BNZ Monthly Confidence Survey
It's been a relatively quiet week with only small movements in wholesale interest rates and the exchange rate. The only major piece of economic data released in New Zealand this week was for the labour market this morning but because the range of expectations for employment growth and the unemployment rate was so wide the release of slightly weaker than expected numbers generated only a mild downward movement in the Kiwi dollar and interest rates.
THE WEEK’S ECONOMIC DEVELOPMENTS
Commodity Prices Still Rising
The ANZ Commodity Price Index in world currency terms improved yet again in October rising by 0.3% to sit 2.1% up from a year ago and just 1.5% down from the record level for this index reached in May last year. This is the fourth month in a row when the index has improved and this signals that although the primary export sector is being hit by a still overvalued currency they are not at the same time being badly affected by weak commodity prices. In fact with the very bad drought worsening in Australia there is upward pressure on beef and dairy prices. In New Zealand dollar terms the rebound in our currency over October meant average commodity prices fell by 0.9% in the month but were still 9.3% ahead of a year ago. 9 November 2006
Vehicle Registrations Falling Away - Especially for Tractors
In October there were 16,794 cars registered around New Zealand. This was a 12.3% decline from a year earlier and in the three months to October registrations were down by 17.4% from a year earlier and off by 10.4% for the entire year. There is a downward trend underway an car registrations consistent with restraint in consumer spending. Note though that the 12.3% decline in October from a year earlier was less than be 17.4% fall in September and 22% for in August. This tells us that although spending on cars is weak it is nowhere near collapsing. Some of the earlier weakness may have been a simple knee-jerk response to the hike up in petrol prices and now with those prices coming down people may be less scared of purchasing a motor vehicle.
There were 224 tractors registered around the country in October. This was a very strong 28% decline from a year earlier, 25.8% fall in the October quarter from a year earlier, and 20.6% decline for the entire year. Total tractor registrations for the year to October of 2,375 was the lowest annual number since November 2001. In fact the 722 registrations in the three months to October was 31% below average registration numbers for this period over the past six years. So there is unequivocal substantial weakness in farmer spending on tractors which will undoubtedly be affecting sentiment of not just tractor retailers but others dependent upon farm capital spending. This is why we expect to see the still high annual rate of growth in lending to the farming sector of 15.8% in September falling away relatively quickly soon. Finally, in October there were 2,484 commercial vehicles registered around the country. This was a 15.5% decline from a year earlier, 17% fall in the October quarter from a year ago, and 10.6% decline for the entire year. A pullback in this particular area of business expenditure is underway.
Wage Inflation Eases Slightly
According to the Labour Cost Index private sector ordinary time earnings after adjusting for quality changes increased by 0.8% during the September quarter after rising by 0.6% in the June quarter and 0.7% in the March quarter. The annual rate of change in this particular wages measure decreased to 2.9% from 3% in the June quarter but was unchanged from a year earlier. For the record this particular measure doesn't tend
to alter all that much and for a perhaps better indication of what is happening with wage rates one might look at the experimental index compiled by Statistics New Zealand which tracks specific jobs. This index recorded a rise of 1.4% in the September quarter following gains of 1% of the June quarter and 1.1% of the March quarter. But the annual rate of change decreased to 4.9% from 5.3% in June and 5.1% a year ago. Allowing for all the uncertainties in the data we look at these numbers and conclude that there is not evidence that wages growth in New Zealand is accelerating but that perhaps a wee did of restraint is appearing in light of the slowdown in economic growth. But this restraint is unlikely to be enough to convince the Reserve Bank that the labour market is easing off and will not be applying significant inflationary pressure on the next year or so. They are likely to remain highly cautious.
Labour Market Eases Slightly
The Household Labour Force Survey revealed a small rise in New Zealand's unemployment rate during the September quarter to a seasonally adjusted 3.8% from 3.6% in the June quarter and 3.7% a year ago. The decline mainly came about as a result of a 0.4% fall in employment in the September quarter but we have to remember that this result follows a couple of relatively strong quarters where job numbers increased by 0.9% in the June quarter and 1.2% in the March quarter. Overall the numbers were slightly weaker than market expectations which were for 0.1% growth in job numbers in the quarter. So if anything they take some slight pressure off the Reserve Bank's monetary policy.
