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For much of the September quarter our general view was growth would start to improve very slowly from
either early 2009 or late this year in response to the Reserve Bank cutting interest rates, the exchange rate
going down, drought conditions ending, and companies completing a period of cost rationalisation. But
every month throughout the year the outlook for world growth has been worsening and things became dire
in the middle of September when the Lehman Bros investment bank collapsed.
This collapse showed other banks in the United States that they could not rely upon a bailout from the
Federal government so they became unwilling to lend to each other. The same thing happened in the
United Kingdom and Europe and the flow of credit to customers dried up. As the authorities realised the
world economy was on the cusp of another Great Depression major efforts were made to get banks
lending to each other again. Central banks and governments have put in place plans to boost liquidity
available to banks, slashed interest rates, guaranteed retail and wholesale funding for banks, injected
capital into banks, and started undertaking their own lending directly to the private sector.
Over the past couple of months it has become clear that these measures are lessening the extent of the
banking liquidity crisis and investors are slowly starting to show interest again in investing in bank
securities. But while solving the problem of banks being unwilling to lend to each other has averted the
Great Depression scenario a very deep global recession is still in prospect.
The outlook for the world economy is bad and it is getting worse on a weekly basis. As yet no circuit breaker
has appeared to allow valid talk about recovery for the world economy. There are hopes that things will be
improving late in 2009 but over the past few weeks the amazing deterioration in economic measures around
the world has encouraged increased talk about weakness continuing full blown through 2010 into 2011.
So the focus of the markets at the moment is not so much on the economic data, which will remain bad for a
long time, but whether the week has delivered something which might be classified as a circuit breaker.
There are hopes that maybe this was the case this week with the Federal Reserve cutting its funds rate
more than the 0.5% expected. They have reduced it from 1% down to a range between 0% and 0.25%. This
has sparked a rally in sharemarkets and contributed to a relatively strong rise in the Kiwi dollar which was
already under way before the interest rate cut. The Kiwi dollar has rallied because of our classification as a
risky currency and investors have shown a renewed small appetite for risky assets over the week.
But there is as yet no light at the end of the tunnel. And when it does eventually appear hopefully early next
year the tunnel is still going to be a very long one which our economy will need to get through over 2009. It
does not seem appropriate yet to speak in terms of good growth in the New Zealand economy in the near
future. Some sectors of our economy are already suffering badly because of factors already in play. These
include retailing and any company involved in the house building industry. Next year many more exporters
will feel the pain and the tourism industry in particular is likely to undergo substantial weakness as people
overseas refrain from international travel as they add up losses from their housing wealth, equity wealth, and
wages and salaries as unemployment soars.
The unemployment rate in New Zealand is likely to rise above 6% late next year and our economy will
probably record something close to 0% growth over 2009.
But at least there are some things moving in the right direction. Petrol prices have plummeted and the
exchange rate is setting the economy up for a stronger export performance over 2010 and 2011. Tax rates
will be cut again in April and debt servicing costs in the household sector are falling strongly with further
decreases to come as the cash rate gets cut from the current 5% probably to within a range between 3.5%
and 4% in the middle of next year.
In the housing market we remain of the view that forecasts of 25% to 40% declines in house prices are well
misguided. There is a very rapid reduction in dwelling supply now under way as construction collapses,
emerging signs of investors being attracted back into the market by low interest rates, and a starting point for
New Zealand going into the recession of a shortage of property. In contrast in the United States where
house prices have so far fallen just over 20% there is a massive building oversupply, soaring unemployment,
and huge inability of people to raise finance to buy what they consider to be cheap houses because of the
near collapse of the banking sector.
House price declines from current levels are still likely but maybe only in the order of 5% on average. Over
the second half of 2009 we expect the housing focus to shift strongly back onto the shortage of
accommodation in New Zealand and it is possible that the major economic weakness overseas could lead to
a mini boom in net migration into New Zealand which will also tend to underpin housing market. We do not
however expect a repeat of the boom in migration between 2001 and 2003 however when the net gain
reached a record just over 43,000.
