Under the ‘temporary’ LVR restrictions we could see house sales falling by 3% to 8% and house price inflation being lower by between 1% and 4%

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The following is a summary of the key events impacting fixed income markets over the past week.

Last week’s Financial Stability Report once again hammered home the housing issue that has gripped the RBNZ in recent times, however the main impediment stopping the RBNZ from raising interest rates appears to be the NZD and its continued strength.

RBNZ delivers its financial stability report

The housing market continued to be the main focus of last week’s Financial Stability Report (FSR) delivered by the Reserve Bank of New Zealand. Much of the attention leading into the report was, how successful and what impact are the loan-to-value restrictions having on the market (given what was expected by the RBNZ)?

The ‘temporary’ LVR restrictions are expected to result in house sales falling by 3% to 8% and house price inflation being lower by between 1% and 4%. This is expected to see house credit growth fall by 1% to 3%. The Governor of the RBNZ told a Parliament Committee that he would like to house price inflation closer to that of consumer price inflation, which is around 2% as opposed to the current 10%.

The simple answer is that there is little in the way of concrete data to fall back on yet, however house sales fell by -3% in October, so there may be some encouraging signs there. The RBNZ reiterated that it still expects higher interest rates in 2014 which was highlighted in the FSR with the RBNZ referring to debt servicing ratios.

Focus on supply of houses and credit

The RBNZ can only impact on the credit side of the equation where town planners need to address the supply of housing issues. Incredibly, there remains very little discussion around the removal of significant tax benefits that housing investments offer. It is also hard to see how the housing shortage in Auckland will be assisted by the LVR restrictions. If anything property developers are looking at increased risk with fewer buyers.

The NZD still a pain in the …

While the RBNZ is dealing with the housing issue in really the only way it can, there is no simple answer to its other problem child – the elevated NZD. As mentioned in previous reports, the strong NZD is not just a New Zealand problem as most currencies have strengthened against the USD due to its current quantitative easing policy. However, New Zealand’s unique problem is that all other facets of the economy suggest the RBNZ needs to lift the Official Cash Rate. This is not an issue for other economies.

BoE revisions

The one central bank that appears closer to New Zealand than others is the Bank of England as its economy gathers speed. Although stating it may have to raise interest rates sooner than originally envisaged much depends on several economic indicators, much like the US Federal Reserve, the BoE are focussed on unemployment.

The unemployment rate continues to fall – now back at levels not seen since 2009 – forcing the BoE to reconsider its forecast as to when the unemployment rate may reach its target of 7%. This is the key level for when the BoE is expected to begin raising interest rates from the current record low level of 0.5%.

Debt Servicing Ratio - a guide to financial risks

In its Financial Stability Report (FSR) the Reserve Bank of New Zealand (RBNZ) highlighted the debt servicing ratio (DSR) as an early warning indicator of financial stress.

While the ratio has declined post the Global Financial Crisis, there are signs that it is once again beginning to turn upwards.

The DSR peaked at the end of 2008/beginning of 2009 at 18.4% but even at the current level of 14.3% is still elevated compared to the long-run average of 11.4%. The low mortgage rates present in recent years has contributed to the decline in the DSR, however with that trend unlikely to continue forever, the RBNZ is concerned (and rightfully so) about the new entrants with high loan-to value ratios in the housing market.

The RBNZ will be mindful that when interest rates rise (at the hands of the RBNZ) further pressure will be placed on the DSR. By RBNZ calculations, mortgage rates are expected to be in the vicinity of 7% to 8% within the next two to three years. The ability for the RBNZ to implement DSR limits is not currently on the table as it is not in their current toolkit; however it may be one day, as it is in places like Canada.

Farm debt causing concern too

It wasn’t just the housing sector that received some special attention in the FSR with the elevated levels of farm debt also causing some concern. The high debt levels in the dairy sector in particular are a concern given the possible double whammy that could hit the sector. 

We have already mentioned the likelihood that mortgage rates/interest rates are likely to rise over the next two to three years and if we couple that with commodity risk where commodity prices are at record highs, there are certainly some risks surrounding the sector. 

Currently at 27.5% the servicing ability is well above the average of 21.6% of operating surplus (as opposed to income as it is in the commentary above). Like the household sector, farm debt peaked during the GFC at 33.4%, however the sector is subject to uncontrollable risks such as drought and international commodity volatility, there is no doubt the RBNZ would like the controllable risks i.e. interest rates/debt levels to be better controlled.

Corporate / Credit news

ANZ (New Zealand) issued NZ$350m via a three year floating rate note. The AA- rated bonds were priced at 65bp over the 90 day bank bill rate. ASB Capital reset the dividend on its perpetual preference share, ASBPA. The new dividend for the year to 15 November 2014 is 4.31%.

Contact Energy (CEN) redeemed its NZ$200m capital bond, CENFA, on 15 November.

Dunedin City Council raised NZ$50m via a fixed rate bond that will mature in November 2020. The coupon was set at 5.56% or 75bp over swap.

Infratil (IFT) reset the coupon on its perpetual infrastructure bond, IFTHA. The new coupon for the year to 15 November 2014 is 4.53%.

Infratil (IFT) is set to undertake its delayed offer to buy-back up to 24.8 million ordinary shares. The buy-back will now take place on 5 December 2013 with IFT stating it will pay a maximum price of $2.60 per share.

Moody’s Investor Services released its credit opinion on Auckland Council stating its credit rating of Aa2 along with a stable outlook was focused around strong governance and stable and predictable sources of revenues.

Motor Trade Finances (MTF) reported its FY13 with NPAT rising from NZ$4.6m to NZ$8.2m. MTF delivered improvements across the board with lower bad debts, higher net interest income on the back of a growing receivables book +NZ$31.7m).

NAB launched an offer of NAB Convertible Preference Shares. These securities will contribute to NAB’s tier one capital. The loss absorbing (by way of conversion to NAB shares) preference shares are expected to be priced around 3.25% to 3.40% over the 90 day bank bill rate. Dividends are fully franked. 

Standard and Poor’s affirmed its A+ credit rating on NZ Post. S&P also maintained its negative outlook.

Transpower (TRP) announced it is seeking to raise up to NZ$200m through its already listed bond, TRP010. The new tranche will be fungible with TRP’s existing NZDX listed bond TRP010 which matures in 30 November 2018. The coupon is 5.14% for the AA- credit rated unsecured, unsubordinated bond. The issue yield will be set on 27 November 2013.

Vector (VCT) announced it had successfully established NZ$230m of new bank facilities that will expire in December 2016. The facilities replace the existing NZ$125m working capital facilities that were due to expire next month.

Wellington International Airport (WIA) redeemed its existing senior bond, WIA010 on 15 November 2013. WIA020, its replacement, is now trading on the NZDX.

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