Rock star economy but who can afford a house?NZ UpdateChris Tennent-Brown – ASB Senior EconomistAugust 2015

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Topics

• NZ economic snapshot.• Housing market comments.• Strengths and weaknesses– sectors and regions.• What next?

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Disclaimer

This document is a private communication and is not intended for public circulation or for the use of any third party, without the approval of ASB. The information contained in this document is given with an express disclaimer of responsibility. No right of action shall arise against ASB or its employees either directly or indirectly as a result of this information. Those acting upon this information do so entirely at their own risk. This information does not purport to make any recommendation upon which you may reasonably rely without taking further and more specific advice.

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Rock star economic growth• Growth trend is around 2.5-

3%. Largely led by strong population growth, consumer spending.

• Great performance by global standards.

• Export outlook mixed. Dairy a key risk this year.

• Low interest rates and lower NZD will support growth over 2016.

-3

-1

1

3

5

7

-3

-1

1

3

5

7

Mar-89 Mar-94 Mar-99 Mar-04 Mar-09 Mar-14

NZ GDP GROWTH

Source: Stats NZ, ASB

%

(f)

%

Annual av erage %

Per quarter

5

Dairy doldrums• Dairy fundamentals are taking

a back seat to very weak market sentiment for now.

• However, taking a step back (and a deep breath), we expect the dairy price bottom is nigh.

• Nonetheless, the milk price this year is going to be low.

0

2

4

6

8

10

05 06 07 08 09 10 11 12 13 14 15 16 17 Long Run

MILK PRICE AND DIVIDENDS(per kg milksolid)

Source: Fonterra, ASB

$

ASB Milk Priceforecasts

Milk Price

Dividend

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Elsewhere, it’s a little more encouraging

• Weaker dollar, reasonable prices, and lower interest rates

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

2011 2012 2013 2014 2015 2016

PRICES FOR SELECTED NZ FOOD EXPORTS TO CHINA

Lamb

Source: Stats NZ

Mutton

Wine

Dairy (whole milk powder)

Kiwifruit

Beef

IndexJune 2011

year = 1

Note: 2015 includes 11 months to May0

6

12

18

24

30

36

0

3

6

9

12

15

18

05 06 07 08 09 10 11 12 13 14 15

NZ EXPORTS(Annual $ billion)

Source: Stats NZ

$

Dairy

Meat

Forestry

$

Other (RHS)

7

Tourism doing well

• Record tourist arrivals over the past year• Lower NZD a boost for local operators• Chinese visitor arrivals keep lifting, Australians keep coming.

160

180

200

220

240

260

280

05 06 07 08 09 10 11 12 13 14 15

Source: Stats NZ

'000 NZ SHORT TERM ARRIVALS(monthly, seasonally adjusted)

Lions tour

RWCCWC

0

50

100

150

200

250

300

350

Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15

Source: Stats NZ

'000 ANNUAL CHINESE SHORT-TERM

ARRIVALS

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Strong population growth

• Net migration at record highs.• Fewer permanent departures

as Australian job opportunities slow.

• Increased permanent arrivals, returning NZer’s from Australia and skill shortages attracting foreign labour.

-20

-10

0

10

20

30

40

50

60

-20

-10

0

10

20

30

40

50

60

Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

NZ NET MIGRATION(annual total)

Source: Stats NZ

'000s '000s

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Strong labour demand AND supply

• Labour demand is strong, with employment up 3% yoy.

• Construction and manufacturing key drivers of employment demand.

• However, labour supply is growing strongly.

• Strong net migration, dominated by young people motivated to find jobs.

• Nominal wage growth is weak, but real wage growth is strong.

0

2

4

6

8

10

12

-3

0

3

6

Mar-93 Mar-97 Mar-01 Mar-05 Mar-09 Mar-13 Mar-17

EMPLOYMENT & UNEMPLOYMENT

Source: Stats NZ, ASB forecasts

%

(f)

Unemploy ment rate (rhs)

Annual employ ment growth

%

10

Sector employment stories

-25 -15 -5 5 15 25

Wholesale tradePublic administration and safety

Education and trainingMining

Electricity, gas, water, and waste servicesTransport, postal, and warehousing

Financial and insurance servicesRental, hiring, and real estate services

Professional, scientific, technical,…Health care and social assistanceAgriculture, forestry, and fishingInformation media and telecom-…

Arts, recreation, and other services(3)Retail trade, and accommoda-tion and…

ConstructionManufacturing

SECTOR GROWTH (000's, annual change)

