Property investor Olly Newland shrugs off potential OCR hike from hawkish new RBNZ Governor Wheeler saying Reserve Bank 'not as separate from the govt as you might think'

Who thought the RBNZ was separate from govt....silly as thinking the govt is separate from the banking bosses.

We are entering the second period of stupid govt...the socialists sat on their &^%$# while bubble number one grew and now this mob in the Beehive are looking the other way....bubble two on the way.

"And I've been around now over half a century and they (house prices) have been doubling every 10 years or so and there's no reason why they shouldn't carry on doing it," Newland says.

This first part of this logic is sound in as much as higher historical mortgage interest costs  had to be covered by capitilising them in the higher value of property. 

But by Olly's own admission interest rates have never been lower and could fall further thus the need to capittilise this cost is extended over a longer time horizon.

Affordable Housing Construction is a possibilty, the land conversion from baren to residential  with full services, water,power,sewer and telco coupled with Council contributions and GST are what blow the budget out.

I'm about to start a 24 lot residential development, 24 1000m2 flat quarter acre lots, located in the Carterton, Wairarapa. 85 km North of Wellington.

This specific develoment has been 2 years in the regulatory process, Resource Consent, the last 2 months has been Council checking off the Services Plans and Construction Drawings.

The construction period is 4 months, so 24 months+ in the regulatory process and 4 months to build.

GST on each lot will be approx $17,000, Council contributions, $9,000 per lot.

Over the years i have met many Developers or Groups that want to be Developers, most have thrown that idea away due to massive delays that financially pillage the project.

Construction Costs of the Houses are compatible over the whole Country, eg a Jennian,A1,Keith Hay,Platinum in Wellington is within % same as Auckland and same in Toupo and Dunedin etc.

Its the Council Building permits and consents that alter drastically through out the country.

Personally i dont see any major action from the current Govt, The Social Housing Unit want to Build more Social Rental Housing with the $104 Million over the next 3 years.

If there are no Affordable New Houses constructed then this Govt better get ready to Build a sea of Social Rental Housing as the masses can no longer afford to house themselves into home ownership.

The important factors are you cant build 20,000 houses overnight its not like manufacturing light bulbs, there is a tremendous amount of lag per house, 4/5 months.

Enough research, enough reports stop kicking the can down the road, seed some building of Affordable Houisng or gety off the pot.

New Zealanders have aspirations they are go getter and at present 1000 per week are going to Australia to get a house.

"I don't think the Governor of the Reserve Bank, with all due respect, has much control over it."

Exactly

Here is why



Wikipedia says, and i agree



The four basic laws of supply and demand are:



    If demand increases and supply remains unchanged, a shortage altogether, thus leads to a higher equilibrium price.

    If demand decreases and supply remains unchanged, a surplus altogether, thus leads to a lower equilibrium price.

    If demand remains unchanged and supply increases, a surplus altogether, thus leads to a lower equilibrium price.

    If demand remains unchanged and supply decreases, a shortage altogether, thus leads to a higher equilibrium price.



Note from this that one changes relative to the other, but, as is usually the case in the real world, both change. None the less the principal still aplies in that if one increase or decreases by more than the other, from the point of equilibrium, then there will be a price change.



When supply and demand are on the increase simultaneously, this is refered to as economic growth.

As we go through this growth cycle, the supply and demand may move out of equalibrium. When this happens, the Reserve bank steps in and adjusts demand, using the OCR.

If supply is growing faster than demand, then prices drop and so the OCR will drop.

If demand is growing faster than supply, prices will rise and so the OCR will rise.



In reality, the Reserve bank is tinkering with economic growth, when they put interest rates up they are slowing down growth, and vice versa.



When economic growth peaks, that is, when the bubble bursts, demand collapses and causes a recession. Supply on the other hand can only fall slowly, as shops and warehouses built up stock during the boom years, and now have to run down their stock which takes time.



After the bubble bursts the Reserve bank is helpless to do anything. Stimulus only works, if it puts money into peoples pockets, so they can pay off debt. Until their debt is paid, their spending ability is greatly diminished, and the economy remains sluggish.



There are two important points that should be noted, and they are:





1) In a closed economy, as we have had in the past, supply is restricted by the ability of the local economy to generate locally produced goods and services, and so demand also has a limit. Using the OCR on such an economy is very effective.

When that economy is then opened up to all outsiders, supply, and the variety of the supply, is boosted significantly and so a corresponding boost in demand is necessary. If supply has no limits then demand also has no limits.

Under this open economy, supply goes way beyond the ability of the local economy to pay from local demand, and so alternatives have to be found. That increased demand has to come from either exports or debt.



