RBNZ To Maintain Rates Despite Rising Housing Market
BMI View: The improving external economic landscape has led to growing optimism over New Zealand's 2013 economic performance. Rising property prices and an accelerating uptake of housing debt by households suggest that there is a risk the Reserve Bank of New Zealand (RBNZ) could hike rates. However, we believe that a sluggish recovery in the business sector will deter the central bank from hiking rate. Rather, we expect them to use measures specific to the property market to cool the market. Thus, we maintain our end-2013 forecast for the official cash rate at 2.50%, and remain bearish the New Zealand dollar.
Economic data coming out of New Zealand has begun to show a slight pickup. Performance indices for New Zealand's manufacturing and services sectors have marked two consecutive months of expansion, with the new order sub-indices for both sectors moving further into expansionary territory. Together with a booming property market, this is leading to calls for the RBNZ to tighten monetary policy.
|Housing Debt On The Rise|
|New Zealand - Housing Related Debt, % chg y-o-y|
Worrying Pick-Up In Growth Of Housing-Related Debt
The upward trend of house prices suggests that households are turning more optimistic about future prices and incomes, with the median price for a house currently 3.2% higher than the previous peak recorded in Nov 2007. The strong climb in property prices has been accompanied by further growth in housing-related debt, which rose to 3.7% year-on-year (y-o-y) in December, the highest rate since January 2009. Alongside the debt increase, the ratio of median house price-to-average disposable income has now risen to 11.9 times, close to the 12.3 times before the previous crash. These signs have spurred the Reserve Bank of New Zealand (RBNZ) to highlight the risks of a possible reflation of the property bubble, while it has repeatedly warned of stretched household balance sheets.
|New Zealand - Effective Floating Mortgage Rates & Business Lending Rates, %|
Property-Specific Measures Likely Preferred To A Rate Cut
We believe that the RBNZ will look to cool the property market through specific measures. This is because much of the credit uptick has been housing-related. Indeed, since the March 2011, floating rate on mortgages has fallen below the business lending rate, largely driven by the growing competition in the banking sector for mortgages, rather than a broad revival in optimism for all sectors in the economy. As such, we expect the RBNZ to opt for more property market-directed measures, such as decreasing loan-to-value ratios and tightening capital requirements for banks (see Government's Property Measures Clouded By Election Concerns, Jan 30 2013). We believe that the implementation of these measures will help alleviate housing demand.
Solidifying Business Recovery A Greater Concern
The uneven recovery within the economy and weak job market leads us to believe that the monetary authorities will err on the safe side, and hold back monetary tightening until the recovery is more widespread. Despite the broad improvements in the performance indices, employment sub-index for both the manufacturing and services sector remained staunchly in contractionary territory. Therefore, we expect the central bank to first try to cool the property market with measures that solely impact the housing sector, before looking to hike rates in 2014. As such, we have kept our official cash rate end-2013 forecast at 2.50%.
|More NZD Weakness Expected|
|New Zealand - Exchange Rate NZD/US$ (LHS) & NZD Forward Rate Agreement 6mX9m, %|
The current cost of the 6X9month forward rate agreement on the New Zealand dollar suggests that market participants are expecting a 25 basis points (bp) hike by the end of 2013. Thus, we believe that there is opportunity in receiving the fixed rate in the forward rate contract. The New Zealand dollar is also likely to continue weakening from current levels.