Potential impacts of a negative OCR. Median Auckland house price to hit $1 million this year. 8 more insights in property news this week…
Property News This Week is intended for intelligent investors. The aim is to provide investors with relevant economic and property insights. Do let us know in the comments below if there’s any feedback you’d like to give us or anything you think we should be covering.
In property news this week…
- Their fair share?
- Interest rate expectations
- Term deposit rates keep getting lower
- Monetary Policy preview
- No slow down in residential auction activity as election draws closer
- Potential impacts of a negative OCR
- How long will the OCR remain negative?
- Record low office vacancies are over in Auckland & Wellington
- Median Auckland house price tipped to hit $1 million this year
- Westpac does about face – now expects house prices to keep rising
Sit down to a nice hot cuppa and enjoy your property news this week…
Their fair share?
Leftists love nothing more than to bask in a visible display of moral preening. One popular method is to state authoritatively and indignantly that “rich pricks” do not pay their fair share of taxes.
Another is protesting against capitalism, as pictured above.
Those driven by the politics of envy will readily nod their heads and murmur in agreement.
Tony Alexander’s latest economics newsletter shines a light on whether there is any substance behind this widely-held but little-understood belief. I quote him directly…
“Labour has couched its promise to place a 39% tax rate on all personal income above $180,000 in terms of upper income people making their fair contribution toward reducing government debt.
“They do not mention that these people already pay probably over 20% of the total income tax take even though they make up just 2% of the adult population.
“The best data showing this come from Treasury’s May Budget documents and can be found here.”
The Government’s Treasury website linked to there contains the table below. It shows the amount of income tax paid by the country’s 3.9 million adults in each tax bracket.
The total income tax take was $37 billion. The data shows that 24% of that income tax was paid by the 3% of people earning more than $150,000 a year.
It also shows, through a little interpolation, that 69% of the population who earn up to around $54,000 collectively pay the same amount of income tax.
Did you get that? The top 3% of income earners pay the same amount of income tax as 69% of all income earners.
Or to put it another way… each person earning over $150,000 p.a. pays the same amount of income tax as 22 people earning up to around $54,000.
That’s a lot of people being subsidised by income redistributed from those “rich pricks”.
Budget 2019: Budget at a Glance – tax year 2019/20
|Annual individual taxable income||Number of people||Tax paid|
|$1 – $10,000||374||10%||$160||0%|
|$10,001 – $20,000||644||17%||$1,170||3%|
|$20,001 – $30,000||588||15%||$1,930||5%|
|$30,001 – $40,000||342||9%||$1,760||5%|
|$40,001 – $50,000||337||9%||$2,340||6%|
|$50,001 – $60,000||311||8%||$2,950||8%|
|$60,001 – $70,000||246||6%||$3,050||8%|
|$70,001 – $80,000||190||5%||$2,970||8%|
|$80,001 – $90,000||154||4%||$2,900||8%|
|$90,001 – $100,000||105||3%||$2,330||6%|
|$100,001 – $125,000||145||4%||$3,980||11%|
|$125,001 – $150,000||74||2%||$2,640||7%|
Back to Tony Alexander…
“These “rich pricks”, as the last Labour Finance Minister called them upon entering Parliament, are already paying their fair share toward government redistribution of income and services to others in the country.
“Labour’s 39% tax rate proposal cannot be justified on either the grounds of making higher income earners pay their fair share, or that the need exists to get debt down starting from next year.
“The move is driven by ideology, just as policy proposals from other parties also are.
“Speaking of which, National’s policy of cutting debt to 30% of GDP within 10 years is pointless in a world where not a single credit rating agency or investor is demanding it.
“And, just to keep spreading the love, NZ First’s policy of keeping the Bluff smelter open whatever the cost is the sort of thinking which got our country into the Muldoonist mess of the 1980s.
“The Green’s policy of bringing in a wealth tax is socialism leading eventually to “the workers control the means of production” to quote Monty Python quoting Marx.”
Interest rate expectations
The Reserve Bank of New Zealand (RBNZ) cut the official cash rate 0.75% on 16 March. It fell from 1% to 0.25%.
Since then floating mortgage rates have fallen from 5.1% to 4.3%. The 2-year fixed rate has fallen from 3.5% to 2.7%.
Term deposit rates have also dropped, with the 1-year rate falling from 2.6% to 1.3%.
It’s worse for the shorter terms with the average 3-month rate falling from 2.01% to 0.54%.
Tony Alexander says, “Lower interest rates have made purchasing a home more affordable, and encouraged investors seeking higher yield than now offered in bank term deposits to look at other assets including property.”
It is not just that interest rates are low, it’s that they are expected to remain low.
