Archive for September, 2011
NZ downgraded to AA
Two of the big three international credit rating agencies, Fitch and Standard & Poors have given New Zealand sovereign credit downgrades from AA+ to AA. They have reviewed the countries and their debts, and we are seen by them to have too much to justify our AA+ rating. As a result we are downgraded.
Andrew Colquhoun, Fitch’s head of Asia-Pacific countries stated last night (NZ time):
New Zealand’s high level of net external debt is an outlier among rated peers – a key vulnerability that is likely to persist as the current account deficit is projected to widen again”
Main Issues
New Zealand has debt (ie. our country’s net external debt) at too high a level to justify our previous AA+ Fitch rating. We were at 70% of annual gross domestic product (GDP) in the June 2011 quarter. One of the biggest issues was household debt, where New Zealand has 150% household debt over household (disposable revenue). This hasn’t changed since the global financial crisis hit in 2008.
The NZ Dollar has weakened in international markets falling to around 76.2 US cents at time of writing. Nearly two months ago we were over 88 US cents.
Impact on Property Investors
There is a real risk that fear will grip in for a little while and banks lending policies tighten. We still source around 40% of money lent in NZ from overseas, and the perceived risk will have gone up as a result of the Fitch downgrade. Standard & Poors are the largest credit rating agency (who downgraded the United States of America famously to AA+ early last month), so we wait with baited breath as to what they will do. The overseas funders are likely to expect a slightly higher return, so there is a real risk interest rates could rise a little bit to compensate them for this risk.
Some Good News
Fitch said the news isn’t totally bad with:
New Zealand remains well placed among the world’s highly rated sovereign credits, with its creditworthiness supported by moderate public indebtedness, fiscal prudence, and strong public institutions.”
I have already told you why I believe the envy tax (also known as Capital Gains Tax – CGT) is not a good idea. Mainly we do not need it. We can trim Government spending to match what we earn, and reward those that put their capital at risk to employ fellow New Zealanders who don’t take the same risks.
When tinkering with the economy and tax system there is always a risk of undesired outcomes. Increasing the rents on tenants who are already facing financial pressures with increasing fuel, grocery and power prices amongst others is not a good thing. The whole system relies on balance. It is a bit like a see-saw. When you add a new item to one side like an envy tax to weigh down property investors, it does raise tenants rent upwards.
The Minister of Housing, Phil Heatley knows this. Have a listen to his landlords.co.nz interview below:
No change in OCR
The Reserve Bank of New Zealand has just issued its September Monetary Policy Statement. This was interesting as the RBNZ Governor, Dr Alan Bollard said:
If recent global developments have only a mild impact on the New Zealand economy, it is likely that the OCR will need to increase New Zealand’s suprisingly strong local economy remains largely at the mercy of developments in the troubled global economy and financial markets…
For now, given the recent intensification in global economic and financial risks, it is prudent to continue to hold the OCR at 2.5 per cent.”
This shows that whilst the New Zealand economy had performed “relatively well”, despite headline inflation increasing slightly since the last Monetary Policy Statement 3 months ago in June, we are increasingly part of a global economy and have terms dictated from overseas events. With some leading French banks being given credit downgrades and other large European bank on negative ratings outlooks, and Greece looking like having a Sovereign bankruptcy, we have a volatile climate. On speaking to leading financial commentator Bernard Hickey of Interest.co.nz over a beer on Tuesday night after our great debate at the Auckland Property Investors’ Association on the moot is property investment productive, he thought that there is even a chance that the OCR could drop. I agree – however I think the status quo will be maintained for a while. However it is all just crystal ball gazing really such are the uncertain global macro-economic times we live in. Dr Bollard acknowledged this with ”at the same time, however, global economic and financial risks have increased.”
On a micro-economic scale rents are rising in New Zealand on the whole slowly, with Auckland going up a bit faster on the back of increased demand from positive migration, and continued undersupply of new houses.
Time to pop the champagne as the manuscript for Invest and Prosper with Property has now been written, approved, with a book cover finally choosing after dozens of mockups and numerous qualitative analysis being done. It has been indexed now and is with local printers. It will be released in just over 3 weeks time.
This is the culmination of over one year’s hard work in drafting the book, working with editors, publishers and key stakeholders. Now it is time for the fun part, promoting it by seminars and events, and hopefully hearing stories of you enjoying the book and profiting from education that you have obtained from reading it. I will give you details of the book tour and doing around the country so you can go to the city nearest you to see me live talking about the book and how to invest in property correctly.
A lot of people have asked me why I wrote this book. The answer is simply that I was asked so many questions from friends and family asking me things like:
- why I invest in property
- how to invest in property
- how to choose an area to invest
- how property investment works
- what property investment strategies I use
- how to avoid making mistakes
- how to finance a property correctly, and much more.