NZ Real Estate- BNZ comments

This snip from Tony Alexander's weekly update pretty much sums up my real estate concerns.
I believe we are seeing the peak (or very near it) of NZ property prices for the next 6-7 years, if not longer. Growth in the last 5-6 years has been driven by people withdrawing and spending equity gained by house price increases- so what happens when house prices reverse, thus reducing household wealth? It won't be pretty, but those with cash in the bank will be ready as always to start buying when the next round of commentators start predicting that we are in a different economic environment and that there will never be decent capital gains in property to be had again (as they did in the last cyclical downturn). Mind you , if oil prices continue at high levels, they might be right next time!

The Housing End Game – Strength For Now But Lower Further Out

This month we have taken a more wide-ranging look at the housing market for a variety of reasons and have chosen to start by considering a factor which many investors hang their hats on – migration flows.
One of the key driving forces in any housing market is population growth. The impact comes via two routes.
The first is simple growth in the number of people needing to be housed. The second is via investors looking for capital gains who buy properties hoping to either rent them out to the new people or (more probably) hoping to sell them to someone else hoping to get some capital gain from the population growth spurt.
On average over the last 20 years there has been a net gain to New Zeaand’s population from long term and permanent migration of 5,000 people. This rses to 13,000 for just the past decade. For the past four years the average gain has been 26,000 people. So we have recently enjoyed a very strong population
growth period. Now that growth is slowing rapidly and in the year to August the net migration gain was just below 7,000 people.
If we look at the three months to August we see that the number of immigrants was up 1% from a year ago versus falling 13% at the same time a year earlier and falling 8% two years ago. So the latest numbers on the face of it don’t look too bad on the inflow side. But the number of emigrants was up 15% from a year ago in the three months to August versus a 15% rise a year earlier and 3% fall two years ago. So we have an interestingly high rate of growth in the number of people eaving. This is not what one would expect to see in response to our economy having the lowest unemployment rate in the OECD, accelerating wages growth, expanding Working for Families middle income welfare package, and growth in the economy of 3.1% over the past year.

We don’t have information on why people are leavingbut what we think people should focus on is the following. It seems reasonable to conclude that as the rate of growthn our economy slows down and the labour market eases up, there will be less incentive for people to move here and greater incentive for people to leave. In fact with growth likely to fall below 2% the push factor could get quite strong – especially as things look OK across the ditch and they are enjoying tax cuts while we are expanding the welfare system.
We see a strong risk that come late this year or early 2006 the annual net migration gain will turn negative.
And if our growing concerns about the imbalances in our economy prove correct then we will see a downward cycle emerging where growth worries cause migration outflows and these cause even more growth and housing worries bringing falling house prices and growing discontent with New Zealand all up.

Residential property investors have had a fantastic run over the past four years with the past year comwith continued strong price rises and acting in our opinion as a sort of “bonus” brought on by low fixed abour market, and a fresh jump in commodity prices. At the moment the real estate market still looks fine with shortages of listings in most parts of the country causing prices to keep rising. But the market is getting further and further out on a limb and the foundations of the strength are steadily eroding.
Population growth is slowing, rental yields are falling and at very low levels, interest rates are rising with perhaps further upside than people realise, jobs growth is going to slow, dwelling supply is growing, and at some point we expect a general wave of caution to go through investors. History shows that picking what an asset market like housing is going to do is very difficult. One never knows when investors will be forced to sell because they are tired of negative cash flows and no onger believe capital gains are coming. You never know when and to what extent developers fall over because investors no longer buy their properties off the
plan and finance companies won’t give the second tier financing they are reliant on. Migration flows are difficult to pick, and as many forecasters have learned over the past year, picking where interest rates go is very difficult when you get structural changes in our economy – in this case massive capacity constraints.

So it is impossible to put a timeframe on what we think will be happening with regard to house prices, and impossible to say how much average house prices will fall by. But as economists our job is to stand back from the current fray and spot the bigger trend – and the bigger trend is completely unsustainable. For the moment the weight of money seeking a home is likely to keep house prices rising, with help from everincreasing construction costs caused by things as diverse asnadequate local authority resources, rising materials costs, and continuing skilled labour shortages. But the foundations of this housing cycle are decidedly shaky and a downturn lies not too far ahead. When it comes investors had best hope that the economy is not at the same time being hit by some fresh negative thing which undermines the high job security which has strongly underpinned the housing market and is still doing so. If that happens then home
buyers are going to get worried about debt servicing costs – with the ratio of debt servicing to disposable income sitting at a record high. This may then bring a round of owner-occupier house sales on top of developers quitting stock and investors cutting their cash flow negative portfolios.
Plus there is one other factor (at least) that is relevant to how long the housing market remains depressed.
We have in recent quarters been noting the way in which the switching of people from floating interest rates to fixed ones has blunted the effectiveness of monetary policy and lengthened the upward leg of the housing cycle. The same applies the other way around. When the NZ economy and housing market tank further down the track and the Reserve Bank eventually gets around to easing monetary policy, it will be a long time before there is much impact on the hip pockets of home owners. This is because it will take a long time for people to roll off fixed rates onto floating rates. In addition, as they do so the saving as they go from a 7.5% or 8% fixed rate to a 7.0% - 7.5% floating rate is not going to be all that great.
This means the flat period for the housing market this cycle could extend longer and deeper than has been the case before.

