1. Rock star economy but who can afford a house? NZ Update Chris Tennent-Brown – ASB Senior Economist August 2015

2. 2 Topics NZ economic snapshot. Housing market comments. Strengths and weaknesses– sectors and regions. What next?

3. 3 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.

4. 4 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.

5. 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.

6. 6 Elsewhere, it’s a little more encouraging Weaker dollar, reasonable prices, and lower interest rates

7. 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.

8. 8 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.

9. 9 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.

10. 10 Sector employment stories

11. 11 Sector growth stories (GDP)

12. 12 Housing construction

13. 13 By region……

14. 14 The NZ economy

15. 15 RBNZ: Rock Star Governor?

16. 16 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 peaked

17. 17 Mortgage rates

18. 18 Housing market

19. 19 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.

20. 20 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.

21. 21 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.

22. 22 Auckland houses unaffordable

23. 23 Debt...doesn’t have to reduce (but it might)

24. 24 Other ways of looking at the issue

25. 25 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.

26. 26 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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