Business confidence and businesses’ expectations of their own activity fell again in March, largely off the back of jitters around residential construction.
According to ANZ’s Business Outlook Survey, business confidence fell seven points in the month, with a net 37% of respondents reporting they expected business conditions to deteriorate in the year ahead.
Firms’ expectations of their own activity eased five points to a net 6% expecting a lift.
Most activity indicators eased, but ANZ chief economist Sharon Zollner says: “A marked exception was residential building intentions, which dropped sharply (led by Auckland – down 21 points) to be the weakest since 2009.”
However she makes a few disclaimers, including general volatility and fears around the possible introduction of a capital gains tax. She also points out the ‘own activity’ measure out of the construction sector held up.
“But at face value, the intentions data suggests significant downside risk for private sector residential building activity.”
Export intentions also dropped to levels lower than during the 1998-9 Asian Financial Crisis.
The services sector was particularly pessimistic (it has some correlation with growth in short term arrivals, which is easing). Export intentions out of the manufacturing and agriculture sectors trended down, but not to such dire levels.
Zollner cautions this data doesn’t square with anecdotes and hasn’t always been a good indicator for ‘discretionary’ exports like non-good manufactured exports.
However she says: “There is no doubt global growth is slowing, so all up, the signal should certainly not be dismissed out of hand.”
Zollner concludes the New Zealand economy is "delicately poised".
She says GDP growth has moderated but is still "respectable", however leading indicators like business confidence suggest the New Zealand economy is "running out of steam quite rapidly".
"Complicating the situation, the regional story is very mixed, with the party still in full swing in some smaller centres.
"But it does appear that increased wariness on the part of firms is starting to feed through into intentions, with a growing risk that the ‘hard data’ is going to start to roll over more markedly.
"Sharply lower export intentions despite a well-behaved exchange rate suggest global factors are a part of it, as well as disappointing profitability as firms struggle to absorb higher costs in a pricing-constrained environment.
"And now we have a cloud hanging over the residential construction outlook despite ongoing population growth, possibly related to credit availability and the fact that Auckland house prices are now going (modestly) backwards.
"We continue to expect the next move in the Official Cash Rate to be a cut, with a growing risk that it is sooner rather than later."
The Reserve Bank, when it on Wednesday reviewed the OCR, surprised markets by decisively moving to an easing bias.
Governor Adrian Orr ditched his line, the direction of the next OCR move "could be up or down," saying the "more likely direction" is down, "given the weaker global economic outlook and reduced momentum in domestic spending".
Risk of pessimism becoming self-fulfilling?
Westpac senior economist Michael Gordon points out ANZ's business confidence survey has "greatly overstated the extent of the slowdown in growth over the last year or so".
"Nevertheless, there is a risk of this pessimism becoming self-fulfilling, which would weigh on business investment and domestic demand.
"That risk was certainly on the RBNZ’s radar in yesterday’s OCR review statement; the key question will be whether it shows up in the hard activity data."
ASB senior economist Jane Turner says: "The NZ growth slowdown, and pessimistic business sentiment, comes despite the NZ economy enjoying a number of strong tailwinds, such as high export prices, low interest rates and greater fiscal spending.
"We believe the RBNZ has time to wait, and closely watch the data to see if weak business sentiment is truly holding back economic performance."
42 Comments
I mentioned in one email yesterday an anecdote about one Chinese developer I am working with being bearish.
I have written a number of other posts over the past several weeks about the wider (non-Chinese) development sector being on the precipice.
I think it's worth listening to people in the industry, don't you?
My Industry (Agri) is also stagnating as farm price falls is hampering discretionary spending on farm because the banks are managing farm equity a lot more closely. A higher milk payout will do a lot for farmers but the higher indebted ones do not have the free cash flow to seriously invest
I've been saying for months that there are big headwinds for residential development.
The thing is, builders or developers won't always openly admit it, they often put on the 'things are fine' bravado.
See my post at 6.13 on Wednesday:
https://www.interest.co.nz/news/98833/review-things-you-need-know-you-g…
I've been saying the same thing for over a year Fritz.
Just last week I had a chat to one of the larger KB construction businesses with over a 100 units on the go. They were and he was very subdued, yet only around 3 months ago things were looking very positive.
The market has turned very negative, and quite abruptly.
Careful, careful now peeps. We don't want to upset the pollies too much. Things are slowing nicely. We can't always have growth. Swings & roundabouts remember. Okay, so they've taken out the roundabouts, but they were/are the killjoys. We all need a bit of respite to wait for the fundamentals to catch up, that's all. Don't panic Mr Mainwaring!
Hi Fritz,
For sure, the construction industry is cyclical.
But I’m concerned if there’s about to be a slowing down in new dwellings completed........ The chronic shortage of accommodation across most of the country is felt painfully by those paying soaring rents.
Spare a thought for tenants.
TTP
Not just tenants.
If construction falls away drastically, there could be a lift in mortgagee sales. There also won't be as much demand to buy, if unemployment increases.
Remember construction is a very significant part of the economy.
I'm glad I don't have all my eggs in one basket.
Well said Fritz. Increasing unemployment will see Landlords pricing power come under increased pressure. Adults head home to their parents, more people cluster together as a means of cheaper living. It's the reverse of the wealth driven spreading out. More overcrowded housing while more lie vacant.
There's 14,725 on realistate.co.nz now for Auckland. Still heading up. Hamilton is also a bubble ripe for the pop.
I can confirm the sharp slowdown in the construction industry. I am getting numerous calls for smaller tradies seeking work because of "project delays", something I have not experienced in years.