NZ Economy- General comments from Bollard Oct05

Heading down a rocky road towards hard landing
15.10.05
By Brian Fallow

New Zealand risks waking up with a dreadful hangover because of its debt-fuelled spending binge. Reserve Bank Governor Alan Bollard said as much yesterday in a speech in Rotorua when delivering a stern warning on the country's spend-up which he will keep trying to curb with higher interest rates. Bollard baldly stated the uptrend in house prices would not be sustained and an outright fall in prices was "likely". He said the present levels of consumer spending, boosted by borrowing on the strength of higher house prices as well as higher incomes, were unsustainable. Bollard estimated that households collectively were spending about $1.12 for every $1 of income - not something that could continue indefinitely. The country's saving rate - or lack of - is among the worst of any developed country. While it is a slippery thing to measure exactly, economists say it is clear the savings rate is negative and has been getting worse. Bollard said strong growth in spending showed up in inflation pressure and in the current account deficit. The deficit was nearly $12 billion in the year to June. Inflation figures out on Monday are expected to show a jump of 1.2 per cent in the September quarter, pushing the annual rate to 3.5 per cent, well outside the 1 to 3 per cent band Bollard is required to maintain. Some economists have taken the Governor's warning as reinforcing financial markets' expectations that he will raise the official cash rate by 25 basis points to 7 per cent on October 27, after a seven-month hiatus. The financial markets had already come to regard a rate rise as close to a sure thing and the majority of market economists have too. Others, however, worry that an extra twist of the interest rate screw, on top of the seven Bollard has already made since the start of last year, could cause an economy which is already slowing to stall and trigger a "hard landing". New Zealand's interest rates are already the highest in the developed world. The Institute of Economic Research, releasing its quarterly survey of business opinion on Tuesday, said that firms' responses unambiguously showed a slowing economy and the survey's findings did not justify another rate increase. While firms reported steep rises in their costs - unsurprising in the light of the oil price - there was only a small increase in the proportion of firms saying they intended to raise their prices. Instead, profits were taking the hit. Firms, it seemed, have got the message the Reserve Bank has consistently repeated since the late 1980s: if too many people try to pass on higher costs to their customers, or employers, the bank will quell the risk of endemic inflation by engineering a business environment so bleak they don't dare to. Preventing a return to cost-plus thinking remains the bank's bottom line. But it faces a period where confidence in the low inflation environment will be severely tested. The Reserve Bank's own forecasts have inflation hitting 4 per cent and staying above the top of its target band until the end of next year. The unknown quantity is how long firms can sustain the squeeze to their profit margins from higher oil and wage costs without passing those costs on. Westpac chief economist Brendan O'Donovan said a rate rise later this month seemed likely - the easy way out for a Reserve Bank nervous about inflation, given that the markets were now expecting it. "But it also seems a hike too far." Domestic demand was already slowing and the impact of higher oil prices on the economy had still to flow through, O'Donovan said. Higher interest rates are not only the prescription for inflation. They are also, along with a weaker exchange rate, what is needed to bring the current account deficit down from its present unsustainable 8 per cent of GDP. Such deficits have to be funded by selling assets or, more often, running up debt. The cumulative legacy of decades of deficits is that New Zealand is a net debtor to the rest of the world to the tune of $124 billion or 81 per cent of GDP, "a much higher net liability position than in virtually any other developed country". Deutsche Bank economist Darren Gibbs said Bollard would like the combination of higher interest rates, dampening demand in the economy, and a weaker kiwi dollar also dampening demand by making imports including oil more expensive. "But he knows he cannot control the mix [of interest rates and exchange rate]," Gibbs said. "Hence the warning in the speech to potential foreign investors. In effect he is saying please go away and leave our currency alone." Bollard said that as the current account deficit continued to widen "one would expect the foreign providers of capital to reassess the relative exchange rate risk attached to their investment in New Zealand dollar assets, increasingly recognising that the exchange rate cannot be sustained at current levels". Bollard's problem is that one of the things keeping the dollar high is the relative attractiveness to foreign retail investors of debt securities denominated in kiwi dollars and paying New Zealand interest rates. If he raises rates again on October 27, as now seems highly likely, he will make those securities even more attractive - at first sight at least. That could create demand for New Zealand dollars, keeping the exchange rate high and imports cheap and eroding the competitiveness of exports. It also partially frustrates his attempt to take heat out the housing market, as most mortgages are fixed-rate loans funded to a large extent by those international investors. They take the risk that when their loans are repaid the exchange rate will have moved against them and they will get fewer Japanese yen or euros for their New Zealand dollars. Bollard was reminding them that that risk grows larger the wider the current account deficit becomes. In his monetary policy statement last month, Bollard made it clear his finger was on the interest rate trigger and that one of the key risks was the prospect of significantly more stimulatory fiscal policy, irrespective of which major party led the next Government. He repeated the warning yesterday. "The likelihood of a more expansionary fiscal policy over the coming period has the potential to add inflation pressure in what remains a rather stretched economy. A growing fiscal surplus has clearly made higher levels of government expenditure affordable in the longer term," he said. "However in the short term a more expansionary fiscal stance also has the potential to aggravate the current account deficit as well as increasing the work monetary policy has to do to contain inflation. These pressures will need to be borne in mind as the incoming Government considers its fiscal options."

NZ Real Estate- REINZ Pres. comments.

Whose industry is pointless...?? Interesting comments from someone in the industry- not a completely un-biased opinion; maybe someone should remind him of these comments in a few years...

Buy up, says real estate chief
15.10.05
By Anne Gibson

The head of the country's thriving real estate industry is encouraging homeowners to turn a deaf ear to housing crash predictions. Real Estate Institute president Howard Morley told owners "pay as little attention as possible" to warnings about a crash from Reserve Bank Governor Alan Bollard. Morley said economists and others who made these predictions were part of "a thriving but ultimately pointless little industry", including authors and headline-grabbers predicting a collapse. It was "theoretical nonsense" to suggest the market was overvalued by 17 per cent, as one bank had this week. Economists had said in 2002 that the market had peaked, but since then prices had risen by 57 per cent nationally. Some banks showed how strong they saw the market by lending 100 per cent of a home's value. Latest institute figures show housing sales set a new national median price of $290,000 in August - 70 per cent higher than the $170,000 median price five years ago. Bollard said yesterday house prices were cyclical and the upward trend would not be sustained. The household sector had relied heavily on mortgage debt to finance spending and might go through an "adjustment process" which he predicted would not be painless. BNZ research head Stephen Toplis warned the market would "come unstuck", hit by rising interest rates, investors getting out of the rental market and falling migration. House prices would be down next year, with no movement for three or four years. Prices could be up to 17 per cent overvalued long term.
THE NUMBERS New Zealanders sell about 100,000 houses annually. The industry generates work for 12,000 to 16,000 agents. A new national median house price of $290,000 was set in August. Prices are picked to break the $300,000 barrier soon. The boom started in 2001 and shows few signs of cooling.

NZ Economy- Population

Again, an article by Gareth morgan on population growth. Real estate is driven by supply (houses available and interest rates) and demand (population). It seems clear which way the balance is swinging now...


