A review of things you need to know before you go home on Monday; no rate changes, Wellington day off, China in minor easing, investors positive, Kiwis expecting trouble, swaps firm, NZD soft, & more

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

Nothing to report today.

No changes here either.

It is a public holiday in Wellington today, and there is nothing in the way of official data released in New Zealand from either the RBNZ or Statistics NZ.

Official data out in China today shows that growth there apparently slowed to +6.4% in Q4-2018. That is the slowest rate in 9 28 years and on expectations (+6.4%) but below the third quarter (+6.5%). That this signal is the official data suggests the real rate might be slower. A drive by Beijing to get its provincial governments to report accurately may be taking a toll too. We should note that electricity production grew at the rate of +4.8% in October, +3.6% in November and +6.2% in December, or an average of +4.9% for the quarter. Electricity production is often used as a proxy for real unsanitised Chinese growth. Separately, remember China needs a high growth rate to maintain social stability. Each year jobs must be found for 7.5 mln graduating university students, at the very least.

More China data shows that 'fixed asset investment' rose +8.7% in private companies but only +1.9% in State-owned enterprises, a clear sign of the dead weight China's central and local SOEs have on their economy. Retail sales in Q4-2018 rose +8.2%, a lowish rate for them in terms of recent activity. Markets haven't reacted to this data, even in Shanghai.

The Australian and New Zealand equity markets have started the weak mildly positive, both up +0.3% or so in mid-session trade. Similarly, Tokyo is up +0.3% while the very early indications of opening trade in Hong Kong and Shanghai are positive (+0.4%, +0.5% respectively).

A special Roy Morgan New Zealand survey taken in mid-December shows 42% of New Zealanders think 2019 will be a ‘more troubled year’ than 2018. Only 10% say 2019 will be a ‘more peaceful year’, 42% expect 2019 will be ‘the same’ as 2018 and 6% don’t know. This year’s results are significantly different to the last time this survey was conducted towards the end of 2009 when only 25% of New Zealanders expected 2010 would be a ‘more troubled year’ than 2009. It turns out more New Zealanders (42%) are expecting a ‘ troubled year’ in 2019 than their counterparts across the Tasman in Australia (38%).

Local wholesale swap rates are firm at the short end with the 2yr up +2 bps to 2.92%, the five year is flat, while the ten year is marginally lower. The UST 10yr yield rose strongly today and is up +4 bps to 2.75%. Their 2-10 curve is just under +18 bps. The Aussie Govt 10yr is at 2.33% and unchanged, the China Govt 10yr is up +2 bps at 3.14%, while the NZ Govt 10 yr is at 2.35% and down -4 bps. The 90 day bank bill rate market is closed today.

The bitcoin price is at US$3,540 and -2.3% lower than at this time on Friday.

The Kiwi dollar has stayed down at 67.3 USc Friday's fall. On the cross rates, we little-changed against the Aussie at 94 AUc and holding at 59.2 euro cents. That puts the TWI-5 down at 71.5.

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Well, with the current leadership not knowing which way is left, is it surprising?


Nothing on Demographia?

Respectfully, it's not news because it is data from last September. We cover it monthly here and this is up-to-date. And I have the view that Median Multiples are a superficial measure, at best (and annual ones, and that use gross generic household incomes are worse).

Interest rates, income taxes, a focus on the FHB; these are real elements that need to be included in the measures of housing stress - and the Demographia data ignores all of them.

And worse, the real relationship is not incomes to house prices (virtually no-one buys a house with cash), but the relationship of take-home pay to the mortgage payment. That is not what Demographia reports. And yes, the affordability of the deposit is also important - much more so than the Median Multiple (which I have come to regard as essentially irrelevant now, other than for its headline value).

Interest rates, income taxes, a focus on the FHB; these are real elements that need to be included in the measures of housing stress - and the Demographia data ignores all of them.

Yes, it's a directional measure. Furthermore, it always fits the agenda of the authors / researchers and seems to downplay credit availability, which is usually the key driver of most housing bubbles.

in addition to that, the analysis comes with strong bias. The guys that produce it are rapidly anti urban, pro car pro sprawl.

The "Urban Tours by Rental Car" section on their website is a real crack up, rating cities as tourist destinations from the perspective of a driver.

Being Pro sprawl does seem to have a large factor in keeping house prices reasonable. The same freedom to create sprawl seems to result in nice low land prices due to plentiful supply.

Are there any anti-sprawl cities that have good house prices (without huge Government subsidies)?


