The full pdf version of the Weekly Overview is contained here.
Weekly Overview May 19 2016
Thursday May 19th 2016
This week I have been on the road so the Overview is on the short side. We take a look at how the Reserve Bank is under-counting the migration boost to Auckland’s population thus under-estimating the rate at which the housing shortage is getting worse and applying upward pressure on prices. Plus we look at how much house prices are rising in Ireland where banks can only lend 3.5 times the borrower’s income.
I am on leave this week and next but forgot to warn of such last week so am sending the Overview out to say that – and to make a few quick comments on the state of the economy and as usual the housing market. There is nothing much new there so give it a miss if you have something better to do.
There is widespread awareness now of the way regional housing markets are rising strongly, and that Auckland has not finished its push higher. With the Reserve Bank expected to cut interest rates later this month and again in June there will clearly be more property demand coming soon from investors – maybe less so first home buyers for whom the problem is not really the interest rate but the property cost and getting a deposit together.
Although some people are optimistic that international dairy prices will rise soon, plenty of forecasters offshore predict still rising supply bringing price restraint, including the US Department of Agriculture which sees no improvement before 2019. Forecasts of rising demand over the long-term remain as robust as ever – but forecasts of supply changing are also as lacking as ever and if you don’t forecast both you can’t reasonably forecast prices.
This week’s Overview is a relatively short and simple one. I take a look at how some people may be overestimating the impact on Auckland house prices of media reports that some people are shifting elsewhere. I also note the way in which increasing investment in some residential property markets appears to be leading to more unoccupied houses.
In this week’s Overview I start by taking a look at reasons why not all banks have passed on all the 0.25% cut in the Reserve Bank’s official cash rate. It comes down to changes in the OCR not being the best measure of changes in overall bank funding costs since the global financial crisis – something well known by the Reserve Bank and a message delivered by all of us since 2008. If the Reserve Bank wants all floating rates to drop at least 0.25% given that the credit spread for us borrowing funds offshore has increased sharply recently, all they have to do is cut the cash rate again. Simple.
The Reserve Bank cut it’s official cash rate another 0.25% this morning so it now sits at a record low of 2.25%, even lower than right after the depths of the global financial crisis. So why cut when the economy is growing near a 3% pace? They are worried about inflation settling uncomfortably low having missed their inflation target range of 1% – 3% for a year and a bit now. Current inflation is only 0.1%. The cash rate cut will lead to some retail lending rates going down, but with bank funding costs offshore rising because of investor concerns about European banks the feed-through in many instances probably won’t amount to the full 0.25%.
This week I discuss the recent reduction in business confidence but how the spread between winners and losers across sectors in NZ at the moment is amazingly wide. If tourists could be encouraged to spend a day frolicking with cows that would be great. Exchange rates have moved little while some retail interest rates have been lifted in response to bank funding costs rising offshore as the world gets concerned about offshore bank exposure to the likes of the energy sector and we Australasian banks get caught in the backwash.
The Overview isn’t a must read this time around in my opinion.