When The Barrel’s Empty
Last week I wrote about the weakness in world sharemarkets in terms of specific factors. These included losses for energy sector businesses because of the structural decline in oil prices, slowing growth in China and worries about debt and capital outflows, weakness in the Japanese economy, and worries about the impact of tightening US monetary policy. But there are wider issues in play which also lie behind the growing disquiet.
One of these is the ineffectiveness of very loose monetary policies in recent years in stimulating growth in Europe and Japan. Another rapidly rising worry is the inability of loose monetary policies to boost inflation, and the growing uselessness of central banks maintaining 2% inflation targets when they seemingly no longer have the tools to much influence inflation. Related to that is concern that as they keep easing to aim at a target they are no longer able to hit the flood of cheap money will cause asset bubbles and collapses bringing new economic woe.
Related to that is the realisation that central banks have very little ability any longer to insulate their economies when not just cyclical but shock-driven downturns come along.
So as the monetary policy backstop disappears from investor and business expectations the risk is that investors rush to less risky assets – bonds – and businesses build even greater cash buffers and hold off on investments.
This big picture loss of monetary policy effectiveness means come the next wave of shocks countries will need to rely upon fiscal policies – but from governments with already large debts.
The way out is structural economic reforms aimed at boosting the ability of economies to adapt to change. But such reforms bring short-term pain, there is no appetite in Europe or Japan to inflict or accept such pain, and out of this will come a long-term redirection of capital away from those parts of the world toward America, Australasia, and the rest of Asia. These big shifts mean we should expect continued bouts of extreme financial market volatility.
Our monthly Property Focus publication provides an independent appraisal of recent developments in the property market.
THE MONTH IN REVIEW
Governor Wheeler has effectively ruled out OCR hikes to counter housing market strength, but the RBNZ has acknowledged they are very mindful of housing excesses and are now also watching some regional housing markets more closely. October sales figures, however, showed that regulatory changes intended to slow investor demand are impacting, with a regionally broad-based fall in sales activity and lower annual house price inflation. The hope is that such measures will provide more time for the lift in dwelling supply to deliver greater balance to the Auckland market in particular, but with net immigration inflows still booming, this is a moving target. Credit growth has followed the housing market and households are re-leveraging off already high debt levels.
House prices and sales fell in October, coinciding with the October introduction of government measures to slow investor demand. House prices in Auckland look stretched relative to both incomes and rents, with support to prices provided by lower fixed mortgage interest rates, tight dwelling supply, and booming net immigration. Other regions look well placed to outperform our largest city in terms of price growth from here.
Momentum across the economy slowed over the first half of the year, but the economy is far from weak. Challenges posed by low dairy export prices, peaking earthquake rebuild activity, capacity bottlenecks in some sectors and some deterioration in structural metrics are being offset by supportive financial conditions and strength in construction, non-dairy agriculture, tourism, and housing outside of Auckland. The risk profile still has a modestly negative skew (courtesy of risks around the global scene and commodity prices), but we can now see some upside domestic growth risks too. The timelier indicators suggest the economy performed better in the second half of this year than the first. We expect 2.5% growth in 2015; that’s respectable.
MORTGAGE BORROWING STRATEGY
This month saw a period of stability in rates, with only modest moves in some special fixed mortgage interest rates. Special rates for one and two-year tenors are at (or close to) multi-decade lows. Borrowers could choose to spread fixed terms across both tenors to stagger roll-overs, although if we had to choose one, we have a mild preference for the two-year rate which offers greater certainty. With no OCR rises on the horizon, longer-term rates – while historically low – don’t offer the same value, although they do provide certainty.
FEATURE ARTICLE: OUR CHANGING POPULATION
Our analysis suggests that demographic changes will result in a slowing in labour force growth, even allowing for a continued shift higher in workforce participation. All else equal this is likely to knock about half a percentage point off annual labour force growth from next decade onwards. Differences in regional growth rates are likely to persist, and some regions will be looking at population falls within a few decades. This will have implications for planning future infrastructure provision. Population ageing is not a phenomenon that’s specific to New Zealand. Technological and population trends are hard to predict and migration flows between New Zealand and the rest of the world are large and variable.
This is one of the better articles explaining house price rises. Hope you find it interesting and useful.
Sunil Prakash Financial Services Limited
Sunil Prakash | Managing Director