to Valu in Review for November and first half of December 2005. This is a summary of news articles in the press over the last month or so. It is also the last newsletter for 2005 . We hope that you have an enjoyable break, if having one, and wish you a prosperous 2006. In the mean time…

Read, learn, enjoy, (relax)..

.. and happy investing!

 

On 8 December the Reserve Bank increased the Official Cash Rate ("OCR") for the ninth time since January 2004. The increase was an extra 0.25% taking the OCR to 7.25%. The announcement also included a warning about the future and that this may not be the last increase in the OCR - particularly if the housing sector does not slow up. However many economists are picking that it will be the last rise for some time. The next review of the OCR is 26 January 2006.

Any more increases in the OCR also need to take into account the effect on the NZ currency. As the Kiwi gets stronger against our trading partners it makes imports cheaper (fuelling spending) but it makes our exports more costly compared to other countries (and reducing profit margins for businesses). Increases in the OCR also mean that international investors are attracted by the higher interest rate yield compared to a lot of other countries so invest their money in NZ, which provides more money for the banks to lend as mortgages!

Economic growth is approx 3%. The Reserve Bank hopes to get this down to 1.5% within 2 years.

Inflation is running outside the medium term goal of a maximum of 3%. Currently annual inflation is at 3.4% (as at 30 September). It is expected to stay above 3% until the middle of 2006. Contributing factors to this is house price inflation (house prices are currently 15% higher than the Reserve Bank predicted in December 2004). With the increases in the OCR the Reserve Bank sees house prices reducing by about 5% towards the end of 2006. The other contributing factor has been household spending. Consumers have been spending 14% more than they earn by borrowing against the perceived increase in wealth, due to the increase in property values. This spending should reduce once house inflation is under control.

Wage inflation is up for the quarter ended 30 September due to the skills shortage, low unemployment rate and increase in prices.

On a seasonally adjusted basis the unemployment rate is the lowest for 23 years at 3.4% and the employment growth rate (creation of new jobs) is at 3.5% annually (forecasted at 2.4%).
 

In the year ahead it is estimated that 40% of all fixed mortgages are due for renewal - primarily coming off 1 and 2 year fixed terms. The Reserve Bank believes that the average rate these borrowers are currently paying is 7.2%. With renewal mortgage rates likely to be 0 .6% to 0.8% higher than expiring. The fact that 80% of all mortgage debt is on fixed terms means that any increase in the OCR has a delayed effect until the mortgage renews. The risk of this increase in the OCR and this lag is a harder than expected landing of the economy. This means a curtail in spending, reduced house price's etc.
 

AMP undertakes a survey every quarter throughout NZ in regions looking at residents' average weekly earnings, median property prices and home interest rates. For the last 18 months (to 30 September 2005) the affordability has decreased meaning it takes longer for people to own their own homes. 10 of the 12 regions experienced a decline in affordability. This has been primarily driven by increased median house prices.

As a result of this (lack of) affordability, 30 year loans are now becoming the norm. This is especially true in areas where the house prices are beyond those on average incomes - such as Auckland and Queenstown.

Researcher Infometrics has advised that while people may be finding it tough now it is not as hard now to buy and meet the mortgage payments as it was in the 1980's (especially with interest rates of 20% plus). The Infometrics report said that in 1987, the average home buyer was paying 50% of their income on mortgage interest payments. This compares to about 36% of the income currently.
 

Figures released in mid-November by the Real Estate Institute of New Zealand show the median house price nationally for October was $295,000. (+$5,000 from September). Sales volumes were down from 9186 in September to 8513 for October. This is unusual given that the start of spring is fairly active. The average number of days to sell was 30 (historical average is 40 days)

The housing confidence survey conducted by ASB Bank found that people expect the housing boom to continue to run with 45% of respondents expecting prices still to go higher and 15% expecting a decrease.

Offsetting this is that the ANZ National Bank business outlook survey is at a 17 year low, with 66% of businesses expecting a tougher year in 2006. The survey was unable to identify any particular consistent reason for the gloomy predictions from business other than a fear of higher interest rates and the Government stepping in and regulating the lending market.
 

Research has been released by Infometrics forecasting house prices by 2008. Their predications are as follows:

Northland	+11%
Auckland	+15%
Waikato/ Bay of Plenty/ Gisborne/ Tauranga	+11%
Taranaki/ Manawatu/ Wanganui	0%
Wellington	+15%
Christchurch	0%
Otago/ Southland	-4%

 

Statistics New Zealand has released its predictions for the period 2001 to 2021 as to the number of people living in each household. The key findings are:

- An increase in one person households (due to general aging of the population)
- Decrease in average size family households (due to increase in couples without children and a decrease in the number of two parent families (average size is 4 people per household))
- Auckland would gain about 50% of the increase in households (rising from 419,000 to 614,000)
- The 6 areas that are expecting the biggest percentage growth in numbers of households were:

Queenstown-Lakes District	82%
Selwyn District	59%
Rodney District	58%
Manukau City	54%
Waimakariri District	52%
Western Bay of Plenty District	51%

 

A property owner on Auckland's North Shore had a permit to extend his house. After the final building inspection and after an additional verbal warning, not to carry out additional work, the owner was prosecuted under the Resource Management Act and the Building Act. This was for splitting the house into 2 separate units and adding an additional kitchen. The owner was found guilty by the judicial system and fined $13,000 plus costs.
 

This relates to a landlord who had bought two properties he intended to develop and sell. As it was being declared and run as a business the landlord was eligible to reclaim a part of his costs. The calculation of these costs and GST, and how it was calculated, was being determined. The Court of Appeal found in favour of the landlord.

The case found that it is possible to get refunds from the IRD for past over payments. In other words landlords were at risk of paying too much GST. It is highly recommend that you seek specialist advice from your accountant.