People Matter - Migration - 6 October 2005

Wasn’t long ago the New Zealand economy was trucking along on the back of high population growth, arising from big net immigration numbers. What’s happened? Growth is holding – just – but we’re running on empty.
Population growth has slumped back to a sub-1% annual rate well down from the 1.7% pa growth earlier this decade and below our long term average rate of 1.2% pa. Indeed the net migration Labour has overseen exceeded in significance that National fostered in the mid-1990’s. It was the largest contribution to population growth from migration we have experienced since the 1950’s.
And the economy responded merrily. Together with falling interest rates it has been population growth over the last few years that have underpinned the giddy appreciation in house prices. It appears however that both pillars of that wealth boom have been knocked over.
During 2002, when population growth peaked at around 1.7% pa, immigration got to 2.5% of the population and emigration was no worse that 1.4% of the population. So 1.1% of the 1.7% growth in population came from net migration. Those new folk of course required accommodation and feeding and some at least contributed to production as well. A population growth-driven economic expansion was established.
Where are we now? Net long-term migration has slumped to be just 0.2% of the population. It’s been flattened. What’s more when we look at whether there’s more people leaving or fewer people arriving than during those heady days of 2002, we find it’s both. Arrivals are down from 2.5% of the population to 1.9%, and departures have jumped from 1.4% to 1.8%.
Those are the numbers, let’s now look at reasons why.
Firstly, the immigration side is a bit easier to decipher as it is controlled by our immigration policy and the approval criteria we apply. We can assume the supply of migrants to New Zealand is for all intents and purposes, infinite. That of course takes no account of the quality of those that wash up. So the government imposes qualifying criteria and those have been anything but steady over recent years.
From the time that National first opened the valves in the mid-1990’s the quality and quantity of migrants has been controversial. Indeed arguably it’s been the raison d'être for Winston Peters’ tenure in politics. In an attempt to raise the quality the government has played with the English language requirements and more recently imposed the requirement of having a job to go to.
These changes choked the numbers coming in although we’ve seen a big growth in temporary visitors, including students and temporary workers. And from the ranks of these have come some “permanent” converts. These days they have an advantage over applicants for migration located overseas in that they already have a job or can more readily find one when they apply to stay. Foreign students may have turned off New Zealand for several reasons including the poor performance of our English Language schools, but temporary workers have remained a vibrant source.
This conversion of temporary visitors ameliorates the fall in numbers of so-called “permanent” arrivals. Nevertheless the overall intake of permanents is down.
The departures side of the equation is far more open to economic influences, there being no institutional barriers to exit. Historically when economic times abroad look better than at home, they go. This is what makes the recent rise in outflow somewhat puzzling. The home economy has been pretty vibrant and yet the numbers leaving have been rising since mid-2003. Sure there have been the factors such as student loans that encourage the outflow but that anomaly has been in place for quite a few years now. Other drivers of the outflow have included despondent recent migrants finding our country not to their taste, businesspeople discouraged by the increasing progressivity of the personal income tax regime here, and that old favourite – a perception that Australia is not only sunnier, but offers a higher standard of living.

As the graph illustrates we’re used to a net outflow of folks to Australia. During our mid-1980’s boom few found reason to leave, then our post-1987 doldrums enticed them to leave in droves. With the 2000 global crash the outflow was stemmed again but of late the increased numbers leaving does defy the conventional wisdom that it’s relative economic performance that’s the major driver of the flow. The loss of population certainly is Australia’s gain as we are short of labour now, and being that way threatens the tenure of our economic recovery.
So where does this lead us? We know that migration policy can work away effectively on the inflow of people, it can’t always get the quality we might require but certainly getting the requisite head count about right isn’t that tricky. Yet we do look to be a bit short on arrivals right now and this is not helping giving that it’s coinciding with a jump in departures. The combined effect has been to almost halve our rate of population growth.
Unless this slump in population growth is reversed then we can expect the growth of this economy to slump with it. Unless of course we discover some elixir to achieve productivity-driven growth. Maybe our current population slump may be just the tonic to force our businesses to adopt production techniques that at last lift overall productivity growth in New Zealand from its torpor up to where it has to be if we are to achieve a lift in living standards in the face an ageing population. That’s a big ask.

Real Estate- Is this where we're headed?

Bankruptcies on rise on eastern seaboard
October 10, 2005 Page Tools

People living along Australia's eastern seaboard have been afflicted by rising bankruptcies as deflating house prices and higher petrol costs sink in.
Victoria, New South Wales and Queensland had a greater numbers of bankruptcies in the September quarter compared to the same time last year.
But Western Australia, Tasmania and South Australia all saw significant falls, according to new figures from the Insolvency and Trustee Service Australia (ITSA).
"I believe that is showing some significance of local factors rather than the broad brush stroke of interest rates," Hall Chadwick insolvency partner Paul Leroy said.
Those living along the eastern seaboard appear to have been more greatly affected by rising petrol prices while house prices - which posted some of the biggest gains along the eastern seaboard in recent years - have experienced the biggest drop compared to the rest of the country, he said.
New South Wales posted a 20.9 per cent increase in bankruptcies to lead the country at 1,900 in total, followed by Queensland (18.3 per cent) and Victoria (9.0 per cent).
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Although the Northern Territory posted the largest increase of 30 per cent, it also posted the lowest overall bankruptcy numbers at 26.
The ACT, WA, South Australia and Tasmania posted falls of 74.4 per cent, 17.8 per cent, 12.2 per cent and 7.5 per cent respectively.
The rising level of bankruptcies along the eastern seaboard boosted the national total by 6.4 per cent to 5529 during the quarter.
Increasing levels of household debt was another area of concern as people find their asset base eroded by a fall in the value of their homes, he said.
With Christmas approaching, Mr Leroy warned consumers to act cautiously and to not rely overly on credit cards.
"If there is an interest rate rise at the end of the year what impact will it have given higher Christmas spending?" he said.

Not interesting, just scary...

Bush: God told me to invade Iraq

08.10.05
By Rupert Cornwell
President George W. Bush has claimed God told him to invade Iraq and attack Afghanistan, as part of a divine mission to bring peace to the Middle East, security for Israel, and Palestinian independence. The President made the assertion during his first meeting with Palestinian leaders in June 2003, according to a new BBC series. >snip

snip< God would tell me, 'George, go and fight those terrorists in Afghanistan.' And I did, and then God would tell me, 'George, go and end the tyranny in Iraq', and I did." >snip

NZ Economy- Landing II

From Tony ALexander's weekly over-view for the BNZ.