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Sector growth stories (GDP)0.0 2.5 5.0 7.5 10.0 12.5

Agr i/forestry/fishing

Mining

Manufacturing

Elect/gas/water/waste

Construction

Wholesale Trade

Retail Trade & Accommodation

Transport/postal/warehousing

Media/telecommunications

Fin. & insurance services

Rental/hiring/rea l estate

Prof/scientific/technical/admin

Public admin & safety

Education/training

Health care/social assistance

Arts/recreation/other services

Q1 2015 PRODUCTION GDP(Annual % Change)

-30

-20

-10

0

10

20

30

40

Mar-89Mar-93Mar-97Mar-01Mar-05Mar-09Mar-13Mar-17

NON-RESIDENTIAL INVESTMENT(annual average growth)

Source: Stats NZ, ASB est

%

(f)

`

-30

-20

-10

0

10

20

30

Mar-89Mar-93Mar-97Mar-01Mar-05Mar-09Mar-13Mar-17

RESIDENTIAL INVESTMENT(annual average growth)

Source: Stats NZ, ASB est

%

(f)

`

12

Housing construction

0.0

0.4

0.8

1.2

1.6

2.0

2.4

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

RESIDENTIAL BUILDING CONSENTS(3mma, thousands)000's

Source: Stats NZ

NZ

Auckland (rhs)

000's

0

100

200

300

400

500

600

700

Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

AUCKLAND RESIDENTIAL CONSENTS(3 month moving average)

Source: Stats NZ

Houses

Townhouses

Apartments

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By region……Share of NZ economy Rating

Mar-14 Mar-15Annual growth = % 000s000s annual 000s annual $m annual $000s annual $m annual No. annual 5 - hotQtr(t) / Qtr(t-4) growth growth growth growth growth growth 1- notNorthland 2.5 166 0.9% 74 -0.1% 430 9% 341 2.2% 81 -4% 1183 8% Auckland 35.3 1527 2.3% 797 4.8% 5295 10% 790 13.9% 1162 14% 28449 16% Waikato 9.0 431 1.5% 221 2.9% 1401.9 7% 358 3.7% 277 -4% 4503 14% Bay of Plenty 5.2 282 0.9% 139 3.7% 899 1% 401 4.3% 188 20% 2948 16% Gisborne 0.7 47 0.2% 128 -2% 263 -2.5% 12 28% 235 -9% Hawke's Bay 2.8 159 0.6% 385 4% 333 1.0% 68 7% 1272 8% Taranaki 4.0 115 1.1% 60 4.2% 255 -4% 337 2.1% 62 -11% 1032 10% Manawatu-Wanganui 4.0 232 0.4% 108 2.0% 632 4% 253 0.5% 95 51% 1981 7% Wellington 13.2 492 1.0% 266 -0.9% 1548 5% 438 0.7% 244 -23% 5248 11% Tasman 49 0.6% 157 17% 420 0.8% 39 62% Nelson 49 1.2% 202 15% 402 2.6% 24 1% Marlborough 1.0 45 0.2% 164 -6% 365 3.0% 36 45% West Coast 0.7 33 -0.6% 95 -38% 199 -0.7% 17 6% 237 20% Canterbury 13.1 574 2.0% 330 3.7% 2109 13% 442 5.5% 1072 17% 8028 14% Otago 4.3 212 1.4% 122 4.1% 827 7% 352 3.5% 166 14% 1790 13% Southland 2.4 97 0.5% 55 5.4% 277 11% 220 1.2% 44 13% 692 -3% New Zealand 100 4510 1.5% 2361 3.2% 14805 7% 491 7.7% 3588 10% 58818 14%

The place to be Be there or be square Fair to middling Needs an energy injection Take pity

PopulationJun-14

EmploymentMar-15

1.1%

House PricesMar-15

Retail TradeMar-15

New Car SalesMar-15

12%1220

99 3.6%

911.8

ConstructionMar-15

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The NZ economy

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RBNZ: Rock Star Governor?

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RBNZ rate cuts will keep mortgage rates low

• RBNZ cut the OCR 25bp in both June and July.

