Finance Companies - warning

An interesting snip from the Herald- I would consider the drivers listed at the end (interest rate spike has already happened too) quite likely...

Downturn warning
22.11.05 7.40am

Debt rating agency Standard and Poor's says the New Zealand finance sector appears to be in reasonably sound state, but has echoed warnings by New Zealand regulators of the risks it faces in a downturn. S&P analyst Craig Bennett said in the current benign economic environment, most companies would generate profits sufficient to supports their ability to service their debenture issues. The levels of non-performing assets across the industry would remain manageable. But an unexpected spike in interest rates or unemployment, deterioration in property prices, or an economic downturn, will take its toll on the finance company sector.

Oil Price - Forecast by Prof. Owen

Seems highly optomistic to me...

Higher oil output to push down petrol price
By Matt Wade
November 19, 2005


The price of oil is likely to fall to about $US35 a barrel over the next few years and push petrol back down to about $1 a litre, an independent expert predicts.
An energy economist, Associate Professor Anthony Owen at the University of NSW, says the world has plenty of oil and it is only a matter of time before production and refinery capacity increase to meet growing global demand.
"There's stacks of oil available in the world," he said.
"Provided the investment is available, oil can be produced at a price that is certainly lower than it is at the moment."
Dr Owen made his predictions in a paper at the University of NSW Centre for Energy and Environmental Markets conference yesterday. He said extreme price fluctuations in the past and a lack of information about oil reserves had undermined investment in the oil production.
"Oil is a very volatile market and lots of people have had their fingers burnt and remember it."
Dr Owen said predictions that oil supplies were running out and would soon become prohibitively expensive - the so called "peak oil" argument - were scare tactics.
In addition to conventional sources, he said, there were considerable unconventional sources of oil, including oil sands and oil shales, which could be tapped in the future with new technologies.
The price of crude oil hit a record just above $US70 a barrel in late August and lifted petrol prices to $1.40 a litre. But the price has fallen, and reached a five-month low of $US56.33 a barrel on Thursday night.
The average price in Sydney yesterday was just under $1.20 a litre, according to the NRMA.
Bottlenecks throughout the "oil cycle" had contributed to higher prices recently, including limited petrol refinery capacity.
"Crude oil price increases of 2005 largely reflect the uncertain environment and expectations of future market tightness in production capacity," Dr Owen said.
But he believes oil prices will head down over the next three to five years as more supply capacity comes on line.
"I think you are going to see the oil price settle down in the mid-30s [$US] over the next couple of years," he said.
"That's the sort of price that will encourage investment in future production facilities."
If the price fell to $US35 a barrel, motorists could expect bowser prices to drop by about 20 cents a litre.
An unexpected downturn in the world economy would drive the price down even further. "A good recession usually brings petrol prices down," Dr Owen said.
However, alternative technologies would have to be adopted for environmental reasons in the longer-term, Dr Owen said. Global energy demand is expected to increase by 50 per cent by 2030, increasing emissions of CO 2 by 52 per cent.
"If oil is produced to meet demand over the next 25 to 30 years, then we are going to have dreadful environmental problems," he said.
Unless alternative technologies are adopted, a growing proportion of oil will be sourced in the Middle East, which may intensify energy-security problems.
Dr Owen said a stable oil price of around $US30-$35 a barrel would encourage investment in, and the use of, alternatives to conventional oil supplies.

NZ Economy - BNZ Comment Nov 05

Again, more warning from the BNZ's chief economist. Bold items mine.

The Reserve Bank Governor made his first serious speech about the inflation problem on October 14. If we measure the passage of time since the RB’s overdue recognition of the magnitude of the situation in weeks then we are currently at the end of RB Panic Week 4. Realistically it is too early to expect that the Governor’s strong comments will have had much impact on household borrowing and spending behaviour. But for the record what do we know now that we did not four weeks ago?
First, from monthly Barfoot & Thompson data we know that the Auckland housing market was still characterised by rising prices in October with a record average sale price of $474,000 from $469,000. Seasonally adjusted sales were off a tad from September but that could be because listings were down 16% from a year ago.
Second, heading into his comments people were more confident about house prices rising than at any other time since late-2003 according to the ASB Housing Intentions Survey.
Third, wages growth has proved stronger than thought which helps explain why people remain willing to borrow and spend. An experimental series published by Statistics NZ puts annual private sector wages growth at 5.5% from 4.7% a year ago.
Fourth, car registrations were muted in October but the series can be volatile. Fifth, average export prices eased 0.7% in the month but still sat 22% above their long term average. This continues to suggest the RB will not be getting much downward pressure on growth this cycle from the farming sector.
Fifth, whatever negative impact on consumer confidence his comments have had may have been consumer reaction to falling petrol prices.
Finally we learned that in the September quarter the unemployment rate fel to a record low for NZ of 3.4%, that employment rose 1.3% in the quarter and not the 0.3% which had been expected. We also learned that a record proportion of the working age population is already in work, that annual productivity growth for the economy may now be negative, and that optimism about securing a job is at a record high (records starting in about 1986). These labour market results are extremely strong and not only make a 0.25% rise in the OCR come December 8 a virtual certainty, they also raise the question of whether a 0.5% move could occur. This looks more likely now than for any previous rate move this cycle. We examine the labour market data in The RB Will Win.