The Productivity Problem

One of the measures we should all keep an eye on is the rate of growth of productivity. This is the measure of changes in how much we produce per unit of input. It is usually measured as output per hour worked and it has to be said that data in this area are very poor. Rising productivity is important because it improves the ability of employers to pay higher wages and it means that for any given rate of growth in one’s resources – labour, infrastructure, raw materials, capital – your economy can grow faster without rising inflation. In New Zealand we have enjoyed strong growth for a number of years almost entirely on the back of greater use of existing labour resources and a running down of the spare quantity of resources like roading capacity and electricity. Now we are into what looks like a prolonged period when resources will be in short supply. That means growth will need to be slower than it has been or productivity growth higher if we are to avoid rising inflation.
The fact that inflation is at 2.8% after being suppressed by a 30% rise in the exchange rate, and we are forecasting inflation over 4% soon, should suggest that there is a productivity problem in our economy – and it is a massive and worsening one. We attempt a rough measure of productivity growth by comparing changes in hours worked from Household Labour Force Survey data with output from the production based gross domestic product numbers. When we do this we see that over the past ten years productivity has grown by 1.3% per annum on average. If we look at just the past five years we get growth averaging exactly the same. So there is no acceleration in productivity growth underway using this crude measure. But it is much worse than that.
If we look at just the past year to June we see that with the recently released GDP data thrown in productivity growth was only 0.5%. This is very bad and the number is well below the 1.25% productivity growth assumed by the Reserve Bank for the year to March 2006. The fall in productivity growth implies that our economy’s growth rate has to slow down quite drastically. The fact that this is happening only slowly is where one gets the currently inflation problem from. This has been a key factor behind our strong warnings the past 18 months about inflation this cycle and interest rates, and our continuing view that although the NZD will one day fall out of the sky, this fall is not imminent because the Reserve Bank simply can’t allow to happen until the inflation outlook is much better. That means continued bad news for exporters and increasing pain for the domestic sector as interest rates go up. In fact just sit back and take a look at where these key macro variables are gong at the moment. A lot of attention has gone on the NZD’s fall against the greenback recently to near US 69.5 cents from 71 cents a month ago. But this fall has been minor and comes about mainly because of a rising USD. On the crosses we are appreciating with the NZD now buying 39.3 pence from 38.5 a month ago. This is the highest rate since November 1997. Against the euro we are at 57.7 cents from 56.7 a month ago. Agaat 78.6 from 77.5 a month ago – also the highest rate since late-1997. And against the Australian dollar we remain high near 91 cents.
The pain for exporters is still very strong. This is now being added to by rising financing costs wReserve Bank highly likely to raise its cash rate from the 6.75% they pushed it to in March to 7.0% and then 7.25%. Our target peak for the OCR this cycle has been 7.0% to 7.5% – though we backed away from that a few months ago when it looked like the economy was slowing more than we now know it is, and it looked like the current account blow-out would not be as ugly as it is proving to be. So we have an economy with over-valued property prices, ballooning debt in the household sector with increasing prevalence of 100% financing of home purchases (surely a warning sign), a vastly over-valued oating and fixed interest rates, shortages of skilled and unskilled labour, costly raw materials, rising inflation, declining net immigration, booming dwelling supply, unusually strong sharemarketconsidering the slowing in economic growth – and to cap it all off, the election of a centre-left government with a key policy of middle income welfare and strong influence likely from the Greens.
We fear this downturn in the economy will be harder than earlier thought simply because there are too many imbalances. The chances that we will sail smoothly past so many rocks are very low. Given the problems in place it is impossible to tell exactly where the bulk of the pain will be experienced. But for now we are most concerned about non-pastoral farmers being hit by a continued high exchange rate but not enjoycommodity prices. Then, given the very high probability that the NZD eventually falls away before the Reserve Bank is entirely happy for it to do so the pain will likely shift to the domestic sector and hit retailing and housing. Given the risks and uncertainties prudent investors, business owners, and debt-driven plasma TV/flash car chasing consumers may want to start exercising some caution. And just in case you want to dismiss this and other warnings on the basis that such warnings have been given before this cycle sentence usually tagged onto such past warnings along the lines of “The longer it takes for growth to slow, the greater the risk of a hard landing”. That is where we are at now.
Don’t close up shop – but take care. >snip

NZ Economy- What sort of Landing?

Again, another article by Gareth Morgan dating from April 05, discussing where the economy could go over the next few years. Where are we headed now?

Sifting Through the Economic Scenarios
5 April 2005

There’s a flurry of discussion right now about where the global and New Zealand economies and investment markets are headed. As always pre-election periods tend to arouse the anticipatory saliva, as voters, businesses and political aspirants all look for opportunity amidst the chaos.
Then there’s the economists who endlessly debate hard verus soft landings, currency tumbles and housing collapses – knowing full well that any prognosis is only ever one scenario no matter how robust its internal logic might be. All up then, pre-election months see a feeding frenzy of interest in our future which, once the election passes and Christmas looms, dies a sudden death.
In this last business column from me for a few months, let’s then join in and sift through the economic and investment outlooks, try to get each in perspective, and summarise what the all-up implications are for investors. Right now I see three candidates vying for the scenario of the moment.
The first and most conventional, holds that the New Zealand dollar has now peaked and will drift gently back to its “fair” value of 55-60 cents US, our rate of economic growth will gently ease back and enable inflation-threatening capacity bottlenecks to clear. The Reserve Bank will be able to avoid further interest rates hikes, and after the pause-that-refreshes, the economy will resume a respectable and sustainable growth rate of 3% per annum. Exporters will do handsomely and our balance of payments deficit will be well contained within the band of tolerance our creditors bestow.
This “Dream Scenario” firmly believed by the eternal optimists within the business and political communities, should more aptly be thought of as a “Dreamers” outlook. There are so many things that have to fall in place as to make it pretty much impossible. For instance the US dollar has to settle into an updraught, our inflation has to fall back in the face of a 20% devaluation, and as interest rates drop, housing speculators have to stay in their kennels despite the commercial banks’ best efforts.
A second scenario is one that sees the Reserve Bank forced to raise interest rates further as the likelihood of inflation retreating below 3% fades. This interest rate scenario excites further interest in the NZ dollar, which resumes continues its upward climb. Set against a backdrop of ongoing strong world growth, the export sector stubbornly refuses to fall apart as ever-rising commodity prices cushion it against the higher dollar effects. Meanwhile in the domestic economy the government pour fuel on the flames of overall spending with a raft of infrastructure spends and expansion of the bureaucracy. The construction industry finds the demand for its services burgeoning despite being at full capacity. It is forced to raise prices aggressively in order to assist buyers rank their priorities. Banking sector innovation (aka competition) enables fixed mortgage rates to stay palatable for borrowers prepared still to devote a rising proportion of their incomes to debt servicing.
Under this “Hard Landing” Scenario (which I detailed a couple of weeks ago in this column) there’s finally a wee crisis of confidence in the structure and sustainability of New Zealand’s growth, so the currency plunges from giddy heights and the Reserve Bank is faced with having to sustain very high interest rates to restrain that fall. Economic growth shudders to a halt.
The third scenario is one that sees the NZ dollar leech value as our creditors are no longer excited by our interest rate offerings in the face of rising US rates. For an economy already at full capacity, facing rising inflation as a blossoming government sector competes for resources with a private sector still in top gear, the mainstay of inflation control – the rising dollar – is removed. This gives the Reserve Bank little option but to raise interest rates further, although not as far as under the “Hard Landing” scenario and so we don’t see a rising kiwi dollar.
Under this “Soft Landing” Scenario, the domestic economy enters a few years of “morning after” blues – high interest rates make the housing market too hard, leakage of skilled labour overseas accelerates and the New Zealand economy enters a funk. But in the tradeables sector, farming at least looks perkier thanks to dollar relief, though manufacturing fails to escape an ongoing thrashing from the Chinese price effect. But in all, our balance of payments deficit peaks and slowly comes down. Economic growth would bottom at around 2% pa, although sit there for a few years, waiting for population growth to revive.
So there’s just three scenarios – a dream, a hard and a soft landing. How to choose? The answer is you can’t and we can be reasonably sure none of them will be what actually transpires, but one will be closest. This tells investors, businesses and households then what they must do, given they have to make decisions now, not once they know what has happened. You have to assign probabilities to each and from those you derive the investment strategy that minimises the chances of a meltdown in your portfolio for any given upside you target.
Pick your own probabilities but mine right now would be 20% Dream Scenario, 30% Hard Landing and 50% Soft Landing. But, and here’s the rub, a 50% probability of a soft landing doesn’t mean it is going to happen so investors that position as though it’s certain, deserve a thrashing. That’s the whole point of tactical management – you take a detached viewpoint of the future, distil the implications of all scenarios and position your portfolio, your business, or your household budget to survive the worst scenario whilst capitalising as best you can on the most rosy.

