The RBNZ's monetary policy power will work this time as more borrowers lock in floating rates, English says; Not worried yet about Auckland property market

By Alex Tarrant

The government is confident the Reserve Bank will have a strong influence over the housing market when it decides to raise the Official Cash Rate (OCR), as increasing numbers of mortgages are on floating rates.

Finance Minister Bill English said this was one reason he was not worried about the property market running back into bubble territory, despite prices in the Auckland market hitting new highs in recent months.

Household credit growth was also subdued, at just above 1% per annum, down from the lofty highs between 10% and 18% from 2003 to 2008. While activity in Auckland was picking up, this indicated credit was not being pumped in to other parts of the housing market at Auckland's rate.

Much has been said on Reserve Bank Governor Alan Bollard's new-found 'potency' for when (or if) he does decide to raise the OCR from its record low of 2.5%. That's because the OCR has much more influence on floating, and short-term fixed, mortgage rates.

More than 60% of all residential mortgages are now on floating rates, while that number was below 20% during many of the boom years last decade as Bollard hiked the OCR up to as high as 8.25% to try and cool the rampant housing market.

At a Wellington Employers' Chamber of Commerce lunch on Thursday last week, Finance Minister English was asked whether he was worried about signs the Auckland housing market was taking off again.

Recent developments there did not yet pose a risk, English replied.

“There’s no across the board [nationwide] evidence that [the housing market recovery] is a problem. In fact, we want the property market to start showing a bit more life. It just gets things moving again, it’s a bit of an indicator of confidence," he said.

There had been a lot of attention placed on a few transactions where there were huge price increases.

A current constraint on the housing market moving back towards bubble territory was that credit growth for households was subdued, compared to what was seen last decade.

"So there really isn’t the room – if someone’s going to push prices up over here, and credit growth stays at zero, or one or two percent, then it’s got to come from somewhere else. So I don’t really see the capacity for it to move away," English said.

“The other thing to keep in mind is, everyone’s gone on these floating rates. So they’re going to be quite ‘interest sensitive’.

“If the Reserve Bank Governor had got out of bed this morning and said, ‘I’m going to put up interest rates by 1%,’ I think you would have heard a pretty sharp intake of breath around the country," English said.

“He’s got a wand there, and I can tell you when he waves it, this time it’s going to work.”

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He's dreaming, "In fact, we want the property market to start showing a bit more life."
So it looks like he's happy for house prices to get back to their peak, and among the worlds most unaffordable.
First home buyers may as well forget about buying a house while these guys are still around.

But the economy relies on us buying overpriced property otherwise the "wealth effect" flow on wont work.

More "Double Dipton" comedy.

Because if property prices declined then people would feel less wealthy, they would stop spending and we'd end up in recession. Got to keep the myth alive. There must come a point where houshold credit growth ceases, assuming a static population. 

i have just returned from our local the section on money,business and finance their were 33 books.
17 of those were dedicated to rental property investments and how to beat the system with different types of gearing,tax advantages etc.
very few books regarding the productive centre investments available.
house prices will continue to rise while their is a definite tax advavtage and no capital gains in place.

And which Harry Potter character is the wand waving Bollard.
The Oz banks will do as they see fit, they have form:
There's a paradox in our relationship with the big banks.
Whenever they refuse to pass on official rate cuts in full - a trick they may well try again this week - anti-bank rage boils over.
Much of the outcry is justified, especially when the banks' motivation is to sustain profit margins despite anaemic credit growth. And yet very few consumers take the next step and ditch their bank. Why?

Read more:


The major banks in Aus flipped the bird to Glenn Stevens, the Governor of the RBA long time ago.  Like they will now pay attention to Dr Bollard!

Last Friday 3 year fixed rates were down to 5.75%  and I locked in 90% of my farm  mortgage for a 3 year term from July1st.  Monday the rates were down to 5.72 so maybe I have jumped too soon but I am happy. Maybe  its a mistake to fix now but I dont believe it will be  a major mistake and I find it hard to believe rates will stay low much longer...

Last Friday 3 year fixed rates were down to 5.75%  and I locked in 90% of my farm  mortgage for a 3 year term from July1st.  Monday the rates were down to 5.72 so maybe I have jumped too soon but I am happy. Maybe  its a mistake to fix now but I dont believe it will be  a major mistake and I find it hard to believe rates will stay low much longer...

How did you get on with the security and LVR terms, did the bank instruct a refresh for the mortgage valuation?
Moving forward are you thinking of making any capital repayments?

No problems with security. I am almost 65 years old and have reduced my debt by $600k in the past 3 seasons and the bank dont require any more principal repayments.  My equity is now about 50% on the lowest of valuations and definitely not making any more capital repayments.

Cowhsit: Thanks, agree, batten down the hatch and know where you are with costs. Its hard to see next years payout being higher that this one, so its a good 18 mths before the chance of a big money year coming back, if that.
Thought about TAF?

I am going to vote in favour of TAF,
my own  reasons why apart from Fonterra needing development  cash  -
1. I cannot see that purchasers of the shares will put undue pressure on Fonterra. if they dont like the dividend they recieve they can sell like any investor  and buy Warehouse or  other shares.
2.  If I sell my farm in 3 years time I would like to be able to invest in the dairy industry
3  gets the Govt and public off Fonterras back
4. brings Fonterra into the modern world.
5. individual farmers who object to TAF dont have to participate in trading.
All the farmers I know will vote in favour. The dairy industry over the years has been built by reasoned brave decisions. Time to stop being week kneed with this decision .
your thoughts?

