By Gareth Vaughan
BNZ head of research Stephen Toplis has accused the Reserve Bank of "pouring petrol" on the housing market fire through its latest review of the Official Cash Rate (OCR).
As expected the Reserve Bank left the OCR unchanged at 3.5%. But it opened the door to a potential rate cut by saying; "In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data."
Toplis says the first OCR review of 2015 was a test of the Reserve Bank's risk preferences in terms of whether it's more nervous about the potential of the strong New Zealand dollar undermining the economy, or whether it's more concerned about the housing market again threatening to get out of control.
"We are erring on the latter view. The RBNZ today showed it is leaning to the former," says Toplis.
He describes the OCR review statement as the Reserve Bank's most proactive attempt yet to get the currency down, with it including a whole paragraph dedicated to the NZ dollar's overvaluation and suggestion of further significant depreciation.
"We misjudged the RBNZ's risk preferences. But we also think that they have taken a premature gamble with the housing market," says Toplis.
There are clear signs that the housing market is again taking off with house sales up 8% in the December quarter 2014 when compared to year earlier levels. Traditionally this would be expected to result in an acceleration in house price inflation."
'Almost guaranteeing further falls in mortgage rates'
"The (Reserve) Bank is bargaining on the recent pick up as being simply a transitory development as sales bounce back from a weak period pre-election," adds Toplis.
"There may be some truth in this but, with excess demand clearly in evidence and very high migration inflows continuing unabated, it's hard to see much of a softening. Moreover banks are already competing aggressively in the mortgage market with fixed rates, in particular, on a trend decline. The RBNZ today poured petrol on the fire and has almost guaranteed further, potentially significant, declines in mortgage interest rates. A precursor to this is today's rally in the swap curve which has seen the two to five year part of the curve rally between six and nine basis points."
"It will be fascinating from here on in seeing how the RBNZ will confront an over-heating housing market when its own actions will have encouraged the very behaviour it doesn't want to see," Toplis says.
He goes on to say fixed interest rate markets are now almost fully pricing in a rate cut as the Reserve Bank's next move, with the swap rate curve suggesting the rate cycle has now peaked.
"We continue to beg to differ. While we don't rule out a rate cut as a possibility, we think the rationale for doing so, based on current economic evidence, is limited."
"Interestingly the market currently places a 30% probability on a rate cut at the RBNZ's next meeting in March. We think that, barring any near term disaster, this is way wrong," adds Toplis.
BNZ's economists still believe the RBNZ's next OCR move will be up and the increase will be in March 2016, Toplis says, noting the "precipitous drop" in the NZ dollar following the OCR review actually increases the probability of a tightening. The Kiwi fell to a fresh three year low of US73.75 cents.
For the Reserve Bank to cut the OCR Toplis argues this would require; a sudden and unexpected drop in global economic activity, a sudden and unexpected drop in domestic economic activity, further falls in dairy prices, or a drought.
"Of these perhaps the most likely is the prospect that a widespread drought might knock the stuffing out of an already burdened dairy sector. Recent climatic developments are certainly worrying and we will be following soil moisture levels closely over the next few weeks," says Toplis.
The Reserve Bank, meanwhile, has "taken a gamble" that the benefits of hammering the NZ dollar will ultimately outweigh the cost of providing more stimulus to the housing market.
More macro-prudential tools?
Toplis made no mention of the Reserve Bank potentially moving to use an additional macro-prudential tool(s), alongside the restrictions on banks' low equity mortgage lending, to combat an overheating Auckland housing market. His counterparts at both ANZ and Westpac did, and ASB's economists said house price inflation risks increasingly becoming a financial stability, rather than a monetary policy, concern.
ANZ's economists said: "We would not rule out further macro-prudential actions against this (housing) sector to free up the OCR to respond to wider economic forces."
And Westpac's said: "One cannot overstate the importance of the RBNZ’s admission that the housing market is 'showing signs of picking up, particularly in Auckland.' Previously, the RBNZ was resolute in describing the housing market as having slowed in response to LVR restrictions. This serves as significant encouragement for our forecast that a tightening of macro-prudential policy will occur later this year. Our thinking has long been that falling mortgage rates, combined with a strong economy, booming population growth and cheap petrol, will create a renewed environment of rising house prices."
"With the OCR pinned down at 3.5% by low inflation, the RBNZ will be left with only one option – macro-prudential tightening. Late last year the RBNZ appeared to shoot down our forecast, explicitly saying that macro-prudential tightening was not currently under consideration. But now that the RBNZ has changed its assessment of the housing market, it must surely also be changing its assessment of the required policy response."