NZ Economy- Cheap Money

This article was published by Gareth Morgan in Aug 05, discussing why interest rates remain low despite the RB...

Cullen’s Call to Compound the Global Glut of Savings
3 August 2005

A conundrum puzzling central banks around the world at present is the fact that bond rates today are lower than they were when interest rates started being raised in mid-2004. There are a number of reasons this could come about but the one that has gathered the widest consensus is that there is a global glut of savings and too few investment opportunities to soak up those monies. The result is that the return required on investment is dropping.
Now of course one country’s surplus is another’s deficit so it is interesting that with some of the record balance of payments imbalances around the world today (deficits for the US, New Zealand and Australia and surpluses for Japan, China and the EU) that the net impact is a fall rather than a rise in global bond rates. More conventionally one would expect, if these imbalances balloon to “critical levels” the risks in international investment to rise as investors fret about the deficit countries’ ability to service their debts. And if risks rise then interest rates rise with them.
But the opposite is occurring. Rates are falling (especially in real terms) giving credence to this view that the world is facing a surplus of funds looking for investment rather than the more conventional shortage of funds compared to the opportunities countries have. This new dilemma has flummoxed no less an expert than Federal Reserve Chairman, Alan Greenspan who just last month expressed his take on it.
“The trend reduction worldwide in long-term yields surely reflects an excess of intended saving over intended investment. This configuration is equivalent to an excess of the supply of funds relative to the demand for investment. What is unclear is whether the excess is due to a glut of saving or a shortfall of investment.”
Even in New Zealand, where arguably we’re pushing the envelope once more on just how high we can get this current account deficit, we see the same phenomenon. Long term interest rates today are lower than when the Reserve Bank recommenced its hike of interest rates at the start of 2004. And prospective inflation is higher now, so real rates are a lot lower than then.
So long as China for instance is willing and allowed (are those protectionist drums I hear?) to increase its investments around the world then in its ongoing trading success lies the source of capital for general world growth. Such a benign scenario could mean a deficit country such as New Zealand could merrily continue funding its standard of living on other people’s money – at least until something rudely interrupts. The willingness of the surplus countries to fund investment elsewhere is certainly for now, the dominant force.
And where’s the evidence that New Zealand is “suffering” from this recycling of the surplus countries’ capital? We have record low unemployment, we have inflationary pressures that are hardly “wild”, and we have a government, despite the occasional politically-motivated denial from Dr Cullen, that has money to burn on its social dreams.
Indeed if we just stay with the New Zealand situation for a minute there’s a real opportunity here. By continuing to drop the real interest rates we face the world is sending us a very strong signal – “borrow more, we love what you do”.
Where then is the strange Kiwi Saver idea of Dr Cullen’s coming from? His Budget speech hypothesised that the reason the country has a permanent and currently expanding balance of payments deficit is because Kiwis aren’t saving enough. But as Dr Greenspan whose skills, you’ll appreciate I have a little more respect in these matters, suggests – it is not for this reason the imbalances persist but rather that others (the Chinese, Japanese and Europeans) save too much! And the trend in interest rates is supporting the Greenspan theory rather than the Cullen one.
So from this heaven-sent supply of global capital New Zealand has the opportunity to expand further its balance-of-payments deficit apparently with impunity. And we’re doing it – we’re out to 7% of GDP heading for 9%. And the closer we are to the ceiling of capacity constraints the faster this spillover into imports will flow. Why would we curb our spending as Dr Cullen requests – the cost of borrowing is falling!
It reminds me of those days back in history when debt, any debt was regarded as the beginning of the end. How fallacious that proved to be – world living standards have rocketed since debt became commonplace in the financing of investment and consumption. Now we have a situation where there’s a global glut of savings – an absolute boon to borrowers such as ourselves – and the Minister of Finance is saying we should save more. Pardon.
Spare a moment for the solemnity of the disaster scenario. One day – who knows when – those countries doing “so well” with their big fat surpluses, are going to wake up and decide to deny us access to them. When that day dawns, the prices of what we’ve bought with our borrowings will come crashing down around our ears. Our house prices, our currency and our jobs will bear the burden of our profligacy. Never mind that this outcome will also destroy the investments of our creditors, apparently it is inevitable. Why else implore Kiwis to save more when the return on savings world wide is plunging?
Pull the other one. Even forgetting the OECD’s finding that governments cannot influence the level of private savings, only its pattern, current financial market conditions are signalling that we should borrow more not save more. Until global conditions change Dr Cullen remains strangely out of phase.
Which raises the question of what his real motivation for Kiwi Saver is? Let’s talk about that next week.

NZ Dollar- deficit not all gloom?

This is an article by Gareth Morgan.