Again, Merry Christmas everyone and best wishes for the New Year. The Weekly Overview will be published
again probably on Thursday 15 January.
Key Forecasts
• Monetary policy easing with the official cash rate between 3.5% and 4.0% come mid 2009.
• The two year fixed housing rate reaching 7.0% in mid-2009 or earlier, with minor downside possible after
that assuming easing of the credit crisis. Falling to the 6.5% low of 1999, 2001 and 2003 is now more
possible this cycle than previously thought for the past few months because of the worsened global
outlook.
If I Were a Borrower What Would I Do?
A large number of people are considering breaking the long term mortgages they entered into earlier this
year and the question is this. Why did people enter into five-year fixed-rate mortgages earlier this year when
one struggles to find a single person in the field who was actually advising fixing for a long-term. We spent
much of this year suggesting people fix for two years, then a few months ago we suggested one year, and
for some time now we have been suggesting fixing for just six months which is where we still sit at the
moment.
If someone is thinking about breaking their five-year fixed-rate mortgage they have to ask themselves why
did they fix for that long period earlier in this year. Was it because they were looking for rate certainty? That
is exactly what they have. If they choose to break now they will lose that certainty they were prepared to pay
such a premium for maybe just six months ago.
People want to break the mortgages now because they believe interest rates are going to go much much
lower. That is their new forecast. Their forecast presumably earlier this year was that interest rates would not
keep falling. What has changed to deliver greater forecasting accuracy on their part?
Depending on how your bank works out break costs results may vary but if we assume the break cost is
calculated using wholesale interest rate changes then only if you believe wholesale interest rates are going
to fall more than the market currently expects you are unlikely to be better off breaking and re-fixing
somewhere down the track than simply sticking with your current interest rate. The answer will vary from
person to person.
Putting aside those people looking to break the interest rates they contracted for some months ago and
taking the example of somebody looking to freshly borrow at the moment what would I personally do? I
would fix six months anticipating being able to lock into a much lower interest rate somewhere perhaps
towards the middle of 2009.
either early 2009 or late this year in response to the Reserve Bank cutting interest rates, the exchange rate
going down, drought conditions ending, and companies completing a period of cost rationalisation. But
every month throughout the year the outlook for world growth has been worsening and things became dire
in the middle of September when the Lehman Bros investment bank collapsed.
This collapse showed other banks in the United States that they could not rely upon a bailout from the
Federal government so they became unwilling to lend to each other. The same thing happened in the
United Kingdom and Europe and the flow of credit to customers dried up. As the authorities realised the
world economy was on the cusp of another Great Depression major efforts were made to get banks
lending to each other again. Central banks and governments have put in place plans to boost liquidity
available to banks, slashed interest rates, guaranteed retail and wholesale funding for banks, injected
capital into banks, and started undertaking their own lending directly to the private sector.
Over the past couple of months it has become clear that these measures are lessening the extent of the
banking liquidity crisis and investors are slowly starting to show interest again in investing in bank
securities. But while solving the problem of banks being unwilling to lend to each other has averted the
Great Depression scenario a very deep global recession is still in prospect.
The outlook for the world economy is bad and it is getting worse on a weekly basis. As yet no circuit breaker
has appeared to allow valid talk about recovery for the world economy. There are hopes that things will be
improving late in 2009 but over the past few weeks the amazing deterioration in economic measures around
the world has encouraged increased talk about weakness continuing full blown through 2010 into 2011.
So the focus of the markets at the moment is not so much on the economic data, which will remain bad for a
long time, but whether the week has delivered something which might be classified as a circuit breaker.
There are hopes that maybe this was the case this week with the Federal Reserve cutting its funds rate
more than the 0.5% expected. They have reduced it from 1% down to a range between 0% and 0.25%. This
has sparked a rally in sharemarkets and contributed to a relatively strong rise in the Kiwi dollar which was
already under way before the interest rate cut. The Kiwi dollar has rallied because of our classification as a
risky currency and investors have shown a renewed small appetite for risky assets over the week.