One thing we can do is look at the numbers to get a feel for the extent of labour hoarding in the economy. This arises because businesses are unwilling to lay off people in an environment where they know the labour market is structurally tight and getting employees back again when activity picks up further down the track could be impossible. Compared with the September quarter a year ago job numbers were up by 1.5% and ahead by 2.2% in the year to September compared with the year to September 2005. In contrast the number of hours worked during the September quarter was down 0.1% from a year earlier and annual average growth was just 0.5%. Perhaps this shows how vulnerable the labour market is to any shock which would force businesses to lay people off. In the event of a shock businesses would not only lay off some normal proportion of employees but those they have hoarded as well. Thankfully we see no such shock in prospect but it is worth keeping in mind.
For those out of work the average length of unemployment has crept up recently to 16.6 weeks from 15.8 weeks in the June quarter and a low this cycle of 14.9 weeks in the March quarter. Five years ago the average length of unemployment was 21.6 weeks. This recent rise is reflected in an increase in the proportion of those people who are available for work but not seeking it because they feel discouraged to a five-year high for the September quarter of 21.7%. The first graph below shows the upward trend in this particular measure. Also reflecting this levelling off in the tightness in the labour market is the absence of any great change recently in the proportion of those leaving their jobs doing so voluntarily.
Nevertheless, people seem quite happy with their lot with the proportion of part-timers wanting to work fulltime still very low at 3.1% - though this was up from 2.9% a year ago. The proportion of part-timers wanting to work longer hours was the same as a year ago at 15.1%. Note that both part-time and full-time job numbers fell in seasonally adjusted terms during the September quarter with part time numbers down by 0.9% and full-time job numbers off by 0.3%. The proportion of all employees working on a part-time basis fell to a 13 year low of 21.4% from 21.5% in the June quarter and 31.7% a year ago.
Wholesale interest rates rose early this week following the release of stronger than expected labour market data in the United States. Although job numbers in October increased by less than the 120,000 expected at 92,000, there were hefty upward revisions to job growth estimates for the previous few months while the unemployment rate fell to a five-year low of 4.4%. At the same time the ISM non-manufacturing index for October came in stronger than expected at 57.1 from 52.9 in September. This index indicates some improving growth in the services sector which acted to counter pessimism about economic growth last week when the ISM manufacturing index came in relatively weak. The US 10 year government bond yield has ended the week near 4.63% from 4.6% a week ago. There was some mild buying following news of the strong win for the Democrats in US elections on expectations of a tighter stance on spending and if the US troop withdrawal from Iraq is accelerated a quicker end to hefty defence spending. Locally we have seen a small decline in fixed borrowing costs mainly in response to news this morning of a fall in employment during the September quarter of 0.4% and small rise in the unemployment rate to 3.8% from 3.6%. The markets have now largely priced out any chance of the Reserve Bank tightening monetary policy again this cycle although we think there is still about a 25% chance they could increase the official cash rate again. The two year swap rate has ended at 7.42% compared with 7.48% a week ago and this is the lowest such rate since early September.
If I Were a Borrower What Would I Do?
If I was rolling off a much lower interest rate from a couple of years ago and was strapped for cash I'd be inclined to fix five years - in particular if the finance was for an investment property. But if cash flow was not a major issue and the financing was for my own house I would probably opt for the two year fixed interest rate and have a reasonable expectation that in a couple of years time the rate will be lower - perhaps just below 7%.
HOUSING MARKET UPDATE
Barfoot and Thomson Monthly Data
This week we received the monthly data on Auckland real estate activity from Barfoot and Thompson. The numbers show the market still in reasonably good health with the average sale price at a record, sale slightly higher than a year ago, rents up strongly in the month, but perhaps also a few extra properties being placed on the market. The company sold 978 properties in the month which was a 0.8% increase from a year earlier. For the three months to October sales were down from a year earlier by just 2% and in rough seasonally adjusted terms were up by 1.4% from the three months to July. The number is therefore show continued good turnover. The strong seasonally adjusted recovery in sales from unusually low levels late last year and early this year is consistent with other indicators showing the economy recovering after a bout of misplaced pessimism.
