of existing NZers who own their own home outright.

Do you cap the amount borrowed , at say $400k .If so then everything will be on the market for $400k

Dumb question. I hardly see folks with a $200K property getting $400K, nor someone with a an asset valued at $600K taking $400K. The amount a FHB should be able to borrow should depend on their ability to repay the loan - why would one need to place a cap on it? Banks might want to require income protection insurance or some similar such policy as a condition.

How do you manage the FHB book ?

I assume using the LINZ register and legal declarations.

Who is an FHB ? .I am in my 50's and have owned 4 homes , none of which were in my own name, so do I qualify as an FHB if I buy one in my own name .

No - by your own admission you have owned four homes. Are you prepared to lie? And for what advantage anyway! It's not as if these FHBs are getting reduced lending rates or anything. They are just getting the chance at ownership under normal finance terms.

If my sons/ daughters partner has previuously owned a home ( in a prior marriage) are they now disqualified as FHB 's .

Well hopefully they would have come out of the previous ownership with some capital anyway, such that they don't need a 95%+ loan but if not or it was spent elsewhere and they are currently renting, then as long as they can pay the mortgage, I see no reason why that new partnership can't be considered exempt from the new LVR rules.

Do Chinese or South African migrants, who are part of the problem , and who have owned property in their home country get treated as first home buyers?

Assuming they are NZ permanent residents and similarly they need a 95%+ loan because they haven't the 20% deposit - yes.

You seem to be treating this as if there is some free money in exempting FHBs from the 20% LVR - it's not a "deal" or a "giveaway" - it's just an enabler for those folks wanting to own their own home.

But all this is a diversion. The beauty of the RBNZs moves relate to the fact that multi-property ownership becomes a lot less attractive and more than likely all those rental investors with 5+ rentals will sell down to no more than four. Prices should ease at the lower end and that will be more beneficial than anything for FHBs.

by steven | 25th Sep 13, 12:41pm 1380069687

Do you have any %s or numbers to support para 2? I cant find anything.

Though this was interesting,

http://www.stats.govt.nz/browse_for_stats/people_and_communities/Househ…

regards

by Kate | 25th Sep 13, 1:38pm 1380073129

You really are very needy when it comes to finding out for yourself - try this;

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10784060

Note the enormous increase in those owning rental investment properties over the period (from 75,000 to 200,000 nationally). And that number isn't the number of individual properties they own - rather just the number of new individuals entering the multi-property ownership game.

I personally don't know one of my friends/acquaintences with only one other property. Most folks I know doing it have at least four rentals - a few standalones and a duplex or two.

All the aspiring first home buyers I know only want one home - a first one, and an only one. Funny that.

by steven | 25th Sep 13, 2:34pm 1380076490

I did a wee bit of digging, like I said lets see you justify your position with some backup info. Sure I could spend hours trying to find what you refer to, on the other hand it might actually not exist. I mean for an academic paper you would expect a relevent reference list? to support your point?

Does the link support what you say? or is it a semi-random thing....no it looks like its not answering / supporting your para2....sure its valid in terms of we have worse affordability, but I think we knew that already. Numbers in specifc geographical locations with no context of actual numbers....I cant quantify that as "enormous"

Using your specific circumstance of your friends and interpolating that across an economy and geography and time seems somewhat risky shall we say. For myself few of my friends or work colleges own a second (or more) properties, 2 maybe. Most of them are FHB (such as myself) or want to be FHB.

I dont disagree with what first time home owners want and Im sure if they could also live in an upmarket area next to a decile 10 school, and only buy for $250k they would be over the moon.....there needs to be some realism.

Oh and if the market pops and these FHBs are left bankrupt owning 10s of if not 100s of thousands what then? dump it on tax payers? moral hazard maybe?

regards

by Kate | 25th Sep 13, 2:56pm 1380077806

For myself few of my friends or work colleges own a second (or more) properties, 2 maybe.

Then I'm guessing most of your friends are <50 years, on less than $100K pa incomes, and none of them are RE or ex-RE agents.

And BTW - it's colleagues.

by dh | 25th Sep 13, 4:14pm 1380082453

If the Herald article is interpreting the numbers correctly, then Auckland is very, very, very, very distorted as nationally (Stats NZ - Dwelling and Household Estimates) the number of dwellings that are rentals has gone from 23% in June 1991 to 29% in June 2013.

by Kate | 25th Sep 13, 4:44pm 1380084261

Having large tertiary education sector in Auckland will of course contribute to its higher proportion of rental property there. But it is most certainly another world in many ways to the rest of NZ.

I saw a TV3 piece the other night on the affordability situation in Auckland. A young teacher was interviewed. She had bought what looked like a pretty dumpy flat (not house) and couldn't afford to live in it, so was renting it - and for herself she was renting an even dumpier place. All I could think was - her teacher's salary would be the same no matter where she lived in NZ. No idea why such a person stays in Auckland.

Here's a 3 bed property in Palmy - decile 10 primary school at the end of the cul de sac it is in - river walks two blocks away - flat city and you can safely bike anywhere;

http://www.trademe.co.nz/property/residential-property-for-sale/auction-642554192.htm

I'm sure one can find similar under $300K properties in good neighbourhoods in most NZ provincial cities. Why anyone would pay a hefty mortgage for upwards of $1m for same in AKL is beyond me. But for some reason the news media seem to find lots of them.

by Stephen Hulme | 25th Sep 13, 10:57am 1380063450

Get real Boatman - RBNZ Governors are not paid the thick end of NZD 600,000 to be independent. The disparity with the US Federal Reserve Chairman's salary is glaring.

The Congress sets the salaries of the Board members. For 2013, the Chairman's annual salary is $199,700.

by Stephen Hulme | 25th Sep 13, 10:59am 1380063547

by Boatman | 25th Sep 13, 12:05pm 1380067512

@Stephen Hulme ...I wonder how Dr Bollard , a fiercely independent thinker , who served with both Labour and National Governments would see it ?

I guess , broadly , you have a point when you consider the remuneration.

Your argument could apply to Audit firms who are supposed watchdogs of Public companies, Banks and the like , and earn massive fees from those very firms and institutions .

Or for that matter Rating agencies who are paid to rate investments ( or countries ) ... for a fee paid by the appointer

by Stephen Hulme | 25th Sep 13, 12:31pm 1380069096

Your argument could apply to Audit firms who are supposed watchdogs of Public companies, Banks and the like , and earn massive fees from those very firms and institutions .

Or for that matter Rating agencies who are paid to rate investments ( or countries ) ... for a fee paid by the appointer

Reported regulatory investigations and court cases confirm as much.

The Justice Department sued Standard & Poor's Ratings Services late Monday, alleging the firm ignored its own standards to rate mortgage bonds that imploded in the financial crisis and cost investors billions. Read more

Cases against auditors and banks are too numerous to list here.