By Bernard Hickey
For months politicians and economists have looked at Reserve Bank Governor Graeme Wheeler as if he was a potential arsonist in the Auckland housing market, having the ability to pour petrol on the fire with rate cuts.
Both Prime Minister John Key and Finance Minister Bill English have openly mused about how the Reserve Bank would have to be careful about cutting the Official Cash Rate because any rate cut would further pump up already over-valued housing prices.
The question of rate cuts bubbled to the surface this year as inflation plunged towards zero and the Governor faced growing calls to cut to push inflation back towards the 2% mid-point of his 1-3% target band, as specified in his Policy Targets Agreement.
However, exporters, unionists and business leaders alike have worried that Auckland's housing market could prevent a much-needed rate cut.
But it's now clear after this week's Monetary Policy Statement that Wheeler himself does not think he can 'pour more petrol on the fire' by cutting the OCR.
He said the Auckland market was a concern from a financial stability point of view, but it was not a factor in his decision to hold the OCR at 3.5%. It also didn't stop the bank from removing any prospect for higher rates in its forecast track for interest rates.
Wheeler said the Auckland housing boom of 2015 was different to the one seen more widely throughout New Zealand in 2006 and 2007, when home-owners flush with the joys of all the fresh equity in their housing ATMs went on a spending spree. Back then, mortgage lending was growing at over 15% a year to finance a swathe of new baches, boats, holidays and decks. That drove up consumer prices generally and helped push domestic inflation to over 4%, well north of the bank's 1-3% target band.
Wheeler said he was not seeing that sort of spree this time around, with bank mortgage lending still growing at less than 5% per year.
"You're not seeing the sorts of wealth effects feeding into consumption that you were seeing in 2006 and 2007," he told a news conference this week. "You're seeing quite a lot of consumption growth in the economy, but a lot of that is because of employment growth and strong income growth," he said.
"We're concerned about the Auckland housing market for financial stability reasons, but it didn't affect the way we thought about monetary policy."
That means Wheeler will not hold back from cutting the OCR if he thinks in the coming months that the inflation outlook over the next couple of years has softened markedly.
He opened up that possibility by pointing to a Reserve Bank scenario where inflation expectations halved to near 1% over the coming year. That would allow the Reserve Bank to cut the OCR by 50 basis points.
The way is now clear for rates to be cut if inflation expectations keep falling in the coming year, as they have done over the last year.
The irony is that such a rate cut would no doubt pump Auckland house prices even higher.
Wheeler is still considering forcing banks to hold more capital to back mortgages to landlords, as well as other tools, but for now he doesn't think his can of OCR cuts will spark the sort of inflationary fire he has to worry about.
He has other fire-fighting tools he may use.
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A version of this article was also published in the Herald on Sunday. It is here with permission.
35 Comments
However, exporters, unionists and business leaders alike have worried that Auckland's housing market could prevent a much-needed rate cut.(my emphasis)
To what end? - New Zealand is in no position to entertain, nor sustain a currency war - what's more they never end well and any benefit accrues to the already financially well off antagonists.
A currency war with whom? we are too small to matter IMHO. No one in a decent sized country gives a rats bottom about what we do. I mean do really you think Japan, USA or China care? got some evidence please?
To what end? well how about the tradeables is -1%? isnt that a concern? or that CPI is 0.8% and might fall a bit more?
No??
A currency war with whom? we are too small to matter IMHO. No one in a decent sized country gives a rats bottom about what we do.
As I have told you many times before, stop talking about topics where you have no idea or professional knowlege. Stick to the day job.
John Key wants to be running New Zealand by the end of the year because, like all other politicians, "I believe the future of our country can be really great."
But 20 years ago, he worked closely with a famed currency trader who mounted a brutal speculative attack on the Kiwi dollar. The attack, which has entered forex (foreign exchange) trading legend for its scale, audacity and profitability, prompted Reserve Bank alarm that the currency would collapse. Read more
One of my London bank employers mounted dealing room based attacks to test the financial resolve of France and Italy, I mention this small sample because of the spectacular visible outcomes in both cases.
As long as our carry rate stays dependably high, anyone who can afford to hold will be happy. if that swapped around then we'd see big volatility. With good carry returns, positions can hold for a considerable time.
-1% is much more tradeable than someone elses -3%. or another countries governmental or military or social collapse...
In driving down the exchange rate - from recent highs of 88 cents (versus US) to nearly 72 cents is already further fueling the Auckland house bubble to the delight of the property speculators. A million $US now will buy nearly $250,000 more in property in Auckland than it did just a few months ago. Lowering the OCR would further fuel property prices from foreign buyers as well as directly benefiting the local speculators in their property purchases. Unintended consequences abound.
That in itself is no good reason to sit on his hands. Just months ago Canada cut off completely the aspirations of 86,000 prospective mainly Asian buyer applicants.
Where have they gone? Almost certainly some of thhat group and its money have headed here.
Has anyone noticed the further heating up of the Auckland market since then?
Doing nothing is no solution for Wheeler or for a do-nothing National led(?) government.
Time the government realised it could take some Auckland pressures off itself just by curtailing immigration since 60% or more of new arrivals end up in Auckland. Logically returning arrivals often have ties to places other than just Auckland and therefore are less of a problem.
What about those foreigners who purchased property at 0.80 above?
Those who borrow abroad to finance a house purchase will likely be in negative equity if the dollar lands down below 0.50. Without consistent currency gains to attract foreigners, high rates, nz housing is poked.
Foreigners with funds to purchase long term assets overseas aren't as leveraged as local buyers (the risk factor would be too high).
