Archive for June, 2011
I was reported in the NZ Herald today commenting on a company providing social housing, and on Auckland’s housing market. Read Anne Gibson’s article to help form your own views.
Otherwise there have been a number of interesting events recently including friendlier credit policies from the BNZ and ASB; international property investment expert Ben Doyle coming to Auckland, New Zealand to speak at a two day weekend event hosted by NZ Wealth Mentor on July 16th and 17th; combined with how not to do a media interview guest starring Alasdair Thompson currently of the Employers and Manufacturers’ Association.
Interest Rates
The Reserve Bank maintained the Official Cash Rate (“OCR”) at 2.50% but stated there is some concern in light of the rising inflation, where the OCR may need to rise. However this was just before the 13 June 2011 6.3 magnitude (Richter Scale) earthquake that caused billions of dollars more damage and shattered the confidence of thousands more Cantabrians. It is now thought that it is extremely unlikely the OCR will be raised this year.
Below is the table of interest rates offered by the major trading banks and Kiwibank:
| Bank | Floating | 6 month | 1 year | 2 years | 3 years | 4 years | 5 years |
| ANZ | 5.74 | 5.99 | 5.95 | 6.49 | 6.99 | 7.45 | 7.70 |
| ASB | 5.75 | 5.85 | 5.95 | 6.40 | 6.90 | 7.30 | 7.60 |
| BNZ | 5.59 | 5.85 | 5.95 | 6.45 | 6.99 | 7.45 | 7.75 |
| Kiwibank | 5.50 | 5.75 | 5.80 | 6.40 | 6.90 | 7.30 | 7.60 |
| National | 5.74 | 5.99 | 5.95 | 6.49 | 6.99 | 7.45 | 7.70 |
| Westpac | 5.60 | 5.59 | 5.95 | 6.40 | 6.90 | 7.30 | 7.60 |
Note: in the table above for Kiwibank, their offsetting loan rate has been used for the floating rate, on BNZ the Total Money rate has been used as the floating rate and the Classic rate has been used for their 1 year fixed term interest rate. For Westpac the Choices floating rate has been used.
Other finance news
ASB have eased their credit policy recently to qualify new investors by dropping their servicing margin from 8.0% down to their 2 year rate of 6.40% (the same as Westpac’s servicing rate).
Earthquake Rescue Plans
Compensation
There have been a number of changes in light of the earthquakes in Christchurch. Houses there have been categorised into different zones. The red zone has around 5,100 homes, which is the zone of most interest as it means your house will be demolished and not allowed to be rebuilt on. The Government has offered to pay the current rating valuation (done in 2007) to the owners of the property. However there is also another option to affected red zone landowners which is to have the Government pay land valuation and their private insurer (if they have cover) to pay out under the building policy for a rebuild elsewhere. The best of explaining this is by example.
Dwayne and Hayley own a property in Dallington, Christchurch in the red zone with a Rating Valuation of:
Land $190,000
Improvements $210,000
TOTAL $400,000
Since they have an insurance policy providing for full replacement cover they have two options available:
1) Get the Government (ie. all taxpayers) to purchase their property of them for the rating valuation of $400,000.
2) Get the Government to purchase the land for $190,000, and if Dwayne and Kylie’s insurers agree, the insurers agree to pay the cost of replacing the house elsewhere – this works out to be $235,000. As a result Dwayne and Kylie would receive a total payment of $425,000.
It is important to note that with no private insurance, there is only one option. And if you have private insurance, you need the insurer’s consent to pay to replace the hose elsewhere. This could be at a higher or lower amount than the improvement value given in the Rating Valuation.
Bank relief packages
ANZ yesterday announced a special 3.70% one year mortgage rate for all red zone home-owners, and Kiwibank and BNZ have offered 2% discounts on their floating rates for one year. BNZ topped this by offering increased rates of 2% to term deposit holders in the red zone.
There are a number of international issues impacting property investors and business owners currently. These include:
- Greece’s debt crisis – Greece had its sovereign credit rating downgraded 3 notches from B to a total junk rating of CCC by Standard and Poors this week. They are looking likely to default and will need an European Central Bank loan, investors in Greek Government bonds to take a hair cut, combined with Greece’s efforts of implementing higher taxes and slashing Government expenditure (hence the massive scale riots in Athens this week).
- weaker Australian job growth - Australian employment numbers released last week showed 7,800 jobs were added in May whereas 25,600 where expected. Australia’s unemployment rate stayed at 4.9% (New Zealand is at 6.6%, USA is struggling still at 9.1%). The Australian Dollar has been hit by international markets because of this. The other impact is that this means the Reserve Bank of Australia is under less pressure to have the RBA raise the cash rate from 4.75% over the coming months.
- Japan’s continued struggles – these have been compounded by their devastating 9.0-magnitude earthquake and ensuing tsunami that devastated the north-east cost of Honshu Island on 11 March this year. I watch CNBC a fair bit and note the comments by their Japanese correspondent, economist Takuji Okubo who has warned of political unrest in light of Japan continuing to have the highest level of public debt of all developed countries at over 200% of GDP. Combined with deflation persisting, a reliance on exports to drive growth, and an aging and shrinking population are major long-term challenges for the economy. The IMF has predicted Japan’s growth to shrink by 0.7% this year.
