China, Interest Rates and Property
I’d written this newsletter before I went to this morning’s Post-Budget Breakfast featuring John Key as the speaker, but hadn’t sent it in case he might say something that was relevant to it.
My little China Girl
You shouldn't mess with me
I'll ruin everything you are
I'll give you television
I'll give you eyes of blue
I'll give you men who want to rule the world
To see the David Bowie classic “China Girl” click here
I’d written this newsletter before I went to this morning’s Post-Budget Breakfast featuring John Key as the speaker, but hadn’t sent it in case he might say something that was relevant to it.
Well he did, and in fact there were a number of comments about our economy that are relevant to this issue. Two of the more important of these being, the revenue our schools and universities receive from teaching foreign students, and the massive growth of the “middle class” in Asia offering huge opportunities for New Zealand’s agricultural exports.
So here it is – unchanged.
Chinese Relations
I’ve mentioned New Zealand’s current and potential relationship with China in number of previous newsletters, the most recent being “Merry Christmas, Food's the Future, Happy to be Here” – where I talked about China as an increasing consumer of protein as their eating habits shift, and “The New Year (of the Dragon) is Here” - where I mentioned BNZ economist Tony Alexander’s study of New Zealand’s future relationship with China.
Tony now writes a regular commentary on China and you can read his current and past articles here. These articles are a must read for anyone contemplating trade with China.
The attractiveness of New Zealand as a destination is clear from the increase in the number of Asians living here, whether they be temporary students studying or permanent residents. And these numbers are predicted to grow. For example it is estimated that by 2021, for every 100 residents in Auckland, 27 will be Asian, 17 Pacific Islanders, 12 Maori and 53 will be European. See Herald article here.
If we are to have closer relations with Asia – as is clearly becoming the case – we need to accept the challenges that arise when other nationalities start showing a presence. To some the lack of Asian integration into our society – geographical clustering, speaking their own language - is a threat. In reality that occurs everywhere in the world. Remember your own OE – how integrated were you?
Of course, whoever lives where is immaterial, but closer relations between Asia and Australasia can only benefit us both - and are inevitable over the next few years.
Competitive Residential Interest Rates
In my March newsletter “Property Making a Comeback” I discussed the residential and commercial property markets. If you’re looking to obtain finance for property this is something you should read. To do so look under Financing Property here.
Since then residential interest rates have continued this downward slide as the banks compete for market share. In a recent Herald article, interest.co.nz Bernard Hickey’s reckons it’s time to take advantage of this.
He says there was a time in late 2008 and through 2009 when banks retreated into their shells in the worst of the financial crisis. Lending standards were toughened and margins for some of the riskier types of lending were increased.
“Those days are long gone”, he said. “The Reserve Bank’s half yearly Financial Stability Report shows the banks are sitting on a cash pile worth $49 billion that they’re desperate to lend. That’s more than their cash pile in late 2008.”
The report also says the banks can afford to give borrowers a better deal. Bank net interest margins have risen from 1.87% in September 2009 to 2.32% in March this year - largely because customers have switched from fixed rates, which are less profitable for the banks, to floating rates.
He goes on to say “Banks now know that to keep growing profits they have to either poach business from their rivals or reduce operating costs. They can no longer just watch their profits rise with the tide of a fast-growing mortgage market. Mortgage lending growth has collapsed from about 14 per cent in 2007 to barely more than 2 per cent this year. Retaining business is now even more important than growing business”.
“The Reserve Bank is already seeing signs of this intense competition in a relaxation of lending standards. A bank can win a mortgage in two ways: cut the price with a lower interest rate or offer to lend more to a riskier customer by relaxing credit standards. Many are now doing both.
“The central bank's quarterly survey of lending standards showed the biggest easing of standards in the March quarter since the onset of the global financial crisis. It also showed that lending officers expected an even bigger easing in the June quarter. That means it is now much easier to get a 90 per cent-plus home loan or to borrow an even larger multiple of your income”.
How long this will last nobody knows but economic commentator Roger Kerr’s view is not much. He says “I cannot see the aggressive bank lending lasting too long when you consider that their cost of funds from retail deposits and offshore wholesale borrowing is increasing, not decreasing”. Read his article here.
In my view the ease of obtaining residential finance hasn’t change that much, but it is cheap and provides excellent collateral security for other loans – like acquiring a business.
Popularity of Property Continues
Whatever the expectation for interest rates and inflation, it seems property continues to be New Zealander’s choice for investment. A recent Stuff article claims that low mortgage rates and rising rental returns, have meant New Zealanders have returned to property as their favoured investment.
For the first time since the beginning of 2010, rental property came out top in ASB's latest quarterly investor confidence survey of investments that people felt would give them the best return. 19%of investors surveyed believed rental property offered the best returns, up from 14% in the last quarter.
ASB’s Jonathan Beal says "The low-interest-rate environment seems to be influencing investor perceptions markedly. Investors appear to be moving away from the traditionally lower-risk investment options, and searching for those with the potential for higher returns."
Property Investors' Federation president Andrew King said sentiment was swinging back to rental properties, with cashflows looking positive. "Investors feel the market isn't going to go backwards and, in some areas like Auckland and Christchurch, it is starting to go forward ... that starts to give people confidence.
"They're going to be making better cashflow, due to good rental returns and low interest rates."
To read the Stuff article click here and to see or download the full ASB survey click here.
The government has responded positively to this news. Bill English does not think the property market is returning to bubble territory, and is welcoming signs investors are turning back to property if that leads to more new house builds. See interest.co.nz article here.
Active Market
Earlier this month BNZ economist Tony Alexander reported on the BNZ-REINZ survey saying it “has found a record net 64% of agents perceive prices to be rising compared with just 25% in April. First home buyers remain very active in the market and more investors are appearing.
However, consistent with the comments received from people in the real estate sector in our BNZ Confidence Survey distributed earlier this week, there is little evidence of panic buying or of a boom. Agents feel the market is neither firmly in favour of buyers or sellers” To read or download his very full report click here.
Anecdotal evidence from people I know in the industry confirms an increase in activity with - if anything - more buyers than sellers
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Cheers
JP
John Paine
TBK Capital Limited
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