Bernard Hickey: Bet on Gen Y debt

Bernard Hickey

How will the generations born in New Zealand after 1980 afford to buy their first home?

This is the crucial question for the baby-boomers running the country. It is central to the economic challenge facing the Reserve Bank and the Government.

The answer will decide how many of those New Zealanders born here will stay and start families. The answer will also be an epitaph for a generation who benefited from what now looks likely to be a tripling of house prices between 2000 and 2020.

Prime Minister John Key gave his answer loud and clear this week: load them up with debt and hope very fast wages growth and low interest rates allow the young and indebted to dig their way out over the next 20 years.

The spotlight fell on the problem in an interesting way this week. The Reserve Bank reiterated its plans for “speed limits” on the growth of high loan-to-value ratio loans. This is one of its so-called macro-prudential tools to allow the central bank to slow down Auckland’s housing market without putting up interest rates for everyone. Governor Graeme Wheeler said he hadn’t finalised these limits but was clear they would apply to first-home buyers and rental property investors, because first-home buyers make up almost a third of the growth in new home loans.

This issue has Key’s political senses tingling. He knows it’s not a good look to take away some of the rungs from the steep ladder to home ownership for young buyers. This week he said he was pushing the Reserve Bank to give first-home buyers some sort of exemption or special treatment.

This is the crux of the matter: how does one generation get to sell their houses to the next generation at the toppest of top dollars when that new generation can’t leverage up?

Key sees low-interest debt as the solution to an older generation’s desire to keep house prices over-valued. The irony is painful. His Government has staked its reputation on reducing government debt to keep interest rates low, but his solution to over-valued housing is increasing the debt for young home buyers.

Young New Zealanders are often already heavily in student debt and are on low post-tax income. The only way they can afford to buy a first home in the big cities is by gearing up to their eyeballs. Taking away that ability to leverage up breaks the model and exposes the problem much of the developed world faces.

When assets can only be passed from one generation to the next with the help of obscenely high debt, we need to ask: are those assets over-valued? The Reserve Bank certainly thinks so, and that’s why it is bringing in speed limits.

Key’s opposition to applying these consistently betrays his purpose: to protect the wealth of his fellow baby-boomers. He is betting high growth and low interest rates will solve the problem. That’s a big bet, and only one generation will pay the price if it doesn’t come off: the young.

Herald on Sunday, 16 June 2013
By Bernard Hickey

Investor morale jumps

 Rising Auckland house prices helped push investor confidence to its highest level in more than two years. Photo / Brett Phibbs

 
Govt asset sale plan, rising sharemarket and Christchurch rebuild driving confidence.
 
Rising Auckland house prices helped push investor confidence to its highest level in more than two years. Photo / Brett Phibbs

Against a backdrop of rising share prices and a booming Auckland housing market, investor confidence reached its highest level in more than two years during the first quarter of 2013, according to research by ASB.

Investor confidence reached a net 18 per cent during the first three months of this year, which was a 5 percentage point increase on the previous quarter and the strongest result since late 2010.

The bank’s Investor Confidence Index – based on 720 online interviews – also found Cantabrians are becoming increasingly bullish, with investor confidence in that part of the country higher than the rest of New Zealand for the first time since 2011.

ASB’s head of wealth advisory, Jonathan Beale, said the Government’s partial privatisation programme for state-owned enterprises, a rising local sharemarket, rising house prices in Auckland and the ramping up of the Christchurch rebuild were all factors driving the increased overall confidence levels.

“Kiwi investors have over the past few years regarded the sharemarket with an air of caution in comparison to some other investment classes such as investment property and term deposits,” Beale said. “However, it appears that public awareness surrounding recent Government SOE share offers has put the sharemarket firmly back on retail investors’ radar this quarter.”

The NZX-50 index has risen more than 13 per cent so far this year.

“We’ve seen a lot of people moving into New Zealand and Australian shares for the yield,” Beale said. “New Zealand shares pay good dividends and at the same time bank deposit [interest] rates have been low.”

Eleven per cent of respondents expected shares to provide the best return on investment, according to the index. That was well behind rental property, with 19 per cent of respondents thinking an investment in bricks and mortar would provide the best return.

The price of the average home in Auckland has risen by around 12 per cent over the past year.

Beale said he didn’t think there was a risk of investors becoming over- confident. “We’re still a way off the dizzy heights of 2009 when confidence got up to [a net] 30 per cent.”

Meanwhile, a survey by the Auckland Chamber of Commerce found confidence among firms in the city continued to rise in the current quarter, with a net 50 per cent of companies believing the New Zealand business environment would improve, up from a net 37 per cent in the last quarter.

The survey also found a net 56 per cent of Auckland business owners thought their own business situation would improve. “There are still challenges, like obtaining finance and finding the right employees, but things are improving,” said the chamber’s chief executive, Michael Barnett.

 

New Zealand Herald 20 May 2013
Article by Christopher Adams 
Photo / Brett Phibbs

Yet another Report, but where’s the real action?

Image

The latest regional economic update report provides a useful summary of how well the regions are performing, but once again it shows how poorly we are at taking ‘game changing’ decisions to get action on the big issues.

With reference to the section on Auckland, Michael Barnett, head of the Auckland Chamber of Commerce, noted that the report claimed that the government and Auckland Council “are working together” to:

  • Improve infrastructure and urban amenities;
  • Develop education and labour opportunities for Auckland’s youth and migrant populations; and,
  • Help the region become more innovative and export driven.

“Here is yet another report setting out Auckland’s growth agenda, but pulling its punch when it comes to spelling out the urgency of decisions that need to be made on Auckland’s big issues,” said Mr Barnett.

For the Chamber and to give the business community some certainty that we are moving past the global financial crises into a period of sustained growth, there are four big game changing announcements that are needed NOW:

  • A ‘game change’ housing action programme target to identify 30,000 – 40,000 new sites in 2013-14 – to show a real response to the need for 13,000 new homes a year against the fact we are only building about 4000 new units a year;
  • Completed business cases for seeking the funding to build the AMETI-East/West Link (critical to Auckland’s freight sector going forward) and Central Rail Link by 2021 – given both projects are substantially unfunded yet have a ‘highest priority’ ranking in the Auckland Plan.
  • A confirmed agenda to finalise the Unitary Plan in a way that enables accelerated delivery of Auckland’s/Government’s growth plans.
  • A confirmation that the International Convention Centre will be built ASAP – given the case for the Centre was made 10 years ago, and with SkyCity offering the $700 million needed to build, “we have run out of excuses for the lack of action,” said Mr Barnett.

For more information contact Michael Barnett, mobile: 0275 631 150.
Michael Barnett, Chief Executive, Auckland Chamber of Commerce.