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The well-telegraphed increase in the Official Cash Rae (OCR) last month signals the beginning of the equally well-telegraphed cycle of monetary policy tightening. In its accompanying Monetary Policy Statement, the Reserve Bank (RB) indicated a 200-basis point increase in the OCR over the next two years. This would see the OCR at 4.75% by mid-2016.
Consequently, deposit, mortgage and other lending rates are expected to rise over the next few months. Whether the rises in the OCR (with another one likely in April, and again in June) are fully reflected in these retail interest rates will depend on a combination of several factors. Included among these factors will be individual banks’ own market strategies. Also relevant will be the relative demand for lending, as well as banks’ ability to attract funds both domestically and from offshore (subject to RB regulations as to relevant ratios).
For New Zealand businesses, the increase in interest rates is unlikely to be welcome. However, with credit to the non-agriculture business sector still below that of five years ago, there remains a query as to whether businesses have the appetite for taking on credit. This suggests the higher interest rates may make little short-term impact on businesses decisions. Nevertheless, the signal of constrained demand may have longer-term impacts on such investment plans.
There is, though, likely to be a greater impact where funding of businesses is through mortgage loans on owner’s homes. Here the interest rate rise is set to have a clear dampening effect.
The RB’s own forecast (issued in Monetary Policy Statement) sees a positive growth story for the domestic sector. Their GDP expectation of a 3.5% expansion over the 2015 March year comprises strong growth in house construction and in the household sector’s spending. In contrast, the export sector is expected to put in a relatively muted growth performance.
The picture for forestry exports continues to be positive. Log and timber export volumes are up nearly 18 percent on last year, with annual revenues more than 35 percent higher. Indeed, the annual revenue from the export of raw logs is almost $2.5 billion, a phenomenal 53 percent up on a year ago.
Meat exports are also positive despite static prices. In particular, both quantity and revenues are up about 5 percent on the previous year. Total slaughter numbers have slowed though, as stock numbers have adjusted to last season’s drought.
Further, the wine harvest is looking promising with prices also on the rise. Growth in export revenues of more than 7 percent sees total annual receipts at close to $1.3 billion. And apples has just recorded a very good first month (in both volume and value terms) for the new season (February), which bodes well for the next few months.
Turning to the big ticket item dairy production, in terms of milk solids collected, is running above taht of last season by about 5 percent. Production seems unhindered by drought concerns, although some areas in the North Island are drier than normal. Further, prices are holding steady inasmuch as Fonterra is able to maintain payouts. Whether this payout level is sustainable in the face of relative weakness in global prices (down about 5 percent) is a moot point.
Some of the concerns from recent Fonterra financials stem from the impact of last season’s drought-related production decline (in the latter part of last season). However, the production recovery means these concerns should not be as great as they seem at face value. But, the financial impact on farms of interest rate rises is likely to be a greater concern – especially if these increases coincide with further weakness in global dairy prices.
While tourist numbers have been surprisingly strong, guest night numbers have struggled over recent years. This reflects a long-term change in the composition of tourists (as visitors from Australia and Asia replace those from afar). In addition, shorter-term challenges relating to the exchange rate as well as Christchurch-related capacity have also tested the resilience of the sector.
However, recent data indicates a welcome recovery in guest night numbers. Annual guest night totals are now running at historical highs, having recently climbed past the pre-crisis peak.
This recovery is spread across the sector, with all accommodation types (hotels, motels, backpackers and holiday parks) experiencing increases in guest nights. Solid increases in occupancy rates across the sector, as well as modest increases in lengths of stay (except for motels), bode well for the profitability of many establishments.
Further promising is the picture of an increasingly strong international market. This is in line with the Christchurch re-build gathering momentum. While still below the pre-crisis peak, the rapidity of the recovery since early 2013 is striking. The latest three months records guest nights at more than 7 percent above year-earlier levels. Particularly welcome are the numbers for the West Coast – a tourism region that is closely linked to the fortunes of Canterbury gateway. Here, guest nights for the three months to January totalled more than 13 percent up on year earlier.
Data for January from the Real Estate Institute (REINZ) reflects a noticeable slowdown in activity in house sales across the country. The median days to sale jumped from a fast 32 days in December to a slow 41 days in January. This reading takes this indicator quickly back to where it was 12 months ago.
Supporting this slowdown conclusion are the REINZ median sale price figures. The median sale price across the nation declined to $402,000 in January, noticeably down from the $427,000 reported in December. This level though remains well up on the $370,000 recorded a year earlier.
It also appears this slowdown is being reflected in the nation’s largest market. The January median sale price in Auckland of $569,000 was a large drop from the $600,000 recorded a month earlier. However, in line with the national trends, prices remain well up on the year-earlier level of $509,250.
In the usual course of analysis we would not place too much store on a single month’s observations. However, in this instance, the evidence of a slowdown is further reinforced by Reserve Bank data showing an unambiguous slide in housing loan approvals. As illustrated, the latest 3 months sees loan approvals nearly 10 percent down on year-earlier levels. Indeed, the rapidity of the decline – from 3-month totals of over $16 billion during mid-2013, to under $12 billion in the latest readings – is stark.
Undoubtedly, the Reserve Bank’s loan-to-value ratio (LVR) restrictions are having the desired impact of ‘taking the heat out’ of real estate markets. Whether the extent (or pace) of the easing is what the RB was after remains to be seen. The impact being seen now, though, does ease the earlier pressure on the RB to aggressively lift interest rates.
While every effort is made to ensure that the information, opinions and forecasts included in this publication are accurate and reliable, BERL and all contributors do not accept responsibility for any errors or omissions, or for any loss or damage resulting from reliance on or the use of information, forecasts or opinions it contains.
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