During the week we received some positive feedback on radio comments made about the Reserve Bank “winning” ther inflation fight and the only thing in doubt being what level the RB needs to push interest rates to in order to secure the low inflation victory. These comments and other similar ones are aimed at those people who instead of getting themselves ready for much weaker growth are moaning about -the need for low inflation in the first place -the nature of the inflation target -the fact exporters take so much of the pain -how the official cash rate is a very “blunt” instrument -having a Reserve Bank at all Suggestions for how to deal with the inflation problem are flowing thick and fast – with an emphasis on the thick. Some people have send long emails suggesting that instead of raising interest rates to slow economic growth the RB should lower them. The theory is that import prices will rise as the currency falls and people will somehow spend less so the economy will slow down. Actually the rise in import prices will directly boost inflation, the lower currency will boost export incomes and lead to greater spending on consumer goods etc. by exporters, while there will also be a lift in production, income and spending for companies competing with imports – again with inflationary consequences. Lower interest rates will also boost spending (people borrow more as interest rates get lower – go ask a student) and this extra borrowing will boost economic activity, resource use, and inflation. Someone else suggested raising GST so people cut back on their spending. Huhh? Higher GST will boost inflation and in a tight labour market lead immediately to higher wage demands – again driving more The suggestion of fixing the NZD to protect exporters when an inflation fight is on has also been made. But doing this means losing all control over interest rates which must be raised or lowered to enhance or stem flows of funds into the NZD. If you try to remove volatility in one variable you create greater volatility elsewhere – in this case including not just interest rates but the housing market and farm incomes in particular. The NZD tends to rise and fall with commodity prices and reduce the NZD in the hand impact on farmers of commodity price trends. Without the exchange rate offset the NZD payment fluctuations would be greatly increased – with implications for financing ratios. The RB Governor has “suggested” that we banks help him by being less willing to lend money. Would you like that? The suggestion seems to be that we should not run “sales’ as other retailers do, develop new products or run innovative advertising campaigns in order to try and grow market share, and instead keep pricing our loans at maximum rates. Perhaps the RB envisages us having some official role in implementing monetary policy – in whch case the laws against company collusion would need to be rewritten, and we’d need to negotiate what salaries we should be paid for this part-time work running the RB’s monetary policy. The Reserve Bank has known about the upward trend in loans at fixed versus floating rates since it started three years ago – they publish the data. They have known about the growng divergence between floating and fixed interest rates since they started tightening in January last year. RB staff borrow money as well – and again they publish the data. Can they not have read the comments from the Federal Reserve Chairman many months ago describing the continued low level of (US) fixed interest rates as a “conundrum”. The RB have also known about the growth in lending by non-registered banks for many years also. The Reserve Bank have their job and we have ours, and just as we take into account cyclical movements in interest rates and economic growth as we grow our business, so too does the RB need to take into account long running changes in mortgage financing when setting monetary policy. To those people who having read this section now feel like sending in a long email supporting their theory – don’t get too optimistic about a reply. Our focus is on what we believe “is” happening and what we believe “will” happen not what we and others might think “should” happen. Debating alternative monetary policy implementation methods can be interesting but ultimately is completely irrelevant when it comes to preparing for what is to come – and the more time one spends on such futile debate the greater the chance one gets blindsided by the rampant monetary policy machine. So deal with what the RB will do not what you want from them for Christmas, and where relevant batten the hatches. There is a storm coming and if you’ve only been in business since everything has been rosy from about 1999 then you’re going to get a lesson in the fundamental volatile nature of the New Zealand economy.

Real Estate- Infometrics predicts higher

Thought I'd post this as an interesting comment; Infometrics believes house prices will continue to rise (15% in the next 3 years in Auckland), which is different from what most economists say. Mind you, that's only 5% pa, which is just above inflation.