The median dwelling sale price improved in the month to $502,000 which was a 5.9% increase on a year earlier. The average sale price over the three months to October was up by 4.8% whereas three months earlier this measure was 8.3% ahead of the year earlier. The data therefore are consistent with the rate of house price inflation continuing to slow down though not at a particularly rapid rate. One certainly cannot yet run any argument that house prices are flat let alone falling.
RENTAL YIELDS - AUCKLAND
The total number of properties listed at the end of the month was 4,526. This represented a 9.2% rise from a year ago and continues a string of annual increases in this number underway since January. The ratio of sales to listings was 21.6% which has down from 23.4% a year ago which indicates some easing in activity since then. However two years ago this particular ratio was 18.5% therefore the market is in a stronger position than it was a couple of years back. Barfoot and Thompson also handily let us know how many properties were freshly listed during the month. In October this number was 1,823 which was a 5.3% rise from a year earlier. But averaging over the three months to October we find the number of fresh listings was down 3.9% from a year ago. So although if one looks just at the monthly result you could start to run an argument that a few more vendor's are placing their properties on the market what one really needs to do is - as with all other indicators the New Zealand - smooth things over a number of months. Doing this one cannot conclude that there is a flood of properties hitting the market. This suggests no great fears are held by yield-constrained investors that the capital gains they are relying on are going to soon disappear.
In the rental market things were reasonably firm in October with the number of fresh lettings up by 3.9% from a year ago at 620. The average rent rose to a record $356 in October compared with $343 in September. This was a hardly earth shattering 4.1% rise from a year earlier however. Looking at the numbers we continue to get a picture of a market which is only very gradually slowing down. We believe the New Zealand housing market still remains reasonably well supported by above average net migration inflows, strong weight of money from investors, people willing to upgrade their properties because of expectations of good future incomes, high job security, and still acceptable levels of fixed housing rates.
Housing Confidence Improves
This past week has also seen the release of the ASB Housing Intentions Survey undertaken each quarter. It doesn't really provide us with much leading information on the housing market but it certainly validates what we are seeing from a wide range of other indicators. As such the positive results are really no surprise. Compared with the June quarter where a net 5% of people said they felt it was a good time to buy a house, in the September quarter this rose slightly to a net 6% positive. But more importantly whereas in the June quarter a net 7% of people said they expected house prices to rise this proportion has jumped strongly to a net 20%.
Why Worry, Be Happy!
So to repeat the headline we ran in the Weekly Overview housing section back on August 17 “ Heck, One May As Well Keep Buying.” After all in spite of all the worries the Reserve Bank have been expressing they haven't done anything extra to attack the housing market since they pushed their official cash rate up by a tiny 0.25% back in December last year. And what has our scary toothless tiger achieved? Nothing really because although floating mortgage rates went from 9.25% to 9.5% the two-year fixed housing rate has gone from 8.25% then to 7.99% now and the five-year fixed housing rate has gone from 7.9% to 7.75%.
Confidence Survey Comments
For your guide here
are the comments about the residential real estate market
made by respondents to our monthly Confidence Survey which
we put out on Monday night.
Real Estate in the Manukau/Papatoetoe area continues to show buyer interest with well priced properties selling in relatively short time frames. The "investor" is no longer a real investor but a buyer who seizes the opportunity to buy and sell for an improved return on what was spent. The market is being sustained by a small percentage of the buying public who have enough finance to be dealing in several properties, and sometimes quite regularly! They obviously feel confident about the market to continue this way!
Rental properties. No vacancies and short down time between tenancies. However, rents have remained static for nearly two years now. Want more property, but the yields aren’t there for expansion.
Real Estate - Eastern Beaches - Auckland. Our market seems to be leveling off. Lots of buyers although more reticent above $600k. Still a shortage of homes to sell which we think is helping to maintain a healthy pace. Should be a good summer season.
Property valuers Noticing a steady fall off in work levels though still satisfactory but property prices under pressure
Rental housing good demand for good quality accommodation
Property valuation and consultancy getting graduate staff is so difficult. Several attempts to employ have been rejected by applicants who want higher salaries!! Market hesitantly optimistic.