• We expect 2 further 25bp cuts over the rest of 2015, to 2.5%.– Weak dairy outlook– Falling business

confidence, – Canterbury rebuild has

peaked2

4

6

8

10

2

4

6

8

10

Mar-01 Mar-05 Mar-09 Mar-13 Mar-17

NZ INTEREST RATES% %

(f)

OCR

10-year govt bond

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Mortgage rates

4

5

6

7

8

4

5

6

7

8

Var iableRate

1-year rate 3-year rate 5-year rate

HOME LOAN RATES

Source: ASB

% %

10-y ear av erage

July 2014

Current

Current Low LVR special rates

Two-y ear ahead f orecast

4.0

5.0

6.0

7.0

8.0

4.0

5.0

6.0

7.0

8.0

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

HOME LOAN RATES (Specials and low LVR Rates)

Source: ASB

% %

Variable Rate

2-year

3-y ear 1-y ear

5-y ear

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Housing market

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Supply and demand

• In Auckland there is only 9.6 weeks’ inventory of houses for sale.• Nationwide inventory of houses for sale is nearly 20% below a

year earlier (20 weeks’ worth).• Asking prices in Auckland are at a record high. The combination

of very low mortgage rates and low numbers of listings means more house price gains should be expected.

0

10

20

30

40

50

60

70

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

Source: realestate.co.nz

Auckland

NUMBER OF WEEKS INVENTORY

Nationwide

CanterburyWellington

30

36

42

48

54

60

5

8

11

14

17

20

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

Source: realestate.co.nz

Auckland

TOTAL HOUSING INVENTORY(thousands, seasonally adjusted)

Nationwide (rhs)

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What next?

• House price expectations hit a record within the latest ASB Housing Confidence Survey, with a net 65% of respondents expecting house prices will increase.

• Far fewer respondents expect higher interest rates, and more people are expecting interest rate declines this year.

• Sentiment about buying a house varies from region to region. Nationwide a net 11% see now as a bad time to buy.

ASB Housing Confidence Survey (Source: Camorra)

Net percent who believe (3 months to July 2015) …

Good time to buy a house

House prices will increase

Interest rates will increase

Auckland -27% 71% -7%Rest of North Island 0% 63% 0%Canterbury -17% 58% -7%Rest of South Island -3% 61% 0%TOTAL NZ -11% 65% -3%Compare 3 months to April 2015 -8% 56% 11%

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Housing market

• Auckland housing market still tight, low interest rates add further fuel to the fire.

• Canterbury market starting to find some balance.

• Outside of Auckland and Canterbury, low interest rates boosting demand, housing demand/supply balanced.-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

REGIONAL HOUSE PRICE FORECASTS (annual growth)

AKL

CHCH

Wellington

Other

Nationwide

Source: QV, ASB(f)

ASB f /c

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Auckland houses unaffordable

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30

40

50

60

70

80

Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

MORTGAGE REPAYMENTSOF A FIRST HOME BUYER

% H/H INCOME(25 year, 20% deposit)

Source: RBNZ, REINZ, ASB estimates

NZ

Auckland

Illustrative only. Assumes median house price and median household income.

4

6

8

10

4

6

8

10

Jan 00 Jan 05 Jan 10 Jan 15

TotalAucklandCanterburyWellington

HOUSE PRICE TO INCOME

Source:StatsNZ, REINZ

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Debt...doesn’t have to reduce (but it might)

4

6

8

10

12

14

16

18

40

60

80

100

120

140

160

180

Mar-91 Mar-95 Mar-99 Mar-03 Mar-07 Mar-11

%%NZ HOUSEHOLD DEBT(% of disposable income)

Source: RBNZ

debt serv icing (rhs)

household debt (lhs)

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

50

80

110

140

170

Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12

$, '000%

NZ HOUSEHOLD DEBT & HOUSE PRICES

Source: RBNZ, REINZ

Median house price (rhs)

Household debt (% disposable income, lhs)

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Other ways of looking at the issue

0

50

100

150

200

0

50

100

150

200

62 67 72 77 82 87 92 97 02 07 12 17

Source: QVNZ, ASB

REAL HOUSE PRICE INDEX (deflated using CPI)

80

100

120

140

160

80

100

120

140

160

70 75 80 85 90 95 00 05 10 15

Source: QVNZ, ASB

HOUSE PRICES/NOMINAL GDP(Ratio, Average 1980-2000 = 100I)

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In other words……

• Some of the housing issues relate to the types of houses we have built, and still want.

• Zoning also plays a part in affordability.• So does transport.• The trade offs to make housing more affordable aren’t easy.• We need to review our ideas of appropriate housing.

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Summary

• Global growth gradually recovering. • NZ economy is set to record 2.5-3% growth over next 2 years.• But inflation pressures are low, and we expect the RBNZ to cut

a further 50bp, OCR back to 2.5% later this year.• Housing: continuing upward pressure on house prices and

downward pressure on interest rates.• Auckland’s affordability stretch will remain a problem for a

while – opportunities for elsewhere.

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