40 Comments
Difficult for banks to maximise their margins with no tightening bias or threat of hikes. Still, banks still have a healthy margin on floating mortgage rates, although their customers/borrowers are starting to realise the floating rates are unreasonably high and have not been "floating" for quite some time. Floating implies that the rate will follow trends / OCR / decreases - at the moment floating is only "bobbing" at the maximum possible rate.
Currently, borrowers would be best to stay floating or on 6 months on into 2015, while on the lookout for the best/decreasing 6/12/18 month fixed rates throughout the year.
With Auckland housing on the open global market, increases/decreases in OCR are having minimal effect on prices. Housing is also the 'safe haven' for everyone's money as the world economy becomes more uncertain.
There will be a wave of mega large infrastructure building around the world, particularly in Southeast Asian, far east of Russia, Latin and South America.
Those activities will absorb large part of liquidity from the QE from the EU, and hopefully maintain and increase inflation. In this regard, house price in major cities of NZ will keep going up whether you like or not.
RBNZ's OCR is irrelevant in this case.
Indeed Xing, China can't invent any new and necessary infrastructure projects at home so they'll be building infrastructure in neighbouring countries who are also trading partners. It will be interesting to see how those relationships play out, don't know if I'd like China owning NZ ports.
I would be very happy if China invested in a cement manufacturing plant in NZ and was able to produce cement at a price similar to what they can in China.
NZ $400 / tonne
Australia $200 /tonne
Singapore $75 /tonne
Hong Kong $50 /tonne
That would make a huge contribution to lowering the cost of most infrastructure projects and housing.
Well you may ask.
The major input costs would have to be fuel and machinery costs. These costs are pretty much the same arround the world. Labour cost is hardly likely to be that significant. The manufacturing process is virtually continuous, only two plants service NZ, so scale is unlikely to be a large issue. What does that leave?????? Two suppliers with a very cosy relationship purchasing and selling each others product where it suits. I think that the answer is pretty obvious.
What amazes me is that central and local government stands by and does nothing, spending hudge amounts of our tax and rate payer dollars on the cement content of infrastructural projects. Not to mention what we all pay by way of housing. Think what the cements content costs for the Waterview tunnel cost. It is no surprise that Fletchers (Golden Bay Cement) won the contract.
Guess what .. you might be surprised .. cement is being imported into New Zealand from China right now
True story
Talking to a South Island builder last week who told of a job he did where the concrete shrank leaving huge cracks like crazy paving .. ready-mixed cement supplier had to pull the lot up and re-do it .. blamed it on supply of poor quality "chinese cement"
I would be pretty sure that it costs much the same to make crappy cement as good unless it was diluted with some sort of rubbish I suppose. Plenty of skyscrapers and high speed trains in Asia that seem to be holding together without problems. It all comes down to having good purchase contracts and quality control systems.
Yeah we are so much better and would never build dodgy stuff that collapses in an earthquake and kills everyone inside. And our train saftey record is first class. Yeah right.
The 350km/h trains from hong kong to guangzhou offer a very comfortable ride and are far more reliable than our flagship auckland to wellington train ride that regularly breaks down and sees toursits shuffled off into waiting busses.
Really, if that is true then they should be aware of it and improve their processes. In a compedative market they could not afford to be so slack and would not survive. The fact that they are profiting hansomely in spite of such inefficiency mearly underscores the fact that our cement market is not compedative.
One part of it is that Council officers don't like quarries and impose much tougher (and expensive) rules on their operations here. Another factor is that NZ concrete standards are much higher, mainly due to our quake standards. We have higher systemic costs and lower production volumes.
I suspect that somebody is feeding you a line of excuses David.
Aggregate cost of a meter of concrete is relatively small and worldwide the prices don't differ that much. NZ is not unique in not waning extractive industries. The nett effect would be insignificant in the cost of meter of concrete. Besides which I was only refering to the cost of cement, a component of concrete. You or whoever is feeding you these comments is trying to muddy the waters by confusing it with the costs of producing concrete. But on that score, it is hard to see that tighter standards would have a very significant effect on the cost of concrete as you are using the same basic ingredients, just doing it in a more controled manner. Once you have the formula and process under control it is just a matter of turning the handle and consitently turning out the same product. The reality is that it will cost much the same to produce rubbish as first class products, infact probably less because having better control of the process means that you will have fewer cock ups and wastage.