Population and politics drive house prices in main centres
10.11.05
By Anne Gibson

House prices in Auckland will shoot up 15 per cent in the next three years, rising faster than in most others areas, according to forecaster Infometrics. Its findings, just released by PMI Mortgage Insurance, shows Auckland will be matched only by Wellington. But prices in other areas will rise more sedately, stay the same or fall. Infometrics senior economist Gareth Kiernan cited strong population growth projections for Auckland and continued job stability in Wellington's public sector after Labour's re-election as the main factors that would drive up prices in those two cities. The robustness of the economy buoyed people's confidence in their own financial strength, which also helped to fuel the market, said Mr Kiernan. "Unemployment doesn't look like it's going to go above 4 per cent or 5 per cent in the foreseeable future because there's simply not enough people out there," he said. Infometrics found that although housing had been predicted to decline this year, there were few signs of the market showing any inclination to slow. "Despite higher property prices, residential demand in New Zealand continues to grow," the report said. "Recent rises in fixed and floating mortgage rates have increased speculation that activity in the housing market will start declining. "Although further decreases in sales volumes are likely over the next year, this fall is not expected to be significant."
Although price rises would not be as spectacular, they would increase 7 per cent nationally by June next year, said Infometrics. PMI chief executive Ian Graham singled out high employment levels as the driving factor behind the continued confidence. "People purchasing homes will continue to be confident about their ability to service debt because of low unemployment, which is expected to continue," he said. Statistics New Zealand released figures this week which showed wage rises accelerated in the September quarter, making another interest rate rise by the Reserve Bank nearly a certainty.

Real Estate- Aussie house prices drop

Will the rest of Australia go the same way, will we follow or just places like Nelson, Queenstown, etc?

House prices on east coast fall further

November 7, 2005 - 6:39PM

House prices on the nation's eastern seaboard continue to fall, backing up the Reserve Bank of Australia's (RBA) view that the market remains subdued.
New figures show house prices declined in four of the seven capital cities measured by Australian Property Monitors (APM) during the September quarter.
Canberra recorded the largest quarterly fall, with prices declining by two per cent to a median price of $401,000, followed by Sydney, where prices decreased by 1.5 per cent to $520,000.
Sydney house prices are now down 8.9 per cent from the peak recorded in the March quarter 2004, the sharpest decline for any of the measured capital cities since the downturn commenced in early 2004.
Sydney also recorded the largest decrease in median unit prices, with a fall of 2.3 per cent in the September quarter.
Median house prices dropped by one per cent to $339,000 in Melbourne and fell by 0.9 per cent to $319,000 in Brisbane, according to APM's composition-adjusted median house prices series for the quarter.
"In terms of prices, the eastern seaboard of Australia continues its downturn," APM research director Louis Christopher said.
But Darwin house prices surged by 7.9 per cent to $338,000 in the September quarter and Perth prices rose 2.4 per cent, also to $338,000, while prices in Adelaide were flat at $302,000.
In its quarterly statement on monetary policy, the RBA said the data suggested nationwide prices fell modestly in the quarter but were broadly unchanged over the year.
"Recent auctions data are consistent with conditions in the housing market remaining subdued," the central bank said.
"Over the past few months, clearance rates in Sydney and Melbourne have fluctuated around levels considerably lower than their averages over the past five years, and auction volumes remain low."
The RBA said forward-looking indicators of housing activity pointed to some near-term easing in construction, noting the number of building approvals had declined by 12 per cent in the third quarter.
"Nonetheless, with further large amounts of work yet to be done, especially in the more buoyant states, the current downturn in house building activity is likely to be shallow by the standards of previous cycles," it said.
The RBA said growth in credit to the household sector had eased back from the exceptionally rapid pace seen a couple of years ago, reflecting the cooling in the housing market and the more cautious approach to spending and balance sheet expansion that households now seemed to have adopted.
Mr Christopher said that assuming interest rates remained steady for at least the next 12 months, the eastern seaboard market - including Sydney, Melbourne, Canberra and Brisbane - was likely to bottom out sometime in the first half of 2006.
"Given statements made today by the RBA, this scenario of zero interest rate increases appears to be quite plausible," he said.
"Of course, much depends on future oil prices and whether core inflation is likely to build in the coming months."
On Sunday the managing director of lending giant Aussie Home Loans, John Symond, said Australians should get out of property investment markets on the eastern seaboard, particularly in Sydney.
The APM house price series is adjusted for a potentially disproportionate number of sales occurring at the top or bottom end of the market which would unduly influence the raw median.

NZ Economy- why interest rates will go higher

A couple of articles this morning which indicate that there will be at least one more rate hike, barring NZ dollar issues (eg Uridashi) becoming very unpopular...