Alexander says the Reserve Bank has made it clear it intends to keep rates low for many years. This is aided by the US Federal Reserve, “which has just shifted its policy stance toward multiple years of low rates to try and generate inflation above 2% for a number of years”.
“Also, our central bank has indicated it may introduce a negative OCR next year.
“Expectations that interest rates will stay low are encouraging people to expect that other people in the future will be seeking higher yielding assets including property. So, they are buying before this expected extra demand comes along.”
In other words, they’re getting in before it’s too late. They know demand will push asset prices up as others slowly realise that low interest rates are here to stay and act accordingly.
Alexander also says that Treasury has penned in a 0.1% 90-day bank bill yield all the way out to 2024.
Those at the less-experienced end of the scale, especially first-home buyers, worry about interest rates going up in the near future. If this article doesn’t reassure them, please refer them to our NZ Interest Rates Forecast page.
It is updated weekly and is a 2,657-word deep dive that authoritatively answers the question: When Will Interest Rates Go Back Up?
Term deposit rates keep getting lower
ASB Bank’s Term Deposit Report yesterday opened with what we already know – that term deposit interest rates have been steadily trimmed over the past year and are significantly below the average levels of the past 10-15 years.
In fact, term deposit rates are now at the lowest on records going back to the 1960s.
ASB says interest rates are expected to decline even further from today’s level and stay low for several years.
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Monetary Policy preview
Mike Jones, senior economist at ASB Bank, writes in ASB’s Economic Note today that he expects the RBNZ to leave the OCR unchanged next week.
Jones describes wholesale and retail interest rates as “grinding lower,” which he says is important given the Reserve Bank’s laser-like focus on driving them down. He also says the economic picture is not materially different to prior RBNZ expectations.
“We expect next week’s RBNZ Monetary Policy Review to be relatively uneventful. Most of the grunty policy updates were done in the August Monetary Policy Statement (MPS).
“And with the deployment of alternative policy tools including a negative OCR a story for early 2021, this meeting will really be about marking time.
“We continue to expect the OCR to be lowered from its current 0.25% to -0.5% in April 2021.”
No slow down in residential auction activity as election draws closer
The strong level of residential auction activity that was evident at the end of August has continued in the first two weeks of September with 73% sales rate.
Over the first two weeks of September the total number of properties offered at auctions monitored by interest.co.nz was 427, compared to 299 in the comparable two week period of last year.
The 73% overall sales rate for the first two weeks of September this year was well up on 53% for the comparable two weeks of last year.
So there is significantly more auction activity this year and more properties are being sold, both in total and as a percentage of what is being offered.
Considering we are now just one month from a General Election and economic uncertainties abound, the latest auction figures suggest the residential property market remains remarkably resilient.
Potential impacts of a negative OCR
In an Economic Note out today, ASB senior economist Mark Smith delves into the potential impacts of operating in a negative OCR environment.
Smith says that pairing a negative OCR with a funding for lending programme, as the Reserve Bank proposes, increases the odds of a negative OCR being implemented successfully and providing further interest rate relief for borrowers.
He also says, “The RBNZ should consider introducing a funding for lending programme before cutting the OCR in early 2021.”
COMMENT: Why does it not surprise me that a banker would want that? 😂
Smith says the objective of pushing the OCR below zero is, “to lower borrowing costs for households and businesses and to encourage economic activity to be brought forward. The NZD would also be lower than it would otherwise be.”
It is not without risk and there are potentially some large drawbacks according to Smith. “Chief among these is the risk that a negative policy interest rate would interfere with the provision of credit, the lifeblood of a modern economy.”
“The RBNZ is aware of the potential pitfalls and has signalled it will tag-team a negative OCR with a Funding for Lending Programme (FLP) that will help provide low cost and stable funding for banks.
“The specifics of such a scheme are yet to be announced and getting this right would bolster the effectiveness of a negative OCR.
“It will take time for the FLP to translate into lower borrowing costs as banks will take time to gradually roll off more expensive funding sources.
“A clearly-signalled approach would help banks prepare for changes, such that the benefits to borrowers from the lower OCR can be realised sooner.”
“Providing operational hurdles are cleared and an effective Funding for Lending Programme (FLP) is developed, our view is that the benefits of pushing the OCR below zero outweigh the potential costs.
“We expect the RBNZ will move the OCR lower after its forward guidance to hold it at 0.25% until March 2021 ends. We expect a front-loaded 75bps OCR cut in April 2021 (or potentially sooner) taking the OCR to -0.50%, roughly at our estimated -0.50% to -0.75% floor for the OCR.”
“The message is to prepare for the probability of lower wholesale and retail interest rates and manage your exposures accordingly.”
The summary table at the end of this note highlights some potential pros and cons from both a negative OCR and a Funding for Lending Programme.
How long will the OCR remain negative?