The Imminent Crash of the Kiwi Dollar
28 September 2005

With last week’s announcement that our balance of payments current account has ballooned out to 8% of GDP, and this week’s news that the trade deficit is really ramping thanks to oil, it’s reasonable to forecast that the deficit’s on the way to a record 11% of GDP and that a crash of the NZ dollar is threatening. It was in 1984 when we had our “constitutional crisis” and enforced devaluation that our balance of payments deficit was last out near these levels.
But things have changed. With a floating currency and a significant government surplus there are grounds to conclude that markets are already freely and continually adjusting to developments in our current account. Given the deterioration is coming from the private sector rather than as it was in the 1980’s – from a government running large deficits as well as trying to fix the currency by borrowing overseas reserves – we could even be so blasé as to assert that there is nothing out of order, nothing to worry about.
Over the last week the Kiwi dollar has eased back somewhat, being down 2.5% since election night (trade-weighted measure). Given the close timing of the three events – the election on the 17th, the June quarter current account announcement on the 21st, and the August month trade deficit on the 27th, it’s not possible to unravel which is the main driver of the weakening dollar. The currency dropped 0.5% between the first two announcements, 1.5% between the second and third, and so far has dropped another 0.5% since the trade announcement. Prima facie it looks like the external accounts were the final straw. Interest rates – both short and long have moved up across the whole two weeks.
Given rising inflation, full capacity and a promise of fiscal stimulus, the market is pre-empting a Reserve Bank action. It’s unlikely however market action alone will be sufficient to enable the Bank to avoid a further rate hike, the market is clearly anticipating that. The rise in interest rates will put a brake on how far the Kiwi will fall. This ying and yang between the level of the dollar and the level of interest rates, is of course how the financial market searches for the right mix to accommodate economic growth in a sustainable, non-inflationary manner.
But how bad is the current account deficit? We’ve covered above how it is a very different animal than when it ballooned out under a fixed exchange rate regime and the government had to fund the cost of maintaining a currency at an unsustainable height. Nowadays the expansion is a private sector phenomenon and reflects a number of contrary influences;
(a) despite very high commodity prices, and a terms of trade at its highest for 15 years, we have managed to blow the trade surplus well away. It’s the ballooning deficit on goods that has been the biggest contributor to the current account deterioration
(b) all’s not well on the investment income balance either however. The net outflow of dividends and interest has gushed with the good profit performance of New Zealand businesses and our relatively higher interest rates. This balance stands to get a lot worse if Michael Cullen manages to “deter” Kiwis investing abroad by imposing a punitive and selective capital gains tax on Kiwis investing outside New Zealand. Such “Fortress New Zealand” type policies have always caused damage.
(c) export volumes are now falling while our import volumes continue to grow at about 10% per annum. This suggests that monetary conditions, at least as far as the domestic sector is concerned, are ineffective. With an economy at full capacity, the excess demand is simply spilling abroad. It may need higher interest rates yet to stunt that.
But it’s not all bad. There are ameliorating factors that portend a prolonged period of current account deficit.
(a) the world’s savings surplus. It has been argued that the emerging economies of Eastern Europe and Asia, while benefiting enormously under globalisation, have yet to “free” their consumers at home, who maintain very high savings rates. As a consequence these economies have amassed burgeoning current account surpluses. As the balance of payments across the world must be zero, this means that another set of countries – including New Zealand – have amassed larger current account deficits. These deficits arise due to cheap world interest rates which make it painless for deficit countries to borrow and fund higher consumption levels.
(b) debt servicing cost. Despite persistently high external debt – still around 80% of GDP as it was at the beginning of the 1990’s – our debt servicing burden (ratio of interest to exports) has dropped markedly. In an analogous fashion to the “new paradigm” of low interest rates discovered by households, debtor countries have found this era of lower rates has enabled them too to sustain far higher debt. Households have taken advantage of lower interest rates to expand their mortgages, New Zealand has done similar and expanded overseas debt in line with GDP – and even then found the debt servicing burden lower. The graph illustrates, the fall in the debt service burden coinciding with the fall in international interest rates that the sharemarket crash of 1999 precipitated.
So what do we conclude? It’s analogous to discussion in last week’s column on inadvertent presumptions about constraints on our government spend. In that column the conclusion was that as far as government expansion is concerned there is little constraint – our government spend ratios aren’t high compared to the egalitarian, welfare-spending countries New Zealanders aspire to emulate. European countries tax and maintain government spends 50% higher than our own.

Similarly when it comes to our external borrowing situation what matters in terms of sustainability is the debt servicing ratio, and that has fallen over the last decade – despite a larger current account deficit. This suggests that New Zealand can maintain at least its present degree of external debt and even expand it some – as it has over the last year.
These arguments suggest that the conventional wisdom of a “crisis” in our current account is rather a tenuous assertion and predictions of a concomitant collapse in our dollar should that deficit keep rising, somewhat fanciful as well. What is more likely is that the external deficit does keep growing and that a dual of rising interest rates and an easing currency – the trend of the 2005 – continues – eventually capping the deficit.
Where’s the greatest risk to this rather sanguine prognosis? That global interest rates leap for some reason and the indebted – countries and households – suddenly find their “new world” has gone. If it becomes a creditors’ market again, then currency shocks would be in store, as would be shocks to house values.
That scenario though isn’t obvious.

Bird Flu- facts and figures

Received from friends in the medical industry- not sure how much actual science is involved in this article (and seems like a good ad for Tamiflu), so read it using the same critical facilities we should read all articles in the media with!

Bird Flu facts/figures

●H5N1 flu occurs in poultry in SE Asia and Russia
●It is carried by a wide range of wild birds in South-east Asia and is spread by
Them e.g., to chickens in central Russia. It has recently been recorded in migratory Bird species in Finland, and because of this threat, the Dutch Government has recently banned the outdoor farming of all poultry. NZ sources some of its Migratory birds from areas that currently have infected wild bird populations and such birds are clearly capable of introducing the infection to NZ. However, bird Flu has yet to be recorded in NZ in any incoming wild birds.
●H5N1 is coming! Only the timing and the rapidly with which it explodes around the world is unknown.
●The virus is highly pathogenic to humans e.g. an outbreak in USA in 1998 resulted in 6 deaths in 18 reported cases of chicken to human transmission (33%). Similar infections have led to the recent death of 150+ folk in SE Asia.
●The death rate following human-to-human transmission is unknown. Mortality rates of 20% of infected humans are expected. Based on mortality data from SE Asia, and on that from the 1918 pandemic, highest mortalities thought likely to occur in fit young males, the aged, pregnant women, and those immunologically compromised. Some data exists to suggest lower mortality in infants and those who have been infected with or immunized against distantly related strains of the virus in recent years. However, this is clearly ‘best guess’ information.
●The virulence of the current H5N1 strain may change when it mutates to a human to human form (a virulence ‘shift’) – conceivably virulence may decline, but don’t hold your breath.
●The last ‘great’ flu pandemic occurred in 1918, and killed 1% of all New Zealanders, and c. 50-100,000,000 people worldwide.
●Currently no vaccine is available for H5N1. Work on a vaccine is underway, but until the final form of the virus in humans is known, progress is unlikely. In addition, pharmaceutical companies involved in vaccine production seem unlikely to swap IP with non traditional manufacturers of vaccines.
●Only tools available to stop its spread are the strategies of cordon sanitaire about pockets of infection and the use of a prophylactic –Tamiflu at $70-80 per treatment.
●NZ Government has ordered c. 950 000 doses of Tamiflu to be delivered by the end of 2005. This will provide coverage for c. 20% of the population.
●NZ Medical Council is developing plans for both the exclusion strategy and for the use of Tamiflu. The former includes ring-fencing pockets of infection discovered in NZ, treating all individuals within such pockets with Tamiflu, and excluding all international incoming travelers during any pandemic. In addition all exposed medical professionals and all Police will receive tamiflu should such a pandemic arrive. Protection for the police presumably reflects the concerns over likely public unrest during any pandemic. The best treatment is thus argued to be containment and isolation, but the problems of this strategy with a slow developing but highly infectious disease in obvious. Presumably it does mean a retreat form the work place to safe areas (homes) as soon as any pandemic arrives -i.e., pulling up the drawbridge.
Dr Short argues that this makes sense only if the disease is initially of low virulence and likely to increase with subsequent outbreaks.
● Any such pandemic is likely to take the form of 4-6 successive waves each 5-6 weeks long, with infections from one wave likely to provide immunity for infections in subsequent waves.
●The virulence of H5N1 may decline with successive waves or equally may increase. Which will happen is unclear, but it will influence the sensibility of isolating your family or not from the community during the initial outbreak.
●Tamiflu works by reducing the symptoms of flu and stopping the virus form spreading. It comes in the form of a tablet to be taken daily for the course of 10, has a shelf life of several years, and should be stored below 28 C (i.e. in the fridge). Unfortunately, humans secrete the virus for up to 2 days before developing the symptoms, and for children for up to 15 days post symptom, limiting the possibility of local containment
●Tamiflu effectiveness in humans against H5N1 is unknown, as it has only been trialled in mice! It is contraindicated for infants but this is still under debate.
●Tamiflu is not contraindicated for any common human illness e.g. asthma etc
●Tamiflu remains the best insurance available at this time
●The problem of using Tamiflu is that it may be taken when flu symptoms become apparent, but if the infection is either a cold or some other strain of flu then individual supplies of the drug will be wasted and not available, should the ‘real Thing’ follow soon after
●Buying up of Tamiflu by the general public presents a moral dilemma - does one seek family protection at a time when some medical societies (e.g. Pegasus Health) seek to keep stocks intact for use in local emergencies. Fortunately for those seeking the very greatest protection for their families, many Doctors are prescribing Tamiflu for their patients.