This started from January with statistics showing a rapidly slowing market, and easing prices made far worse by the threat of a Capital Gains Tax.
People do not want to make important decisions at this time, preferring to put off anything that is non essential .
It would be of immense help if the CGT question was kicked to touch sooner than later, as it would remove at least one major uncertainty.
Winston Peters and the NZ First party are the only hope we have between the Loonie Left and some stabilisation of the deteriorating market place. He and his party should tell us now what their stand is on this topic rather than let it drag on for another month. They have stated before that they are against this tax, so it would be very helpful if they would scuttle this whole nonsense, and the sooner the better. The CGT idea is the wrong thing, at the wrong time and will hit the wrong people.
CGT talk hasn't helped, but things were on the edge anyway.
The biggest issue is that the cost of land and construction is unsustainable, it's getting impossible to build housing at prices that many people can afford. And we can look at previous governments for not addressing those things urgently enough.
Fritz is 100 percent correct.
The OSH rules for instance, are stifling construction let alone the myriad of other costs imposed on development.
A few years ago scaffolding was a minor part of the cost of construction. Now it takes over a third of costs in many cases. It would be interesting to compare the statistics for work place accidents ten years ago and today to see if OSH has made much of a difference,
The cost of land in Auckland may fall in the next few years
https://www.squirrel.co.nz/blogs/housing-market/is-2019-the-year-that-t…
Auckland Council dumped considerable over supply of land onto the regional market in 2017 and we currently have more land open for potential development than at an other stage.
There might possibly be a fall in the cost of land.
Actually land has already started to fall in price,
You are also seeing price discounting for sections.
As more construction projects get delayed, more of those workers have to find work (tradespeople, labourers, electricians, plumbers, plasterers, etc). As there are fewer projects available, then the longer these people are out of work, they will lower the hourly rate that they are willing to accept to get money into the household and put food on the table, pay bills etc.
As the number of constructions projects decline, then scaffolding companies will have fewer jobs available and lower the price that they are willing to accept in order to get revenues for the business in order to pay for the fixed costs.
This is how free markets work. Economics 101 and simple demand and supply.
When these costs decline, combined with the lower cost of land this leads to a lower cost of construction for housing. The only area where costs don't seem to decline are council fees - there is no free market in that area as they are a monopoly supplier, and there is no competition.
Some property price bulls have cited that construction costs of housing continue to rise and use that as justification that property prices in Auckland won't fall.
This market is very confusing. I just put more money on one year TD and received 3.45%, which is barely changed from previous additions/rollovers, yet mortgage rates are dropping with ANZ charging 4.05% for one year fixed. Is cash king yet? It doesn’t feel like it yet, but I have renovations in the design phase and am hoping it will be when the quote process starts, but then again am I comfortable trusting my work to builders possibly on the fringe who are desperate for work? Maybe the best strategy is to find a good builder looking for work to fill out his schedule. Interesting times.
CN, yes, similar to Sydney. Nothing seems surer now. It has been quite the speculative bubble (remember the legions of flippers a few years ago). This construction industry news is another leading indicator, and it’s been happening for a while now. We’re dreaming if we think this will be a soft landing.
Now if we can just drag Twyford out the back and handcuff him to a tree to stop him signing up anymore Kiwibuild contracts that would be great..
I see on the "follow our progress" page they have committed to 10,356 houses.. Yet kiwibuild has only 47,500 people that have "registered interest". Once you factor in the number of non-eliglible people that signed up (like property investors who just want to monitor whats going on) and that most couples probably both registered interest, I think you've probably committed to enough houses to satisfy the actual demand.
Stop signing up for expensive houses, and sort the underlying issues
He's been ranting on, even before elected, about freeing up development ('up and out'). Haven't seen anything meaningful yet....
Apparently the government will be consulting on something in May / June. but my understanding is that it is likely to be underwhelming. I hope I am surprised.
Much of the risk around developing these days is from councils. Especially Auckland Council.
The normal commercial risks like price increases for materials, getting the right builder/tradespeople etc, being able to sell the completed units for the right price and so on, pale in comparison to the risks that councils bring with them.
They are able (and they seem to try) to add significant costs and delays to projects.
Especially Auckland Council. Up until 2017 Tauranga (0.13 million) and Hamilton (0.22 million) were building faster per head of population than Auckland (1.4 million). Given the obvious economy of scale advantage Auckland enjoyed this was completely due to Auckland Council. (Inappropriate part of comment edited out, Ed).
I agree the council is a basket case and is making things worse.
But even if they were an efficient, humming machine things would be really challenging.
Because it's coming back to land and building costs.
But yes the council is a disgrace (although there are some good individuals, but usually below management level) , and if they were even half decent then the challenges the industry faces wouldn't quite be so daunting. The place needs to be radically restructured, and there's a lot of dead wood at senior levels that needs to go.
I think it’s the law that’s the real problem. The council end up carrying the can for bad building work unless they get a bunch of paperwork (PS1 etc) that proves someone else is liable. That paperwork and third party liability costs money. Also the council have no legal ability to apply risk assessment- even though they know that builder X is dodgy as, they have to pass him unless they find a technical problem (apparently they can’t fail for bad workmanship unless it is really bad). The building code is the real problem, things were much better beforehand.
Yes they have the unenviable job of policing the building code.
But that's not where the problems lie. It's the planners IMHO. They generally abuse the RMA for their own ends. To try and meet their own ideas about how a development should be done.
It's this planning function which slows things down and adds the costs.
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