The Reserve Bank quietly released its M10 measure of housing values as at June 30 yesterday, which is sourced from PropertyIQ and Statistics New Zealand. It showed the value of New Zealand's housing stock rose NZ$54.5 billion in the 90 days of the June quarter to NZ$959.85 billion.
That means house values rose at a rate of NZ$605 million a day during the June quarter and New Zealand's houses were worth 381% of nominal GDP as at the end of June.
The US housing market peaked at 210% of GDP in 2007. Australia's housing market is currently worth over A$6 trillion or 352% of Australian nominal GDP.
I'd recommend anyone who hasn't yet either read or watched The Big Short to do so. I'm not saying Australasia's housing market is just like America's before the Global Financial Crisis (GFC), but the scale of the over-valuation of housing in Australia and New Zealand relative to the size of our economies and incomes should make people think twice before believing house prices can keep growing like they have in the last couple of years. All it would take is a slide in migration back to longer-run averages of less than a third of current levels, a rise in interest rates because of an inflation burst and some sort of global shock to put those valuations under pressure. Few are forecasting any of those at the moment, but they're far from impossible.
New Zealand house values rose by NZ$138.5 billion in the last year alone. To put that in context, New Zealand's entire stock market is only worth NZ$117.7 billion. The growth in valuations, which will filter through to households as Government valuations are mailed around in the next year or two for ratings purposes, is clearly one of the factors growing household debt at twice the rate of income growth, and also faster than term deposit growth. For those who can't wait, Homes.co.nz offers readers a 'real time' valuation of their homes by simply putting in their addresses. Have a go and see how much richer you feel.
The symptoms of this return to the good/bad old days of the 2002 to 2007 period are most evident in the gap opening up between term deposit growth and lending growth, and in record high sales through hardware stores and new car dealerships. This chart via ANZ (figure 1 in this weekly note) effectively shows households are now borrowing around NZ$8 billion more per year than they're saving. This is a major turn-around from the 2009-15 period when household saving broadly matched and sometimes exceeded borrowing.
That is having to be made up in the short term through borrowing offshore, and helps explain the inability or reluctance of banks to pass on OCR cuts as they scramble to ensure they keep within the Reserve Bank's Core Funding Ratio requirement for 75% of their funding to be either long term wholesale (more than a year) or local term deposits. By not passing on OCR cuts to borrowers and not passing them on to savers through lower term deposit rates, banks are essentially discouraging borrowing and encouraging saving as they try to turn around that NZ$8 billion gap and build up their net interest margins and profits ahead of higher capital requirements from the Reserve Bank and APRA.
Term deposit rates well above OCR
Another symptom of the banks' renewed hunger for term deposits is the increased marketing activity for term deposits. I have regularly seen newspaper and television advertisements in recent weeks for term deposits, while advertising for fixed term mortgages has been dialled right back. For example, ASB is now offering 3.65% for an 18 month term deposit, which is a full 200 basis points above the expected OCR over that period. Term deposit rates are usually much closer to the OCR rate, which is expected to be cut by 25 basis points to 1.75% in just over a fortnight.
'Putting the mega in Mitre 10 Mega'
The effects of these renewed spending appetites were also evident in yesterday's CPI figures.
Prices in the household contents and services group, which includes homewares, furniture and household appliances (the sorts of things you'd buy at Bunnings Warehouse, Mitre 10 Mega and Briscoes) rose 2.3% in the September quarter, including 2.9% for furniture and floor coverings, 4.4% for appliances and 5.6% for glassware, tableware and household utensils. That implies strong demand helping to push up prices, along with a potentially delayed effect of last year's sharp fall in the currency, given many of these products are imported.
See a lot more below on yesterday's inflation figures in the alert sent out shortly after midday.
The irony of all this is that yesterday's inflation figures, despite being a touch stronger than financial markets expected, were broadly in line with the Reserve Bank's forecasts and were seen as locking in one more OCR cut on November 10. There was debate though over the potential for another one early in February. A few economists are going cold on the prospect.
The juxtaposition of all this strong growth in asset values and spending in tandem with a 0.2% rate of annual CPI inflation and a falling OCR is startling. I suspect the Reserve Bank will be quietly hoping the banks continue to retain most of the next OCR cut from both savers and borrowers to try to narrow that gap between spending and income and suck out some of the inflationary pressure building in some pockets of the economy.
It's worth remembering that the NZ$959.9 billion valuation for the housing market was at the end of June. Since then, QV's house price index has risen a further 4.9%, implying house values are now worth over NZ$1.006 trillion dollars and up another NZ$49 billion in the last 90 days (NZ$523 million a day). That will put the mega in Mitre 10 Mega over the Labour Weekend spring gardening spend-up.
In other economic and financial news...
Prices for wholemilk powder rose 2.9% to US$2,760/tonne in last night's Globaldairytrade auction, which was not quite enough to reverse their falls over the last month and not as strong as futures markets had expected. The result also surprised some given Fonterra announced last week it would reduce supplies being sold on Globaldairytrade by 11,136 tonnes in the coming months because milk production in the Waikato was down 10% in October due to a very wet start to Spring.
In other political news...
Judith Collins announced the Government planned to spend NZ$1 billion building another 1,800 prison beds to cope with a larger number of longer sentences for violent offenders and a lower than expected improvement in the recidivism rate. Bill English told reporters there would also be an extra NZ$1.5 billion spent on prison operating costs over the next five years.
Asked if that meant there would be less room for tax cuts, English said: "I wouldn't want to judge that because it is a bit early, but certainly spending this kind of money on prison capacity is going to reduce other options."
In another sign the debate about the effects of migration on wages and employment is broadening out beyond New Zealand First and Michael Reddell, the Salvation Army published a report this morning challenging the use of low-skilled migrants to fill jobs that young New Zealanders might fill and to suppress wage inflation.
"Continuing to import labour as an easy, short-term solution avoids the broader society-wide issues of what to do about the skills deficit of hundreds of thousands of New Zealanders and of catering for the needs of migrants," the Salvation Army's Alan Johnson said. "As a country we need to have a rational and open debate around the role of immigration in New Zealand’s future," he said.
In people news, Labour announced it had selected Tamati Coffey for the Waiariki electorate to challenge Te Ururoa Flavell, Newshub reported list MP Parmjeet Parmar had been selected as National's candidate in Mt Roskill and Stuff reported Phil Goff had decided against re-appointing Penny Hulse as Deputy Mayor of Auckland Council.
Have a great day