There is no need for them to panick, unless they were planning on pulling a large amount of cash out of NZ during the next few weeks/months. Otherwise, with a long term plan, the assets foreign value doesn't matter, because they're not needing to draw cash back against the tide - so they can just park it in NZ until rates improve.
More likely than not they'll actually send more investment and buying money this way - as each of their currency units gets them een more now. If they have drawn extra leverages on local banks they can use the favourable exchange rate to shrink that mortgage even faster, or build cash pools in NZ for when the rate goes back up.... The money they pour in while our exchange rate is low will get them much more return than their own banking system!
With immigration high, and unrestricted foreign buyers, favourable tax treatment for investors, perhaps an OCR cut would only have a very limited effect on the Auckland market now.
Most other popular 'main city of country' cities have very much lower mortgage rates than NZ, so rates are not necessarily the main driver.
echo echo echo echo
the inferno rages about monetary policy - while silence reigns on the accelerant fiscal policy
Rodney Dickens - March 11 - chief economist sra.co.nz - ex RBNZ
Headline - Is Graeme Wheeler a Control Freak
Rodney Dickens looks at the RBNZ's housing experiments, its exchange rate game, and assesses what sort of a Governor Graeme Wheeler is
http://www.interest.co.nz/opinion/74434/rodney-dickens-looks-rbnzs-hous…
Geoff Simmons - March 13 - senior economist Gareth Morgan Foundation
Headline - RBNZ throws another pail of water on the house price inferno because John Key won't act
http://www.interest.co.nz/opinion/74488/geoff-simmons-says-rbnz-throwin…
Bernard Hickey - 15 March
interest.co.nz
Headline - Graeme Wheeler's petrol can
Bernard Hickey in the NZherald
politicians and economists look at RBNZ Governor Graeme Wheeler as if he was an arsonist in the Auckland housing market, with the ability to pour petrol on the fire with rate cuts
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=114…
Interesting comments
One has him throwing a bucket of water while Bernard has him throwing a bucket of petrol
Listen to the chatter
The economists and influencers and talking heads widely expected the RBA would cut the OCR last week down to 2% - which didn't happen - however the same lobbyists and influencers and talking heads have since racheted up the pressure clamouring for a rate cut - loudly predicting a cut in April or May
Local resident natives, listening to the chatter, are not known to be slow on the uptake, and they aren't waiting, and are pouring into the property market with a vengeance with the following result this weekend where a $1.5 million property with a reserve of $1.7 million went for $2.85 million or $1.1 million over the reserve, well above expectation. Looked at the video of the auction - big attendance - no foreigners apparent - all locals
As Bernard notes, Wheeler has removed the threat of any imminent increase, which is code for a pending easing in the future outlook, and if the auckland natives are equally quick on the uptake - there is the risk of the same - they ain't gonna wait - the smart money will move first
http://news.domain.com.au/domain/real-estate-news/gladesville-home-sell…
The housing market is not too big to fail. The market will do what every market does and that is go up and then down. And then after the down it will start going up again ... and repeat itself over and over again.
The rich make more money in a downturn so if you think they will stop the correction then you do not understand the system.
Only fools think a market can go in one direction forever.
Obviously the property market will go up and down over time. However the point is it will ALWAYS make higher lows and higher highs. That's a fact.
Only fools will argue otherwise.
There ya go ( 1990-2014 ) Look at those lovely red bars - up, up, up.
http://www.rbnz.govt.nz/statistics/key_graphs/house_prices_values/
OnwardsUpwards, how many property investors went under followig the 87' stock market crash?
Some properties lost up to 50% of their value. Yes i know the market recovered eventually however many people lost everything if they were overleveraged as they could not hold on until the market recovered.
Nothing has changed. The market will fall and some people will lose everything. And these are usually the ones who think the market can only go in one direction so they are not prepared.
It's actually very sad - people lose family farms & homes, marriages break-up, kids are pulled from their schools as parents can't afford their fees, and in some cases people commit suicide.
The Auckland property market is dangerously high and completely out of whack with rental yields and incomes. A correction will come soon enough.
Just before the dotcom boom, 97% of US investors thought that the stockmarket was the best place to invest as every fall is followed by a bigger rise. The NASDAQ still hasn't recovered to the same level 15 years later. Incidentally, this sentiment dropped to around 50% following the crash despite this being the best time to invest.
reminded me of this
CFD story - a true story
Once upon a time .. in 1998 a successful UK based spread-betting shop called DealForFree.com came to Australia. A television advertising blitz offering the Deal For Free (no fees) concept got a lot of traction. Problem for DealForFree was their UK model was built around a private customer base that only traded on the long side. And they didnt need to hedge their risk. Here in Australia the trading public were far more savvy with both the long and the short side of the market. DealForFree went broke and their customers cleaned up during the Dot.Com meltdown. Then CMC Markets appeared and picked up the carcass of DealForFree, offering the same "no fees no brokerage". Difference was CMC hedged their NET position at the close of each day. CMC were most successful, taking market share from the prime brokers, and choking the options market. The big end of town then got into the act. They're all offering CFDs now.
Yes it is sad. Children have no control over their parents financial decisions. Even a family that was financially responsible could lose everything if their jobs are lost due to a recession.
Somethings will always be out of your control in life. That's no reason to be afraid to make money.
At what point can Auckland not generate enough wealth to support higher house prices? To my thinking higher housing and transport cost must result in higher wages in order for people to live there, at what point do employers move in order access cheaper labour? How low do rental yields go before investors stop buying and all investors are classed as speculators by the IRD?
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