Two telling points for the NZ economy

Is this as good as it gets for New Zealand?

The country’s terms of trade (export prices divided by import prices) are a whisker from an all-time high. New Zealand Inc’s net-buying power hasn’t been this strong since the United Kingdom - then New Zealand’s major export market by far - joined the European Economic Community in 1973. 

Encouragingly, the recent strength has been more broad-based than other peaks in recent years. 

"The recent strength has been more broad-based than other peaks in recent years.”  -Sharon Zollner

Dairy has certainly played its part, with prices up around 50 per cent off the lows of a year ago, but it’s a broad story, with forestry, apples, kiwifruit and meat all getting in on the action. 

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No wonder the NZ dollar is going up, as strengthening commodity prices join solid domestic data to make for a pretty consistent good-news story.

Stressing the risks

Elsewhere, much analysis and discussion has gone into looking at the vulnerability of property investors relying on capital gain should interest rates rise strongly or house prices fall.

In its Financial Stability Report last week the Reserve Bank of New Zealand cast the net wider, taking a detailed look at the vulnerability of house owner-occupiers to 7 per cent or 9 per cent mortgage rates, taking into account household income and expenditure data from Statistics NZ’s Household Economic Survey and surveyed debt-to-income ratios.

It concludes around 4 per cent of all borrowers (representing 6 per cent of the stock of mortgage debt) and 5 per cent of recent borrowers (9 per cent of the stock of debt) could not meet essential expenses (would be in “severe stress”) if mortgage rates were to rise to 7 per cent.

At 9 per cent mortgage rates (admittedly pretty hard to envisage in the current low-inflation global environment but far from unprecedented over New Zealand’s history), 7 per cent of all borrowers and 18 per cent of all recent borrowers (representing 29 per cent – almost a third – of the stock of mortgage debt) would be in that situation.

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In practice that would lead to a surge in sales with an accompanying uncomfortably fast house price adjustment downwards, with flow-on effects in the investor market.

There’s no prize for guessing which region the stress would be focused in, with Auckland housing-affordability ratios far more stretched than anywhere else in NZ.

Sharon Zollner is an Associate Director & Senior Economist, ANZ NZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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