But the plentiful supply does not always mean that the city naturally sprawls, because as the land becomes cheaper on the fringe it also becomes cheaper towards the center so those that prefer city living can effectively move closer in and also buy more for their needs.

Part of the sprawl in Auckland is due to the very fact that it is anti sprawl, ie high prices are forcing people out to the fringe and beyond.

Yes, Pro-sprawl was a poor choice of words. Perhaps accommodative instead of restrictive.

Accommodative is a good word.

The compact city people say that the reason that people buy in the suburbs is that is all the choice developers give people and if there were more higher density then people would natural choose the city life.

What is driving most peoples home choice is first the cost, not their need, so anything they are buying at present is sub-optimal.

My point is by opening up the fringe (and up as well) then everything becomes cheaper, both on the fringe and in the center, then you would see people buy more by what they needed, than by price.

This approach does not generally favour a compact city as the compact city people want it, because one way to make a city more compact is make the housing so expensive, than people cannot afford any other type of housing than small apartments, and transport other than walking or basic public transport.

That's the trouble when you give people more discretionary income through cheaper housing, they go and spend it on things that other 'better in the know' people, know how you should spend it.

"But the plentiful supply does not always mean that the city naturally sprawls, because as the land becomes cheaper on the fringe it also becomes cheaper towards the center so those that prefer city living can effectively move closer in and also buy more for their needs."

pfft. That's conjecture.
You have no idea of what the decay function is from the fringe. Sure, there will be price effects closer to the CBD, however increasing supply at the fringe unsurprisingly has the greatest effect on land prices at the fringe.

Supply becomes fixed in the closer areas as redevelopment premium increases (Improvement value / land value) and thus the only real channel for increases in supply come at the fringe, resulting in sprawl.

Nope 100% incorrect.

Every city in the world has a general stylized gradient from high in the center to curving lower on the fringe, irrespective of whether the city has restrictive or non restrictive fringe boundary. Although there is generally a small up curve right on the fringe compared to the older subdivisions immediately in due to the fringe being newer.

Cities with less restrictions on the fringe are lower on the fringe and thus relatively lower in the center compared to cities with restrictive boundaries which are higher on the fringe and are higher in the center.

And the only reason the price of land becomes greater on the fringe (compared to its raw/rural price) is when it is restricted and drip feed onto the market.

Yes, prices are distributed by some cdf from the center to the fringe.
However, you have no idea what the decay function for price is based on introduction of marginal units of land supply at the fringe - hence why I said conjecture.
I know this for a fact because in the literature there is essentially no research that has estimated this. The focus has been on estimating marginal land value premiums of LURs just inside boundaries.

It is entirely possible that land on the fringe is not at all a substitute for land at the center. Thus, the effects on prices are nil from land supply at the fringe. This will especially be the case in monocentric cities with high transport costs.
If indeed there is a drop in the value of land at the center, there will be no increased brownfields activity due to the relatively increasing value of land improvements.

So, essentially, yes, land values may drop universally (although not linearly) but new supply will be sprawl based due to the low cost of greenfields land and the increasing redevelopment premium on brownfields.

Westpac enjoys their market leading 3.99% 1 year mortgage rate, with no Big 4 or Kiwibank imitators yet.

I'm one of the worried Kiwi's. Markets are hugely overvalued, as are Kiwi houses. So what to do ?

not sure how meaningful the survey is, other than being a very high level barometer of confidence. How 'worried' are the kiwis that are 'worried'. If I was surveyed then I'd say I expect the economy to be less buoyant this year than last - but not by much. And noting it's not specifically about the economy.

If I was a graduate in China and finding it hard to get a job, I would be asking why that was with all the "data" painting such a rosy picture.

Like the U.S. Lowest unemployment rate in 50 years but 40% of the population struggles to pay for groceries, housing and other basic needs. 60% of h'holds couldn't access $1000 for emergency needs.

But you would only be asking that question in a darkened room with nobody else listening. Got to keep you social credit score up if you don't want Big Brother to take a big steaming crap on your life and prospects.

I think the median multiple is an important indicator, albeit one of several indicators.
When you look at NZ's ugly median multiples, and our high interest rates, it's a very ugly picture.

There's a bit of distortion in the measurement of Median Multiple, it's done by Median Household Income and these days a Household Income is now derived from 2 incomes rather than 1. As seen below, in the late 70's the Household Income and Average wage is more or less the same. Not the same today.

1978 - Annual Household Income $8204.14 Source (chart halfway down page)
1979 - Average Wage Earner - $157 per week or $8164 per year (Same as Household). Source

2018 - Average Household Income $105,000 Source
2017 - Average Wage Earner $50,000 Source

Yes that is correct.