Writing in the same Economic Note discussed above, ASB senior economist Mark Smith predicts the OCR to remain negative into mid 2023, as seen in this chart…
Smith says it does depend on how long lasting the impact of Covid-19 is, and how easy it is to return to a positive interest rate environment.
“We believe that the OCR will remain negative until the NZ economic outlook had sufficiently brightened so as to warrant OCR hikes.
“This is assumed to be until at least late 2022, with the RBNZ erring on the side of caution to make sure the recovery is well established before slowly raising the OCR.
“From a least-regrets analysis point of view, it would be better to overstimulate the economy and tolerate a period of high inflation rather than to undercook the policy support and run the risk of deepening the downturn.
“This is the route that the US Federal Reserve and other major global central banks seem to be taking.
“The failure of inflationary pressure to ignite despite considerable policy stimulus to boost the economy could see interest rates marooned around record lows.
“Our gut feeling is that if the OCR does go negative it will stay there for a while.”
Smith says the longer the OCR remains in negative territory, the stronger the subsequent rebound and the more likely interest rate settings will normalise.
“However, in looking at the experience in Europe and Japan, the reality is that once an economy has started the journey down the negative interest rate path it is extremely difficult to return to an environment where interest rates are north of zero.”
Record low office vacancies are over in Auckland & Wellington
Retail and office vacancies are beginning to rise off record lows in Auckland and Wellington and will be noticeably higher in two years, Colliers predicts.
Auckland CBD office vacancies were tipped to hit about 11% in mid-2022 from a record 4.7% low in December last year.
Colliers director of research and communications Chris Dibble said asking rents, or “face” rents, are flat rather than falling, but landlords were increasingly providing incentives, which means actual rents are falling.
Incentives in Auckland were about 8-12% of the costs for a tenant and were likely to rise to 12-16% in the next two years, he said.
Wellington CBD office vacancies are expected to peak at 10% in mid 2023 from a record low of 5.9% last year, Colliers said.
Wellington’s office vacancies will peak a year later than Auckland because the new BNZ building will open in 2023. When BNZ staff shift to the new building in Whitmore Street vacancies will be created in the other locations they previously occupied.
Auckland retail vacancies were forecast to reach 4.6% by mid-2022, with the hardest hit segment being strip shopping, which is expected to reach a vacancy rate of 8%.
Auckland shopping centre vacancy rates are lower currently at 2.5%. Colliers forecasts them to rise to 3.3% by 2022.
At present areas like Newmarket, Takapuna and Dominion Road have the highest retail vacancy rates.
Wellington CBD retail vacancies are 6.8% now, up from 4.2% in June 2019. Colliers expects vacancies there to peak at 8%.
Vacancy rates are highest in Willis Street, then in Manners and Dixon streets, and in Courtenay Place where a lot of hospitality businesses are located, Colliers reports.
Median Auckland house price tipped to hit $1 million this year
The median property price in Auckland is forecast to hit more than $1 million by the end of the year, rising $57,000 in three months – more than many Kiwis will earn in a year.
Despite a 12% decline in GDP for the June quarter which pushed New Zealand into recession, house prices would continue climbing, according to 13 experts and economists in a survey by comparison site Finder.
A 6% increase in Auckland’s median house price by December will push it up to $1.007 million, an increase of $57,000 which is more than the median New Zealand yearly income of $55,120.
The New Zealand housing market has defied forecasts since the country entered a coronavirus lockdown in late March.
“New Zealand’s property market has proven to be remarkably resilient in the face of both a global pandemic and now a recession,” said Kevin McHugh, Finder’s publisher in New Zealand.
“Homeowners were bracing for significant price dips at the start of the pandemic but this hasn’t happened as of yet.
“While this is good news for homeowners – particularly in an era of low mortgage interest rates – the opposite can be said for those hoping to get a foothold in the market,” he said.
Westpac does about face – now expects house prices to keep rising
In a Home Truths newsletter Westpac chief economist Dominick Stephens said when Covid-19 broke out, Westpac’s economists predicted a 7% decline in house prices between March and December, while other major banks, Treasury and the Reserve Bank picked even greater declines.
“But our collective predictions of house price decline have been proven wrong,” he said.
Between March and August house prices had actually risen 2.6%, which Stephens said was “no statistical quirk or brief period of catch up.”
“Back in July we upgraded our house price forecasts,” he said.
“We shifted to forecasting a fall of 2.5% over the second half of 2020 and an increase of 8% over 2021.
“We now expect an increase of 3.5% between March and December 2020 and we are sticking with an annual increase of 8% for 2021.”
Stephens said there were two main reasons the housing market had performed better than expected – the overall economy had been more resilient than anticipated and lower interest rates had a bigger impact on prices than expected.
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