Matt Nolan

More concerns about limited building activity

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The Dom post has two articles on the potential shortage of property in New Zealand, one on builders capacity (the labour force of traders) and another on the response of rents to the undersupply.

Now we have talked about this before.  Structural factors have prevented developers and builders from getting funding (go credit rationing) which has lead to a collapse in house building activity.  However, a fall off in building will help to support prices by making property more scarce.

In the short term the recent drop in residential building will prevent a free-fall in prices.  The question then is, how many of these structural factors are temporary (credit rationing) and how many are permanent (constraints on land use, RMA?)?

If we only have temporary factors keeping down building then we can expect a sharp decline in prices once this has worked through the system and the “undersupply” has been dealt with.  If there are structural factors (which National and Labour both believed) then there will be some support to prices until these factors are dealt with.

Another thing I would point out.  There is a feeling out there that house price falls=bad, greater housing affordability=good.  However, house price falls=greater housing affordability – so unless bad=good I think this is a factor we have to keep in mind when discussing the housing market …

Matt Nolan

Labour suggests breaking mortgage contracts

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It appears that the Labour party has decided that, in some cases, contracts shouldn’t be enforced. Phil Goff has suggested that people should be able to easily break out of their fixed rate contracts to jump on a lower interest rate.

I tell you what, while we’re at it why don’t we also make it that employers can break contracts and make employees reapply for their jobs when wage rates are falling (when unemployment is high)? Why don’t we make it the contracts are only a suggestion and have no actual legal force in setting the price and quantity in a transaction.

I’ll tell you why – because contracts act as a mechanism to prevent “hold-up” between agents. It allows trade to happen in places where issues of bargaining power prevent efficient trade.

People committed to a mortgage in knowledge of the costs and risks – why should we suddenly make banks pay for that? If the government goes around intervening in contracts, will the banks be as willing to loan to people who want to buy homes anymore?

Wow, I’m glad that we don’t have Labour in charge in this tough economic climate …

Update:  Anti-Dismal covers here.  He provides a tighter argument for hold-up than my rant 😉

Matt Nolan

Is New Zealand fighting a wave of protectionism?

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Protectionism is a scary thing during a global downturn. A bunch of nations trying to “protect” their own interests can turn a bad situation into a worse one.

New Zealand wants to fight off what it sees as protectionism – namely subsidies for dairy farmers in Europe. However, although there is too much protectionism out there I’m not sure our argument against this set of policies is watertight.

If we think that the current shock to dairy prices is temporary, and that dairy prices will come back when the current massive increase in supply works through the system, then it makes sense for Europe to temporarily subsidise farmers in the face of a MASSIVE CREDIT CONSTRAINT.

Industries all around the world are struggling to sort out their cash flow because of a freeze up in lending. If the firms are still profitable given the expectations of future prices, then it makes sense for domestic government to prevent the industries from failing.

Do you think this type of intervention is defendable – discuss 😉

Matt Nolan

Chinese growth slows rapidly

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Given the increasing importance of China as a trading partner to New Zealand (they are our 4th largest trading partner, account for 4.5% of our exports in the year to November *) and as a major support for our main trading partner, Australia, the rapid slowdown in growth in China should be concerning.

Both Calculated Risk and Econbrowser mention that Chinese economic growth has slid to 6.8%pa in December – down from 9.0%pa in September.  According to Nouriel Roubini this indicates that Chinese economic activity was virtually unchanged between the September and December quarters (seasonally adjusted) – indicating a massive loss of momentum in the worlds fastest growing economy.

This slowdown is a lot more rapid than expected – as is illustrated by this graph from Econbrowser:

Matt Nolan

Will a lower currency prevent a big rate cut?

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Over at Tumeke, Tim Selwyn states:

Not even our high interest rates are enough anymore (to keep our currency elevated) – that’s why I can’t see our Reserve Bank slashing rates on the 29th as aggressively as some people think they should

Now Tim raises a relevant point – a lower dollar both increases prices and stimulates activity for exports, as a result you would expect an exogenous fall in the value of the New Zealand dollar to constrain the size of any rate cuts in New Zealand.

However, the current value of the TWI (53) is broadly in line with where it was when the RBNZ cut rates by 150bps – and at the time they said that they believed that any further declines in the currency would “help” not hinder monetary policy.  My impression is that this is because the Bank is interested in loosening as quickly as possible – without loosening “too far”.  If the exchange rate is willing to adjust to a deterioration in New Zealand’s external position, then this is of great help to the Bank, and allows them to be more “conservative” by cutting in 75bp and 100bp chunks rather than heading straight for and OCR of 1% 😛

As a result, I doubt that the current level of the TWI would prevent a large scale cut of the OCR by the RBNZ at its next meeting.

Matt Nolan

December quarter inflation: 3.4%

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So, annual growth in the consumer price index has fallen from 5.1% to 3.4%.  A sharp decline in petrol prices appears to have been the main driver of this drop off in annual price growth.

However, what about “inflation”.  Annual non-tradable growth increased to 4.3% – the highest level since late-2005.  If I wasn’t now expecting New Zealand economic activity to plummet in March (given poor consumer and business sentiment and temporarily lower trade incomes – note, these are temporary shocks 😉 ) I would be highly concerned about rate cuts.