But there is as yet no light at the end of the tunnel. And when it does eventually appear hopefully early next
year the tunnel is still going to be a very long one which our economy will need to get through over 2009. It
does not seem appropriate yet to speak in terms of good growth in the New Zealand economy in the near
future. Some sectors of our economy are already suffering badly because of factors already in play. These
include retailing and any company involved in the house building industry. Next year many more exporters
will feel the pain and the tourism industry in particular is likely to undergo substantial weakness as people
overseas refrain from international travel as they add up losses from their housing wealth, equity wealth, and
wages and salaries as unemployment soars.
The unemployment rate in New Zealand is likely to rise above 6% late next year and our economy will
probably record something close to 0% growth over 2009.
But at least there are some things moving in the right direction. Petrol prices have plummeted and the
exchange rate is setting the economy up for a stronger export performance over 2010 and 2011. Tax rates
will be cut again in April and debt servicing costs in the household sector are falling strongly with further
decreases to come as the cash rate gets cut from the current 5% probably to within a range between 3.5%
and 4% in the middle of next year.
In the housing market we remain of the view that forecasts of 25% to 40% declines in house prices are well
misguided. There is a very rapid reduction in dwelling supply now under way as construction collapses,
emerging signs of investors being attracted back into the market by low interest rates, and a starting point for
New Zealand going into the recession of a shortage of property. In contrast in the United States where
house prices have so far fallen just over 20% there is a massive building oversupply, soaring unemployment,
and huge inability of people to raise finance to buy what they consider to be cheap houses because of the
near collapse of the banking sector.
House price declines from current levels are still likely but maybe only in the order of 5% on average. Over
the second half of 2009 we expect the housing focus to shift strongly back onto the shortage of
accommodation in New Zealand and it is possible that the major economic weakness overseas could lead to
a mini boom in net migration into New Zealand which will also tend to underpin housing market. We do not
however expect a repeat of the boom in migration between 2001 and 2003 however when the net gain
reached a record just over 43,000.
Again, Merry Christmas everyone and best wishes for the New Year. The Weekly Overview will be published
again probably on Thursday 15 January.
Key Forecasts
• Monetary policy easing with the official cash rate between 3.5% and 4.0% come mid 2009.
• The two year fixed housing rate reaching 7.0% in mid-2009 or earlier, with minor downside possible after
that assuming easing of the credit crisis. Falling to the 6.5% low of 1999, 2001 and 2003 is now more
possible this cycle than previously thought for the past few months because of the worsened global
outlook.
If I Were a Borrower What Would I Do?
A large number of people are considering breaking the long term mortgages they entered into earlier this
year and the question is this. Why did people enter into five-year fixed-rate mortgages earlier this year when
one struggles to find a single person in the field who was actually advising fixing for a long-term. We spent
much of this year suggesting people fix for two years, then a few months ago we suggested one year, and
for some time now we have been suggesting fixing for just six months which is where we still sit at the
moment.
If someone is thinking about breaking their five-year fixed-rate mortgage they have to ask themselves why
did they fix for that long period earlier in this year. Was it because they were looking for rate certainty? That
is exactly what they have. If they choose to break now they will lose that certainty they were prepared to pay
such a premium for maybe just six months ago.
People want to break the mortgages now because they believe interest rates are going to go much much
lower. That is their new forecast. Their forecast presumably earlier this year was that interest rates would not
keep falling. What has changed to deliver greater forecasting accuracy on their part?
Depending on how your bank works out break costs results may vary but if we assume the break cost is
calculated using wholesale interest rate changes then only if you believe wholesale interest rates are going
to fall more than the market currently expects you are unlikely to be better off breaking and re-fixing
somewhere down the track than simply sticking with your current interest rate. The answer will vary from
person to person.
Putting aside those people looking to break the interest rates they contracted for some months ago and
taking the example of somebody looking to freshly borrow at the moment what would I personally do? I
would fix six months anticipating being able to lock into a much lower interest rate somewhere perhaps
towards the middle of 2009.
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