Suggested actions if flu symptoms occur (from Dr Short)

●Standard signs of flu include severe headache, muscle ache, high temperature, coughing and fever.
●Go to bed and rest
●Take 2 Paracetemol at 4-hrly intervals to lower body temperature
●Drink copious quantities of liquids
●Do not overheat. Even though you may feel cold, keeping core body temperatures down is very important.
●Be aware that if after some remission you get sick again, the cause may be bacterial pneumonia and that requires a course of antibiotics
●If H5N1 is thought to be the cause, begin taking Tamiflu as soon as symptoms appear – thus GET YOUR TAMIFLU NOW

If the strain is highly lethal, isolation from the public/rest of family may be the best strategy even by wearing masks, which cut down transmission by c. 80%)

Real Estate- Price Predictions

This seems to be a likely scenario and is one reason why I'm not keen to leap into re right now- however, doesn't preclude prices continuing to rise slightly higher in the short-term.

House price inflation likely to cool slowly
19 September 2005

While house prices are currently greatly inflated compared with the long-term trend, it's likely to take a long time before they adjust back to trend, says Andrew Gawith, an economist at Infometrics.
Infometrics has analysed data on house prices going back 75 years.
"There are long periods where house prices stay away from the trend," Gawith told the New Zealand Mortgage Brokers' Association annual conference last week.
For example, in the early 1950s, house prices rose dramatically above trend and took 10 to 15 years getting back towards trend.
"In the late 1970s, house prices fell in real terms, although you didn't notice because inflation was galloping."
House prices got to 20 per cent below trend for a while and took 12 to 15 years to get back to trend, Gawith says.
House prices are currently 30 per cent over-valued compared with the long-term trend, he says.
"The question you've got to ask yourselves is will they adjust to the long-term trend tomorrow. That's what The Economist magazine's been telling every country that will listen."
If house prices fall 5 per cent next year, that's just a sixth of the gains above trend clawed back, he says.
Gawith attributes the boom to the fact that real floating rates have been extremely low as house prices were bolting.
"That suggests there's plenty of fuel sitting under the housing market. We think that will turn around as house price inflation cools and interest rates won't change much."
While debt-servicing costs are currently high, he expects that will ease over the next few years. The proportion of gross income needed to service a mortgage is 50 per cent in some cases now with floating rate mortgages and slightly less for fixed rate mortgages, he says.
People are prepared to take the risk of such a high debt burden because they expect their incomes to rise.
That's probably true going forward, given that there will be tax cuts regardless of who has formed the next government and because the tight labour market makes it likely wages will rise, Gawith says.
With building costs rising about 8 per cent a year and section prices rising about 22 per cent, since prices of existing homes are rising about 13 per cent a year, it's still cheaper to buy an existing home than to build a new one.
"That's why house prices continue to rise while building consents are dropping."
Gawith says the supply and demand position for housing is currently neutral but that the country is likely to be over-stocked in 2007 to 2009.

Bird Flu- US preparations for

U.S.: Billions to fight avian flu

Government is stepping up spending as fears about new pandemic grow; Roche, Sanofi seen as winners.
October 6, 2005: 2:17 PM EDT By Aaron Smith, CNN/Money staff writer

NEW YORK (CNN/Money) - The U.S. government is getting set to add billions of dollars to its budget to build a stockpile of drugs to fight the threat of a deadly avian flu virus, and European drugmakers are considered the top candidates for federal funds.
But White House officials will meet with representatives from the U.S. pharmaceutical industry Friday to encourage them to get involved in making flu vaccine amid fears of an avian flu pandemic, CNN has learned.
Most U.S. drugmakers have stopped making flu vaccines for a variety of reasons, but many public health advocates believe having a reliable supply of the vaccine may be the best way to contain a "bird flu" pandemic in humans.
The avian flu, also known as H5N1, has killed more than 60 people in Asia. Some public health experts are concerned that it could surface here, particularly after scientists announced Wednesday they had reconstructed the influenza virus that killed up to 50 million people in 1918 -- and discovered that it was a bird flu that had jumped to humans.
The Senate has approved nearly $4 billion to stockpile medications to protect the populace against avian flu, said Jim Manley, spokesman for Senate Minority Leader Harry Reid, the Nevada Democrat who's one of the lead sponsors for the budget amendment.
The amendment, which needs to be reconciled with a similar measure passed by the House, is in addition to the $5.6 billion Bioshield budget that's being used to stockpile drugs in preparation for the threat of terrorist attack.
The funding would be added to the Department of Defense budget "to stockpile anti-virals and necessary medical supplies" and "expand global surveillance and domestic vaccine infrastructure," according to Sen. Reid's Oct. 4 letter to President Bush seeking his support.
The additional money would also be used to improve emergency preparedness centers and hospitals, as well as "risk communication" to the American public.

NZ Currency- Current Acct

This article speaks for itself...