Effectively the Medium Multiple is under reporting the problem. And many households are now also getting further support from stay at home working adult kids as well.

That 3x income of the 1970's was done with just the one wage earner.

And to add further insult, the quality of our NZ housing is a lot poor than say a comparison with a house In Canada.

We get hit with the double whammy in NZ ie high house prices AND poor quality.

Then you have the deposit. Record low interest rates mean that you're getting a pittance of a return on your savings. If you're not fortunate enough to be living at home, then the longer you're saving for that deposit the more dead money rent you're paying.

And if house prices were cheaper, you need less deposit or your 10% deposit on $1,000,000 house now can be a greater percentage deposit on a cheaper house, further reducing your mortgage requirements.

At the end of the day, everything will be fine because interest rates will stay this low for 25 years so nobody who has bought now will ever encounter mortgage stress of any sort. Wages will go sideways too.

100% agree Fritz.

The forward by Alan Bertaud in the latest Demographia is brilliant. http://www.demographia.com/dhi.pdf That should be printed as a stand alone article on this site.

if you cannot understand the benefit of what he says after reading that, then you are either stupid, willfully ignorant, or your vested interests in the status quo make you turn a blind eye to the truth and morality.

David is in denial about the link between income to medium multiple relative to different jurisdictions zoning rules and housing affordability, maybe because this site being called interest.co.nz is about debt, the more the better, and/or maybe because it has something to do with him banning Hugh P from this site.

There is no universal law that says housing in NZ has to cost as much as it does. Other jurisdictions, with higher growth rates and lower interest rates have far more affordable housing, and so can we, if we want it.

NZ's medium multiple used to be about 3x up until the late 1980's.

As the evidence clearly shows., those jurisdictions with low medium multiples, unsurprisingly have more affordable housing, with the common denominator being less restrictive zoning, irrespective of population growth, economic actively and interest rates.

With the right legislative framework, housing and land in NZ could be built for up to 1/2 the present price, which not only means 1/2 the debt for the purchaser, but their deposit goes twice as far re the LVR.

You would have more disposable income left for kids education, retirement savings etc. and there woudl be no need for all the strikes for higher wages.

It's simple, lower price to income ratio, ie more affordable housing, the less restrictive zoning policies they have. Or as demographia shows in NZ's case high Price to income ratio, high house prices, high restrictive zoning policies.

A high price to income ratio is a red flag that something is systematically wrong, and needs changed, unless of course you are one of the apologists for the status quo because you are making money out of it.

Understanding the link between medium multiple and all restrictions in the system and the demand and supply curve gives you a clear understanding not only of why we have unaffordable housing, but also why Kiwibuild will never work in its' present from, but also points the way to what would work.

Good intro and thanks for the link, Dale. I too miss Hugh P, and the Demographia surveys are, whatever their perceived faults when viewed from a purely national/one-country standpoint, a great time-series using established international measures. The point Bertaud makes in the intro, is that it is not so much the absolute value of the measure as its trend that is significant. That's as true for PSA (prostate-specific antigen) as it is for the Median Multiple. And by that trend, Auckland is failing badly (as if we did not know already). Interesting, though, that he has this to say:

For instance, in New Zealand, an otherwise exceptionally well-managed country, Auckland’ s PIR has increased from 5.9 in 2004, to 9.0 in 2018. The current government has explicitly declared that it will:

  1. Remove the Auckland urban growth boundary
  2. Free up density controls
  3. Fund new infrastructure through innovative infrastructure bonds

These measures constitute the best approach to create a market for housing units responding to the demand of the majority of households. These measures, even when forcefully formulated, require time to be implemented as representative branches of government have to pass new laws and design implementation guidelines. After the government has successfully passed these reforms, the international community will watch with great interest the impact it will have on Auckland’s PIR in the next few years. It is hoped that the example of Auckland will create a blueprint that could be used in other high PIR cities.

One can only say, well, we hope along with Mr Bertaud that the Gubmint actually gets around to this. Because there is not much sign of progress to date, and next year's Election year (in case anyone has forgotten), which tends to preoccupy whatever passes for politicians' minds to the exclusion of most everything else.

Hey ho.

Hey ho indeed.

Am skeptical about how the Govt. really interpret 'Remove Auckland Growth Boundaries' and what they mean by 'implementation' etc.

For example if they remove the Growth Boundary but then roll out the wastewater infrastructure slowly over time (rather than open up the market to STEP systems) through the new Urban Development Authority then this is a 'boundary/restriction' by default, so nothing will change.