I have been arguing lately, that when an economy is open to all suppliers everywhere (globally), and when an economy is in the growth stage, demand will always lag supply. When that happens prices remain either stable or very slightly suppressed and so no need for an OCR increase (unless you wish to slow growth). My further reasoning is that in this growth stage, business are keen to increase turnover and market share, which means they will keep well stocked to meet that potential demand. That further reinforces my belief that demand will lag supply. Also, demand can only grow at the rate people are able and willing to borrow and spend. And that to also further reinforces my belief that demand will lag supply. When demand lags supply the OCR dosn't go up.





2) When an open (global, unlimited supply) economy is in the growth stage there are only three possiblilities available to a Reserve bank.



a) allow the economy to grow to peak and then collapse (boom and bust)

b) push up interest rates before peak to crash the economy early. That is, before debt gets too out of control, so the subsequent downturn will be minor.

c) Hold the economy at a sustainable level.



The reserve bank governor knows that there is little else he can do. As for his "other tools" that is just tinkering, when a whole new direction is required.



As far as c) is concerned "holding the economy at a sustainable level" that requires a whole new subject, as it requires a whole new direction, as mentioned above.

So Olly is right - "the reserve bank is stuffed"

 

"No, my views haven't changed at all. I think there's a lot of politicking going on there. The Reserve Bank, whatever they'd like to say, are not as separate from the Government as you might think," says Newland.

" I don't think the Governor of the Reserve Bank, with all due respect, has much control over it."

If Olly's observation is true, then it reveals a sad state of affairs, not only for the first home buyers in Auckland, but for all of New Zealand as well.

First of all there is nothing new about the rock in the pond principal or ripple effect.

 In the early eighties wealthy Koreans displaced many Epsom dwellers offering ridiculous money to gain residences, leaving displaced locals to buy near to driving up  prices in surrounding areas with cash in pocket to boot.

 Is the RBNZ helpless or just simply irrelivant to what is an internal shock to the economy, or shock dose if you like...? The larger part of demand for houses in affluent areas is coming from foreign investment and ...is ..largely Chinese, regartdless of the bollocks you'll hear to the contrary, as I said previously I have a senior contact at Barfoots and have no reason to doubt the information supplied.

Auckland skews the figures as far as median price goes Nationaly horrifically, but is the drive for demand in Auckland localy driven .?..in areas of affordability post displacement or first home buyers yes, but again where did the benchmark begin...well with the rock in the pond or shockdose Foreign capital.

Is the current Administration indifferent to the bubble situation in Auckland or is it complicit in allowing it to run it course...?

Complicit I'd say ,while State house properties earmarked for sale will benifit drastically in both affluent i.e.( Tamaki /Orakei) and demand areas (i.e.)( Roskill) during this bubble period .

The sacrificial lamb here is the average New Zealander, first home buyer, being disenfranchised in the interests of Foreign Capital injection, on that alone why would the RBNZ take any action to discourage the current set of outcomes.I mean if they could , which they can't for reasons of being hamstrung.

What sickens me here is the Local property industry laying claim to the boom as if it is a naturaly occuring event or a normal part of long term cycle, oh yes we know every ten years Blah blah blah sitting down talking bollocks... and continualy feuling a fear buying market...as in get in or miss out altogether.

 It's ok to pay a lot for something if that's what you really want or desire , it's not ok to be solicited or duped into owning something that ends up owning you, just because you were afraid you might miss out.....as it will be of little consolation to you paying your mortgage with your pension years.

 For those heavily leveraged to generate wealth portfolios, I'd say good luck to you as there is always risk attached to high return investment, it certainly appears as if the bounce has gone the way of the P.I. over the medium term, and knowing when to get out or build an exit strategy should be of prime importance even in the current climate.

Somebody said to me of Wheedler...I remember him at school, he was insignificant then, he's insignificant now.

Ollie...for heavens sake man ,dress like you sell...the car dealer thing is long gone.

John Boy ....well you just suck altogether.

 Be mindfull of captured monies at all times.

First time post(er) but have been reading for many years...

Can someone with more of a background in economics than me explain why the following actions / consequences would not happen:

1)  Reserve Bank prints a boatload of money and buys into the US S&P 500 or some such index fund for the purpose of long term funding of NZ super and other needs;

2)   The hot money people and other holders of NZ$ head for the exits, depressing the value of the NZ$;

3)  Exports / employment improve;

4) Tax take improves;

3)  The reserve bank then has more latitude to raise interest rates (when necessary) without the exchagne rate going even higher.

It would seem to me that NZ could do this and I don't see significant downsides (unless you are a NZ$ trader), since NZ would simply be catching up with every other economy around the world that is printing money - except that the country might get something tangible in the end. 