The lending rates are slowly becoming less relevant with the OCR as seen in the last few months. What importance is how much banks can source the funding for their lending business, bear in mind that Australia is forecasted for a recession, Greece situation in Europe and Russia with their rubbles (roubles)
There are many irrelevant items pertaining to the Worlds economy.
One sure thing though is Costof Living.
Some are higher than others. We just are way too expensive, comparatively.
Must be the huge overheads.
http://www.movehub.com/sites/default/files/filemanager/cost-of-living-%…
I have no idea, but that is what you will need, to buy a $1m home, plus another $55k per year in after tax income to pay the mortgage. I can only assume that the median Aucklander is making pretty good money, seeing as they can afford to buy the median home. Median income is about 41k, but they will be making another 30-40k from capital gains, maybe that is where the food money comes from?
not all aucklanders can be making good money.
cant get food money or first deposit from capital gains.
likewise mum & dad probably not have significant equity in house (until too late) and many folks according to Elizabeth's article and its responses expect to stand on their own 2 feet.
divorce settlement... means there was equity to start with...and you're the one getting the ca$h. Perhaps the $55k means you have to be a lawyer to own a house?
Overseas funds means it's not New Zealanders owning New Zealand any more.
$55k is a huge amount for many people to come up with if they're paying rent (and other living costs).
How many years would a young couple (ie no background equity) on the median 41k wage, with median expenses for rent, travel, living costs, take to save that 55k ?
If rates stay where they are, and Dairy prices are sub $6 for another year, there will be serious trouble in the dairy sector which will hurt the general economy. I don't think OCR hikes are the right tool for managing Aucklands house prices. Maybe an advertising campaign on the history of bubbles and manias would be helpful, of course then people would just point to the many reasons why it's different this time :) It would be entertaining though.
An interesting development in NZ Herald letters is the numbers of comments on immigration as a disturbing/ aggrevating factor in Auckland's housing.
Politicians seem to fear being accused of dipping a toes into the argument and being xenophobic or even racist (whatever the difference is). That may not be in a sphere for Wheeler to tackle but the other major cause of unfair advantages that investors have as a whole taxwise certainly is and one where Wheeler should demand Key and English provide significant help.
Pigs may certainly fly .
Fonterra production behind 6.1% for same time last year. Expecting to end season 3.3% behind (had been forecasting approx 4% increase). As smaller volumes will be on GDT it will be interesting to watch WMP prices. Sad truth is historically payout goes up on the back of a drought/dry.
Down our way there is a 'green drought' developing. The grass is green, but there's not much feed there. More farmers are now considering going on 16hour milkings and are starting to feed out - -but not using bought feed. The problem has been it was so cold and so wet for so long and within a matter of two weeks the ground went from slushy to rock hard. Old time locals born in the area say they have never seen it change so quickly. It's the speed at which the weather changed which has caused the problem.
Many multiple farm owners considering, as well as up and coming families wanting to find farms for sharemailkers in the farmily.
The dairy farm market is thin, and rather illiquid, and the units of trade rather big, , so demand is high and you have to be willing to take a large chance and make it work for you if you want to get in.
That's a factor many employees and housepeople in towns, and renters have zero experience or gnosis of. The dynamics are just beyond their comprehension entirely.
they "go to work for a wage" the thinking is as alien to them as it would if you ask them if they were going to work today to buy the office. It really is that different and that much of a stretch.
That's why first and second generation farmers are completely tapped out. That's what it takes to even get a foot in the door. Folks like me can try, and walk away with many hundreds of thousands, not quite having enough to get over threshold. How would most job-houseowners feel if they were told their $800,000 deposit wasn't enough to get them into the equivalent of a 2 bedroom unit/duplex.
With a bit of luck this might signal to us that RBNZ is going to start considering the Auckland House issues as a localised phenomena, and factor that in with it's "picture of NZ".
Remember they lifted OCR on the promise of a Record Dairy Payout and to prevent inflation from that. It is clear that inflation was never going to hit and excluding Auckland Housing, much of the rest of the country is still in douldrums. Sadly increasing stimululs through dropping interest rates is likely to see more consumer orientated spending. (ie increase hard indebtness)
This could be NZ too, down the track JoKey and his new debt-pedlar sidekick RBNZ are taking us: http://www.dailymail.co.uk/debate/article-2934620/PETER-HITCHENS-Think-…
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