There is confidence coming back to NZ businesses, and the rural sector continues to be buoyed by very strong commodity prices. There should be an excellent turnout (well over 100,000 people) at Fieldays in Mystery Creek, Hamilton this weekend. The NZ housing market is again being led by Auckland with another quarter of stronger sales, and prices having risen 4.1% in Auckland in the past 3 months. Construction is heading into a deepening recession.
From meeting with Presidents at other property investor associations from around the country and looking at the QV and REINZ regional data, outside of Auckland house prices are essentially doing nothing. Rents are moving up strongly in Auckland, and you are likely to be under-renting your 3 bedroom house in South and West Auckland if this is rented at less than $350/week. With the OCR staying at 2.50%, there were fears of inflation meaning this would have to rise by the end of 2011. Whilst this of course could still happen it is less likely to in light of yet another significant Christchurch earthquake.
Unfortunately there have been another round of earthquakes in Christchurch earlier this afternoon. The media coverage I use to track this Twitter, NZ Herald, Stuff, TVOne and TV3 news have all reported no deaths, but a lot more damage. The eastern suburbs have again experienced severe liquefaction, and tens of thousands of people have had drains broken, freshwater mains break and power cut to their homes. Below is a photo of some kitchen damage that incurred in today’s 5.5 Richter magnitude earthquake at 1:00pm (11km deep, 10km east of Christchurch) followed up with a 6.0 Richter magnitude earthquake at 2:20pm (9km deep, 10km south-east of Christchurch), and nine 3.5 or higher Richter magnitude earthquakes to hit Christchurch in the 6 hours since up to the time of writing.
This will be the final straw for many more proud Cantabrians who will move to Timaru, Ashburton, Auckland, Wellington, Nelson, Dunedin, Queenstown, Invercargill and other New Zealand regional centres, and a few who perceive the grass to be greener in Australia. What happened was money markets reacted by selling down the NZ Dollar, which is likely to be temporary. Leading bank economists are predicting that the OCR will now rise later. It may have been raised in late 2011, or early 2012.
As a result floating and short term fixed interest rates are far more likely to stay low longer. This will help the rebuild of Christchurch and investors and home-owners alike all around the country.
Whilst this months OCR announcement and Monetary Policy Statement stated inflation is the fear, and the OCR is the tool the Reserve Bank of NZ will use to combat the effects of inflation. It is hard place to be in the RBNZ as exporters are concerned about the historically high NZ dollar.
The Official Cash Rate (OCR) remains unchanged at 2.50%. Interestingly the Reserve Bank noticed signs of a recovery particularly with commodity prices remaining strong and stated that inflation is a concern. Since the OCR is the tool to fight inflation, this will rise, and the speed of the OCR rise will broadly match the speed of our great nation’s economic recovery.
Reserve Bank Governor Dr Alan Bollard said:
The outlook for the New Zealand economy has improved since the publication of the March Statement.
Economic activity has been significantly disrupted by the Christchurch earthquake. However, while many firms and households – particularly within Canterbury – continue to be adversely affected, it appears the negative confidence effect of the earthquake on economic activity throughout the rest of the country has been limited.
The early signs of recovery noted in the March Statement have continued. Despite some continuing signs of weakness in the world economy, commodity prices remain very strong and firms expect to increase their hiring and capital investment. Reconstruction in Canterbury is projected to add about 2 percentage points to GDP growth over 2012, and boost the level of activity for several years thereafter.
Despite the strong outlook for export earnings, household expenditure is expected to grow only modestly. Household debt remains very high and is expected to constrain retail spending and the housing market for some time. Continued fiscal consolidation will also act to dampen activity.
The New Zealand dollar has appreciated substantially over the past two months. This appreciation, supported by high export prices for primary producers, is negatively affecting other parts of the tradable sector, constraining rebalancing of the New Zealand economy.
Headline inflation is currently being boosted by recent increases in indirect taxes, food and petrol prices, and surveyed expectations of future inflation have edged up. Despite this, indicators of capacity usage and core inflation suggest underlying inflation remains constrained.
As GDP growth picks up, underlying inflation is expected to rise. A gradual increase in the OCR over the next two years will be required to offset this, such that CPI inflation tracks close to the midpoint of the target band over the latter part of the projection. The pace and timing of increases will be guided by the speed of recovery, but for now the OCR remains on hold.”
There is a massive undersupply issue of housing in Auckland right now. This is not helped by high council contributions and levies and a tougher environment to raise development and construction finance. The demand for housing in Auckland is huge. The Auckland Plan discussion document recently released has suggested we need 330,000 houses by 2040. In the next 20 years we will have an increased demand in housing of nearly 40%.
It doesn’t take a tax lawyer to work out what direction rents and house prices will go in with demand like this, and continual undersupply. I will be going into detail for this at the NZ Wealth Mentor Advanced Investment Strategies event this weekend for our mentoring clients.