Lower South Island Regional Real Estate: Listings shortage, competition fierce, but positive buzz and quietly confident of a good 2007.
Real Estate - selling stock but need more listings. Good Realistic prices, less tyre kickers.
Property valuers A definite dip in the volume of valuations requested for mortgage finance as banks move to use computer generated value indicators and as the volume of sales slows. More activity in compliance valuations as trusts are formed and plenty of activity in the commercial property sector with rental reviews.
I sell residential real estate in Fielding, things are ticking along nicely, people are still out buying at all ends of the spectrum, but especially anything under $200k is being snapped up.
Residential Real Estate - East Coast Bays: Buyers still cautious but interest in new listings has picked up over the past two weeks. In many instances homes are not selling because of vendors unrealistic expectations.
Rents holding on North Shore in Auckland but difficult to get any increase. House prices firm and realistic but hopefully will be a few bargains about though the next 12 months.
Property valuation in Wanaka - becoming more competitive
Residential property investment. No trouble getting tenants. Very little rise in rents in the last few months. I notice increasing media reports of tenants facing rental property shortages in Australia egg Sydney, Canberra, Melbourne and South-east Queensland. This follows on from one of the biggest house building booms in Australia’s history. House building has since reduced to historically low levels on Australia’s east coast.
Real estate residential. Lots of good enquiry from people with plenty of cash available. Purchasers are careful with the money but keen buyers none the less. Vendors are either keen to get out and move on or are overly optimistic and unrealistic in their expectations. Top end homes particularly over priced and slow to sell. Cannot see any great change on the horizon.
Property Valuations Auckland - Residential market is slower than 6 months ago. Prices still steady/strong but volume of activity is down.
Residential property valuation - currently quite patchy. Sales levels have been decreasing which has a flow on effect to the valuation industry.
Real estate Market buoyant short of listings lots of buyers. Prices firm
Residential real estate Pakuranga/Howick - very busy general price range (slow at the top), listings better but still not plenty, good tidy properties selling fast (under ten days). A few private sales around but don’t seem to be selling as fast. Buyers becoming too choosy and missing out.
Residential landlord - Big rise in GV [more than expected], but rents static. Things what you expect for a long-term investment
Page 9 EXCHANGE RATES
The Kiwi dollar started this week buying 67.1 US cents and has finished lower near 66.5 US cents. The decline mainly reflects reduced expectations of further tightening in monetary policy by the Reserve Bank with the greenback itself hardly moving over the week. USD buying pressure following the stronger than expected employment report on Friday night was contained by caution ahead of the United States elections. With a large win for the Democrats there has been some mild short-covering of the US dollar but no substantial change in market views.
Commenting on the US elections our economists in Melbourne wrote the following. “Investors are starting to think that the US mid-term election outcome may be benign overall for the USD, paring earlier short positions. The opposition Democrats won control of the House of Representatives from the Republicans for the first time in 12 years and are a seat short of winning a majority in the Senate (voting counting in Virginia is continuing). Along with the resignation of Defence Secretary Donald Rumsfeld announced overnight, the likelihood of the US pulling its troops out of Iraq on an earlier timetable has risen considerably. This would significantly cut the large US budget deficit, a positive for the USD. Working in the other direction for the USD are Democrat policies to raise the minimum wage (bad for corporate profits) and advocate for more protection of US trade interests. Attention of investors will now likely return to the US economy.” The US dollar has ended the week largely unchanged against the British pound at $1.906 and unchanged against the euro also near $1.276. There was a small gain against the yen to 117.8 from 117.2 last week.
AUD/USD EXCHANGE RATE
The Australian dollar was also having a relatively quiet week until this afternoon when the announcement of an unexpected fall in employment of 32,100 generated some selling. It has ended near US 76.6 cents from 77.3 last week with earlier mild selling following a fall in metals prices over the past couple of days. As expected the Reserve Bank of Australia raised their cash rate by 0.25% on Wednesday to 6.25%. But they gave no indication that they expect to have to raise the cash rate again and we think this will be the peak for the cycle. In the short term nothing jumps out and suggests any obvious likely movements in major exchange rates. The NZD remains well underpinned.