Thanks - Flying Ranger

Interesting to note that the RB is Independent in only so far as its what it does, the consequences of its independent actions fall on the people of New Zealand. This is such a strange situation that we then pretend is normal. Why should it be that the decisions are independent of us yet the consequences of those decisions fall squarely on us? It appears a little lobsided.

"And I've been around now over half a century and they (house prices) have been doubling every 10 years or so and there's no reason why they shouldn't carry on doing it,"

Bollocks.

Overly simplistic. Extrapolating the past to the future is fundamentally flawed given the demographic and economic headwinds that exist over coming years. We are starting from a base of very low interest rates, high employment participation by women and a demographic cycle where the baby boomers are ageing. The booms of previous years were facilitated by growing household incomes facilitated by greater female employment participation, lowering interest rates, and a demographic bulge in home buying created by the baby boomers.

Olly Newland can spruik all he likes but he lacks justification for his claim. If median house prices are 50% higher than today in 10 years time I'd be very surprised, let alone 100%  (ie double)    

"I don't think the Governor of the Reserve Bank, with all due respect, has much control over it."

 

RUBBISH! They have all the power to deal to it but..........choose/chose not too. Put the OCR for example up to 6% and watch what the banks do..........and then watch the house prices..........and the NZD.......

IT has an effect IF used at the right time AT the right level. For example IF the OCR had been put up to 8% in 2003............the bubble would never have gotten traction.... 

TIMING is everything. That and a TRULY independent RBNZ  from bank influences INCLUDING the US FED

Now there's a good idea.
Put interest rates up and see the NZ dollar go to $ 1.10 / US $1.00 and unemployment to exceed 30 pc.
Interest rates hit 22 pc in the 1980's and house prices still went up 100 pc within 18 months.
Justice should apply for a job with the RBNZ .
His talents are going to waste.

If interest rates were hiked suddenly by 50 pc or more then landscape would be littered with homeless people who will be forced to abandon their homes.
Then, as prices collapse, the mob will rule.
Be careful what you wish for.

 

Hong Kong Monetary Authority Chief Executive Norman Chan said Monday that if the process of deleveraging is disrupted by quantitative easing, asset prices might drop sharply and remain volatile.

 

When delivering a speech entitled the Global Deleveraging: The Right Track at the Hong Kong Economic Summit 2013, Chan said that excessive leveraging, or over-borrowing, in major industrialized countries was the root cause of both the global financial crisis and the more recent sovereign debt crisis plaguing Europe.

 

Chan said quantitative easing is not a panacea, but it is the exact opposite of deleveraging. In the past three years, quantitative easing had limited stimulating effect on the real economy. "In order to solve the structural imbalances built up in the past two decades, we must get to the bottom of the problem."

 

There is a possibility that quantitative easing produces the desired results, which is a very desirable scenario as global economy will return to its normal growth path, he noted.

 

However, there is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices in the first place. Yet, since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient.

 

As a result, households are unwilling to increase spending and in the end, the real economy fails to rebound, if inflationary pressure builds up alongside asset price increases, central banks may consider exiting the market and raise interest rates, the authority's head said.

 

When economic performance, inflation or monetary policy falls short of market expectation, asset prices might drop sharply and remain volatile, he added.

 

Chan said he was certain that since the outlook for macro economic and financial environment is very uncertain, it is highly possible that large fund inflows and outflows as well as sharp fluctuations in the financial markets will continue to be seen.

 

"We should all take precautionary measures and get to the bottom of the problem, learn from others' experiences and avoid overstretching ourselves. Otherwise, we may find ourselves being trapped in the debt abyss with no way out," he said.

The NZ Property market prices will continue upwards until the time comes when the US federal reserve raises interest rates. This will be either because the USA has no choice due to debt or if employment in the USA drops to 6.5% . At the moment we are looking at 2015. More and more central banks are diversing away from US dollar notes as they relise that the US dollar long term is going to collapse. A trigger could be a bond market collapse when rates go up.  In 2013 both Europe and the USA will be back in recession, in 2014 the worst of the Chinese crisis will unfold and Greece will be out of Europe at the back end of 2013 or in 2014.  Much pain is going to be felt in the next few years which is why interest rates will stay low during the next couple of years that could still cause property prices in NZ to rise even though major trading partners are struggling.  My view is that the inflation case is likely to be a stumbling block in the property market when interest rates eventually start rising and this could be in 2-3 years time when Australian banks get downgraded as there external debt becomes to big with slowing growth returns from the Chinese industrial mining that Australia has done well in the past years. Funding costs will go up.  For the next few years like Olly has said the property market may give the best returns and then you need to time your exit or buy in areas of NZ that have not had overheating to protect yourself.