NZ debt heading for 'banana republic' status
22.09.05
By Adam Bennett

Latest current account figures show New Zealand is headed for "banana republic" levels of debt faster than anyone expected, ANZ economist John McDermott said yesterday. In the year to June, foreign investors hoovered more profits out of the country while strong demand for imports and higher oil prices saw even more cash pumped offshore. That pushed our current account - which measures all our dealings with the rest of the world, including investments and trade - to a deficit of $11.89 billion, close to 8 per cent of GDP. Statistics NZ said the main factors were a rise in income paid to offshore investors and an increase in the value of imports, particularly petrol and other fuel which rose by 32.5 per cent over the year. The deficit was well up on the 7.5 per cent of GDP most economists had expected and a long way above the 5.2 per cent for the June 2004 year when the deficit was $7.2 billion. "At 8 per cent it's very large and very troubling and it will get worse," said McDermott. A current account deficit above 5 per cent of GDP is generally reckoned to be a negative for any economy and tends to weigh on its currency. But the kiwi remains well sought by foreign investors. If the currency stays firm the current account deficit is expected to rise, and if it eases our export sector will take time to recover while imports become more expensive. "So it almost doesn't matter what we do at this point," said McDermott. "New Zealand is going to get a current account deficit of 10 per cent of GDP. That looks, in the words of Paul Keating, like a banana republic." BNZ economist Craig Ebert also believed a figure of 10 per cent of GDP was "probable". He blamed "King Kong domestic demand" and said an interest rate rise was looking more likely. Finance Minister Michael Cullen said the "sharp deterioration" in the current account reinforced his warnings about the danger of National's planned across-the-board tax cuts. "This is no time to be stimulating demand in the economy," he said. "Instead the focus must be on assisting exporters and, in the longer term, on encouraging New Zealanders to save more through initiatives such as KiwiSaver." But Greens co-leader Rod Donald said no matter how hard exporters ran, "they're not going to catch up with the trade deficit ... We've also go to focus on import substitution".

Real Estate- Yields low.

What happens to real-estate if oil-induced inflation causes governments worldwide to continue pushing up interest rates to curb? Growth for the past several years has been consumer-driven: increases in real-estate due to cheap-money have enabled households to withdraw equity from housing, thus increasing house-hold debt. What happens when the cheap money stops?

I suspect that as investors become dis-enchanted with residential yields, house sales will follow.
There was another similar article in the Press last weekend on the same subject, but in Chch.



Investors caught between rent and mortgage
20 March 2005
By TIM HUNTER

Rising interest rates and a defiantly strong housing market could create a double whammy for investors in rental property as stagnant rents struggle to meet rising costs.
Since Reserve Bank chief Alan Bollard increased the official cash rate by a quarter point to 6.75%, mortgage rates have followed suit. Floating rates now top 9%, and many fixed-rate loans are more than 8%.
Bollard has not ruled out further interest rate rises.
Real Estate Institute figures last week showed the national median house price reached a record in February, up from $265,000 in January to $269,200 last month.
In Auckland, the median house price rose 14.3% in the year to February, reaching $355,000.
But rents have not kept pace with soaring house prices. The REINZ figures show the median rental for a three-bedroom house in Auckland was $380 a week in February, 2.7% more than it was in February last year.
At those levels, Auckland rental property would produce a gross yield of 5.6%, down from 6.2% last year.

Rob Macdonald, director of property management firm Crockers, said the number of landlords with unreasonable rent income expectations had increased.
Crocker's figures show some rents are dropping, but other landlords, many facing rising mortgage costs, were unwilling to drop their rents.
However, in a market where tenants were generally spoilt for choice, other landlords were beginning to face the prospect of digging into their pockets to meet mortgage payments.
"Ask yourself, 'Is my property honestly in good enough shape to attract a decent tenant?'. And if the answer is no, then do not expect a bull run - do something about it."
Many property investors seemed insensitive to yield, Macdonald said, "which is amazing".
"People believe the capital growth will get them out the other end, and history has mostly proven them correct."
But for those facing an unbridgable gap between rent and rising costs, "consider selling in what is essentially still a good market".

Real Estate- houses needed?

What if house prices were to get cheaper? Is house ownership dropping because of high property prices or because people (esp. young people) have been encouraged to spend (have now, pay later) and not save to enter the housig market? Who is going to provide rental accomodation while rents are falling and house prices are going up?

Hungry housing will need $50b

By ROELAND van den BERGH
The residential property market will need $50 billion of new investment during the next 10 years to cope with demand, a report by Centre for Housing Research says.
Significant new public and private investment will be needed to finance the necessary expansion of the owned and rented housing stock as house prices become increasingly out of reach of young people and low-income earners.
Reduced ownership affordability will place an increasing reliance on renting, the report says.
The capital requirement for new housing is based on a building cost of $250,000 for a rental unit. Of the total needed $32.5 billion will have to come from the private sector, assuming the government public housing stock continues to increase by 1000 a year.
"These capital requirements are similar to the levels of investment that have occurred in recent years."
As a result, the pressure on the building industry is unlikely to exceed that of the past five years.
"The key issue is: will similar amounts of capital be available if the outlook for the residential rental investment market soften?"
Rental values have not kept pace with the increase in property values in recent years, and some recent investors are being hurt by falling rents and higher interest rates.
The total number of households is expected to increase by about 20,500 a year to 1.75 million during the next 10 years.
Of that, 206,490 will be in rented properties and 101,230 owned.
Just under half of that growth will be in the Auckland region and 70 per cent in the upper half of the North Island.
The report shows New Zealanders' dream of owning their own home is not waning, but their ability to achieve the goal is.
The national home ownership rate is forecast to decrease to 61.8 per cent by 2016 from 68 per cent now.
Rapidly rising house prices and the inability to save a deposit and household debt are the biggest hurdle to home ownership, the Centre for Housing Research report says.
While it might be more difficult and take longer for people to get into home ownership compared with 30 to 40 years ago, the desire is still strong.
Most of the participants in a focus group renting in Auckland and Hawke's Bay aspired to own their own home in 10 years.
"The desire for home ownership remains very strong and well ahead of the proportion of households actually currently owning," the report says.
Moreover, most aged between 18 and 40 want to live in a large house on large sections, but requiring minimal maintenance.
The probability of home ownership has been falling since 1991, when the proportion of ownership peaked at 73.8 per cent, though the number of households actually owning had risen.
"Accompanying the fall in ownership rates has been redistribution of home ownership away from younger to older households," the report says.
"The fall in ownership has disproportionately affected younger, low-income households."
Households with people aged 65 years and over are expected to increase by 104,190 during the next five years, compared with just 4740 for younger age groups.
"The current trends in home ownership rates combined with our aging population will have a maximum impact in 2050."
New Zealand's housing trends are similar to other Western countries.
"We are currently experiencing the downside of policy decisions made in previous decades.
"We need to act now to anticipate the environment in 20 years," the report says.