John Paine: April 2007 Finance Newsletter
5 April 07
April 2007 Finance Newsletter
Yesterday the Australian Reserve Bank decided to keep the cash rate target unchanged at 6.25%. Most economists had been saying it would be a close call and the ANZ bank’s comment was “We expect the RBA to hike rates in May following the release of the March quarter CPI in late April.”
The New Zealand Reserve bank doesn’t announce its Official Cash Rate until the 26th of April. Whether or not it will follow Australia’s lead will depend largely on the “pipeline effect” of increasing fixed residential mortgage rates.
There are about $33 billion worth of fixed residential mortgages due for renewal in the next year.
The rise in fixed rates I predicted months ago is gathering momentum. In the last week we’ve been seeing statements such as “BNZ has made significant increases to its fixed rates as of 5pm Friday”, and “ANZ National Bank and Westpac have both increased two-year fixed rates from 8.5% at the start of the month to 8.9%.”
Looking back a year ago to my April 2006 newsletter, then the two-year rate was 7.70%
As BNZ economist Tony Alexander reports in his Weekly Overview, “Only eight weeks ago the two year rate was 7.89% and three weeks ago the seven year rate was a nice 7.77% compared with the current 8.6%. These jumps are probably going to take quite a few people by surprise and will exercise some restraint on the housing market and the domestic economy.”
The key words here are “will exercise some restraint on the housing market and the domestic economy”. This may be enough for the RBNZ to hold rates this month.
But in the medium term we’re seeing no real drop in confidence amongst consumers. A recent Market Focus report from the ANZ sums it up very well.
“The economy remains stuck in the circle of economic success. When people have jobs, they spend. A firm base to growth continues to put pressure on resources. Traditional financial conditions metrics no longer apply. In such an environment, the economy becomes victim of its own success. Interest rates and the currency are likely to remain high as a consequence.”
Over the last few days the expectation of a rise in Australian interest rates has meant the New Zealand dollar has been “dragged along” too. The worry about the “carry trade” and maturing Uridashi and Eurokiwi bonds not being renewed, has not eventuated after the China stock market scare earlier this year. Accordingly the Kiwi dollar has remained high – and gone higher than most would have imagined at US 72 cents plus.
Looking overseas we are starting to see some concern in the U.S. about the mortgage market there.
The slowing U.S. housing market, coupled with rising interest rates, has meant fewer borrowers have been able to keep up with mortgage and loan repayments.
We’ve already seen what they call sub-prime lenders there in big trouble. These are lenders who target customers with poor credit records. New Century Financial, one of the largest sub-prime lenders has just filed for Chapter 11 bankruptcy after it was forced by its backers to repurchase billions of dollars of bad loans.
Some are saying the problems are more deep seated. David Shulman, a senior economist in the University of California’s Anderson Report said “We suspect the problem in the sub-prime area is just the tip of the iceberg for the mortgage market as a whole.”
A lengthy and complete study of the mortgage market in the U.S. by Credit Suisse came to the conclusion that “40% of the market (share of sub-prime and Alt-A) is at risk of significant fallout from tightening credit and increasing regulatory scrutiny. In particular we believe the most pressing areas of concern should be stated income (49% of origination), high CLTV/piggyback (39%), and interest only/negative amortizing loans (23%).”
And if you really want to read a pessimistic view check out the article about “Lemming Loans” which opens “For the first time in the nation’s history, a significant number of Americans are being threatened with the loss of their home even though they still have a steady job.” See - Lemming Loans Drive US Economy
The article claims lenders have been driven by a desire for extra loans and profits by increasing the amount people could borrow against their houses through exotic mortgages including “adjustable-rate loans with little or no money down, loans with no documentation of income or assets, loans with simultaneous second mortgage, mortgages with low initial “teaser’ rates, and even mortgages with monthly payments so low they don’t even pay all the interest due”.
Dr Neville Bennett has given an excellent summary
on www.interest.co.nz. See -
Dr Bennett's Article
Does all this sound familiar?
In previous newsletters I’ve expressed my concern about the ease of raising residential finance in New Zealand with high lending ratios and “low doc” loans –see - Previous Article
So what’s the situation here now? According to a recent article in www.stuff.co.nz, Massey University head of banking studies, David Tripe, said sub-prime mortgage lending and low documentation lending made up less than 3% of the total New Zealand market.
Here at Global Pacific we’re mainly concerned with commercial finance. But we do arrange residential lending of all types, although the most common we do are low doc loans restricted to 80% of purchase price or valuation, as these are usually easier and less expensive. We’re seeing no drop in demand for these from self employed people or commercial borrowers using residential property as collateral security.
Meanwhile housing affordability, both here and in Australia, continues to be a major topic of discussion.
A monthly survey carried out last February by David Chaston showed it took 73.5% of the average take-home pay to make a standard mortgage payment of a median-priced house. Just 5 years ago in January 2002, the figure was 40.3%. To see - January 2002 Document
The champion of housing affordability here – Hugh Pavletich, a Christchurch property developer and co-author of the International Demographia affordability survey – has initiated an inquiry into housing affordability by the Commerce Committee which is inviting public submissions. These close on Friday 15 June. For more information - Inquiry into housing affordability in New Zealand
I’ve covered the housing affordability issue in previous newsletters, and am still of the view any artificial interference is doomed to failure and market forces will eventually mean the property market will sort itself out – as it has done in the past. That doesn’t mean of course there won’t be any pain at the time.
With the commercial property market there seem to be no such worries with the latest Property Council of New Zealand Investment Performance Index survey showing commercial property investors received an average return of 17.78% in the year to December 2006.
Income returns were relatively similar across the various categories with only a small variation between NZ shopping centres, the lowest at 8.22% to Auckland CBD office, the highest at 8.96%. Capital returns however varied considerably with Auckland CBD office again the highest at 13.01%. Not surprisingly Auckland CBD office was the star with a total return of 21.78%.
If you’d like a copy of this survey send me an email with “Send Survey” in the subject line. Have a great Easter break.
John Paine B.Sc. Dip BIA Global Pacific Corporation Limited P O Box 3229,
Auckland, New Zealand
Please note that all opinions and statements expressed in this newsletter are indicative of my opinion only. Global Pacific Corporation Limited issues no invitation to rely on the information contained in this newsletter and intends by this statement to exclude liability for any such opinion and statement.