High cost fails to hit thirst for petrol

07.11.05
By Chris Daniels

Record high oil prices have barely made a dent in New Zealanders' growing petrol consumption. In late August the price for a litre of fuel at many pumps hit $1.50, prompting an uncommon decline in petrol sold, but since then prices have fallen to about $1.40 a litre and consumption is back to normal. "In August and September, when prices hit their peak, there was a two-week period when demand did drop off a couple of per cent. But it appears in October that as the price has come down, behaviours have gone back to normal," said Peter Griffiths, managing director of BP New Zealand. "My sense is that when the number got that high and people filled their cars, they got a surprise - what do you mean it costs $100 to fill my car? My God! Or 'I always put $20 - now I get less for it and I have to come back more'." One of BP's rivals, Shell, reports a similar experience, with volumes falling when prices went to their most recent peak in September. Steven Bartholemusz said Shell NZ had not experienced a "significant decline in fuel demand" due to the recent high prices. "We have seen steady growth throughout the year. In July and August the industry as a whole did see a slight decrease in industry volumes and this dropped further in September. We are beginning to see a pick up in volumes." Griffiths said BP's profits this year would probably be down, but not dramatically. More than a third of BP's income in New Zealand came from sources other than fuel sales. This included its Wild Bean cafes and other retailing at its petrol stations. Griffiths accepted that BP's parent company was reaping the rewards of the high oil prices. "If you own an oil well today, you're doing well," he said. "And BP produces a couple of million barrels of oil a day from around the world. They are selling that oil at something like the numbers we hear quoted." These profits do not come trickling down from head office though, as BP locally last year made a $53 million after-tax profit. This was a 12 per cent return on its $500 million of capital invested - including its stake in the Marsden Pt oil refinery. Around half of this profit, $26 million, was re-invested into the New Zealand business. "The downstream oil business in New Zealand, its a tough business, you can't sit on your hands. We turned over nearly $2 billion - and we made $54 million," he said. "We've got $550 million invested, so it's okay, it's better than some businesses, not as good as others." Recent high prices meant business as usual, he said. "When the price is high it's usually because we have to pay more for our input material - more for our crude, more for refining and more for shipping." Westpac chief economist Brendan O'Donovan last month said the doubling of oil prices since 2002 was likely to have significant effects on economic activity in New Zealand. Westpac said the price rises had reduced economic growth by 0.3 percentage points or $420 million in the past year.

Many still expect house rises

07.11.05
By Brian Fallow

Confidence that the housing boom has further to run is undimmed, despite the prospect of higher interest rates, ASB Bank's quarterly survey of housing confidence has found. Of 600 people surveyed between August and October, 45 per cent expected prices to go higher while 15 per cent expected a fall. The net 30 per cent expecting higher prices is an increase from a net 20 per cent in the three months to July. The survey's margin of error is 4 per cent. And confidence did not flag as the quarter wore on, despite the Reserve Bank raising the official cash rate and a sharp rise in interest rate expectations: in the month of October a net 31 per cent expected higher prices, in line with the average for the quarter. ASB chief economist Anthony Byett said the rise in price expectations reflected renewed activity in the market as it shook off its seasonal winter blues. "Activity levels increased faster than usual over September and October and properties are selling faster," he said. The number of sales reported by the Real Estate Institute in September was up 17 per cent on September last year and the national median home price of $290,000 was 16 per cent higher. And ASB's lending figures and the anecdotal evidence both pointed to activity and upward price pressure having continued last month, Byett said. The pick-up makes the indicators of affordability, four years into the boom, even more stretched. "House prices are even higher now relative to income, so too are interest payments, and that's before people roll into fixed rates that are already higher and still rising," Byett said. "In other words, the housing market and the household sector in general are more at risk to future shocks. And 2006 is shaping up for a tougher economic climate. It's clearly a time for prudence." Household debt in September was 15 per cent higher than in September last year and the increase in the month was the fastest for two years. That is in spite of rising interest rates and the ratio of interest costs to household incomes being already at historically high levels. Collectively households spent about 10.5 per cent of their income servicing debt, Byett said, when the normal ratio over the past 10 years was between 8 and 9 per cent. And those figures are diluted by the fact that only one household in three is owner-occupied with a mortgage. Reserve Bank Governor Alan Bollard said on Wednesday that about 10 per cent of households with mortgages were deeply in debt, spending more than half their after-tax incomes servicing the mortgage. They were vulnerable to rising interest rates, falling house prices or a weaker job market. Byett said new borrowers were undeterred by the mortgage rates on offer at the moment. Borrowers who had taken out fixed rate loans two years ago between 6 and 7 per cent were rolling into rates close to 8 per cent. But in any month only a small proportion of borrowers were in that position.