– On the surface Standard and Poor’s released positive news on Friday that it was keeping its rating of NZ at AA given so many rating downgrades are occurring for European countries.  However, S&P did note that NZ still has high external debt levels, much of which is related to bank lending for residential property investment.

– Figures also out on Friday supported the S&P concerns as it showed that bank lending is starting to pick up again with over $180 billion of total lending outstanding to households at the end of June, most of which relates to residential property.  This is consistent with the increasing number of anecdotes I am hearing that banks in NZ are returning to aggressive lending policies on residential mortgages.

– Given the above it is a real concern to see New Zealand residential house prices seem to be picking up again, particularly in Auckland.  In fact New Zealand residential house prices have recently been doing better than in Australia (up 5% for the year ending June vs down 2% in Australia for the same period).

– The property resurgence in parts of New Zealand is happening when net immigration levels into this country are basically nil  and one wonders what would it be like if we returned to the days of 20,000 plus per annum coming into NZ (most of whom end up in Auckland)?

– A combination of sustained low interest rates and increasing net immigration into the country could cause real problems for New Zealand. 

– At the very least it would mean the current imbalances in our economy (due to the over valuation of property relative to incomes and an over reliance on property as proportion of household wealth) will continue. 

–  At worst we could see cheap money being the source of a property bubbles as occurred in parts of Europe; although the ability of the Reserve Bank here to raise rates to head this off is an important advantage we have compared to the likes of Ireland and Spain.

– For individuals who are taking up mortgages it is important to allow for an increase in interest rates at some stage and not assume that the current very low interest rates will be in place forever (a lot of borrowers in the US got into trouble when interest rates rose significantly over there and they could not service the higher interest payments).

– From a political perspective I hope that they consider the well researched Productivity Commission’s report that was released back in April.  This made various recommendations to help housing affordability including looking at urban/rural boundaries and ways to bring down the cost of building a new home.

– The Government has been relatively quiet on this recently but hopefully has it on its radar screen to help drive a better mix for our economy.  This is crucial if we are to ensure that New Zealand does not repeat the issues that occurred for northern hemisphere countries when high house prices are combined with significant levels of household debt.

Anthony Quirk
Managing Director