There is plenty to think about.
Yesterday the press reported Henry saying that none of the TAF related money/value would be used for development cash.
There is also some feeling that all the new money Fonterra has taken in over the past 7 years is not showing much return....
1. Some new purchasers of the shares can be expected to place buckets of pressure on Fonterra (especially as title of the shares is to be transferred away from farmers). An example re the Spotless sale: From todays web edition of the Australian Financial Review:
As the kingmaker of the Australia sharemarket, Simon Marais of funds management group Allan Grey willl be even more closely watched by boards of directors and investment bankers......
Its a different kind of shareholder activism to what has gone before.
Its is particularly aggressive, it makes full use of the media and, if it is associated with a private equity bidder, it can put a company under seige.
This will be worrying for the boards of companies that have Marais on the register, including Paperlinx, PMP, APN News and Media, Fairfax Media, Metcash and Sigma Pharmaceuticals...
The Ag example I can find is the Wine Trust of Australia, that was the remains of the grape growers co-op that became BRL Hardy, that sold to the US, and now rebought by private equity - grower grape contracts are now rock bottom.
Look at the scrap going on with the Crafar sale, these are not gentlemens' rules...
2. This is probably a decision best left to be made in three years time. The value of this "option" now does not look that high. A concern maybe in three years, of not being able to get your shareholding back or its full value.
However the over riding aim should be for there to be high on farm/farm gate returns, so that in three years time you have several competing bidders wanting to buy your farm for a good price (and being able to borrow to do so).
3. If the Govt. wins now, they (and other pressure groups) will come back again and again and again, because they know they can kick Fonterra round the park (and will do so. It also makes it more difficult to say no in the future). Naggers should not be rewarded.
4. People overseas already consider Fonterra is up with the best:
Today Robert can predict his profit or loss next month with all the certainty that you or I can predict the stock market or gas prices. During my visit, Robert said that his success this year will be determined by, among other things, China’s unpredictable economic growth, the price of gas (influenced, of course, by events in Iran and Syria) and the weather in New Zealand (a major milk exporter), where a drought can send prices skyrocketing.
5. Sure, it all gets back to the percentages of the vote, but in itself not a reason to vote for if you wanted to vote against. The vote is for everybody to have a say.
A concern I have is that no one is saying by how much this is going to increase either farm gate price, share dividend or producing farm value.
My view - inclined to vote against.

cowhsit, doesn't sound like you and your friends place much value on belonging to a true co-operative.
TAF doesn't provide any development cash. Successful co-ops grow slowly and steadily through retaining profits, the need for which keeps board and executive honest and on their toes.
1. Potential redemption risk
2. Pressure on farmgate milk price for benefit of dividend may see land values decrease. Don't need to own a farm to receive dividend from Fonterra.
3. How can you be sure it will get government and public off Fonterras back? Will it get pressure off suppliers, and will suppliers be considered a cost of business by then? Something to ponder:
‘Critical thinking and rational judgment based on co-operative principles would allow governance to unlock the full potential of Fonterra for its members, as opposed to continual flip flopping based on economic desires and market whims. It sends a clear message to the wider community that Fonterra wants to engage for reasons beyond just ‘it makes commercial sense’ (modified from an opinion by Caroline Gilbert of NZ Co-ops association and found on!co-op-principles).
4. In his book  ‘23 Things They Don’t Tell You About Capitalism’, Ha-Joon Chang (Professor Development Economics, Cambridge University) states: “..the difference between rich and poor countries is that enterprises cooperate with each other more than in poor countries. For example, the dairy sectors in countries such as Denmark, the Netherlands and Germany have become what they are today only because their farmers organized themselves, with state help, into cooperatives, jointly investing in processing facilities and overseas marketing” (p166).
5. Need to participate in share trading market if want to supply milk, as shareholding will vary on a three year rolling average. Participants wishing to join or increase supply must compete on trading market.
Our government, with the help of directors and cloistered financial industry, is purposefully trying to undermine Fonterra as a cooperative, in the name of stability and growth, but is really a get rich quick scheme.
Given enlightenment in lieu of 2008 financial crisis and associated spin offs, my view is TAF won’t advance Fonterra into the modern age, but will cast its primary producer shareholders into the wilderness, and for that I have very wobbly knees.

cowhsit:1. I have been told that as these units will fall under stock exchange (nzx) rules, if investors don't like the dividend there may well be things that they can do, if they are well funded, that could have serious effects on the 100% farmer control, as nzx rules are quite different to those in the constitution/DIRA legislation. 
2.I don't understand the nzx rules but the person I was talking to did and said Fonterra will be listed in 5years.  You may well be out of the industry by then, so won't care. I care about young farmers coming through. Destroy their future and you eventually destroy the industry.
3. It is said there are certain bureaucrats and MPs who are absolutely determined to see Fonterra broken up. Until this happens the govt will never be off Fonterra's back and the public will always be whipped up by the Independents.
You will be selling your farm without shares?
I take it you will be happy to see Fonterra listed?
I have heard that there is still information to come to shareholders. I am keeping an open mind on TAF at present though wonder 'what's the hurry' given that TAF is not yet finalised. I am curious though as to how Craigs IP will keep the share price from becoming volatile, as its part of their brief - especially when offshore hedge funds etc will be interested in buying units.

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