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AUCKLAND RESIDENTIAL REPORT MARCH 2007

FAVOURABLE ECONOMIC DRIVERS

This time last year there were economic commentators predicting the Reserve Bank’s Official Cash Rate (OCR) would be down to 6.25% by the end of 2006 with a likely further decrease to 5.75% in March 2007. This was based on the scenario that interest rate increases over the 2005 year would have ground the economy to a halt and the Reserve Bank would need to implement stimulatory measures to reignite growth.

However, back in real time, the New Zealand economy is facing quite the opposite situation. The economy remains buoyant with key fundamentals such as business and consumer confidence improving and unemployment, wage increases and economic growth all in the positive. These factors plus continuing positive immigration levels are keeping the housing market far more active than the Reserve Bank would like and, in the case of most commentators, more active than in predictions made over the past year. This situation, according to most economic forecasts, will remove any chance of a decrease in the Official Cash Rate (OCR) until 2008, with the possibility of further increases in 2007.

Any further increases in the OCR as an instrument to slow the housing market by the Reserve Bank must be questionable given the current loan profile of home mortgages. The December 2006 update on New Zealand financial institutions residential lending shows 85% of the $128 billion of housing mortgages are on fixed term

Of the $109 billion of housing loans on fixed term, only 32% or $35 billion will expire in 2007, rolling off an average mortgage rate of 7.71%. If these loans reverted to the current floating mortgage rate, then the new interest rate would be in the vicinity of 9.5%. This is a significant increase and one that would have a significant impact on the spending power of households faced with this scenario. However, most home loans are going straight back into a fixed term and a lower interest rate than the floating rate. At the time of writing, the interest rate for two years fixed term was down to 8.4% and 7.99% for longer five to seven year terms. In 2008, another $37 billion is up for renewal with the current average interest rate of 7.75% while in 2009 $17 billion rolls off with an average interest rate of 7.76%. It is anticipated that interest rates will start easing in 2008 as the Reserve Bank winds back the OCR.

While interest rates are increasing, other factors in the economy are countering the effect. Generally households are better off than they were a year ago, a result of low 3.7% unemployment and the strong wage growth associated with a shortage of skilled workers. These conditions see households happy to take on additional debt and able to afford, in most cases, the loan payments associated with higher borrowings and higher interest rates.

Another big driver of the housing market is immigration. While the current rate is well down on the peak levels of 2003 when there was a net gain of over 42,000 people, the latest figures are showing a net gain of 15,000 signifying a recovery in immigration from a trough of only 6,000 towards the end of 2005. This inflow of new people has immediate implications for the housing market with this increase in population needing to be housed through the purchase of houses or the renting of properties.

Forecasts for 2007 suggest the economic drivers of residential property will not change significantly. Interest rates will remain close to current levels, unemployment will remain low and wage growth will continue. It is likely immigration will ease back but there is little like hood it will go negative. Households may be constrained to withhold future spending, not so much as a result of higher interest rates, but more due to the high debt levels many households now hold. Interest rates aside, taking on further debt may be avoided and this is already evident with the rate of household debt growth slowing.