By Frank Newman on 18th September 2016
New Zealand is a world leader. Our economy is doing what most aren’t – growing. Economic activity was up 3.6% in the last year, beating Australia, the US and UK. The remarkable thing is that this growth comes at a time when the dairy sector is suffering from hard times.
Most of the 3.6% growth has the Auckland property sector at its epicentre. The influx of people into the Auckland region has been extraordinary and a booming construction sector has flowed through to more spending on virtually everything. According to BNZ economist, Tony Alexander, “There are one million Kiwis offshore increasingly favourably comparing New Zealand with other countries, and 4.7 million people here who are feeling the same way and may not leave.”
There is also a significant impact coming from the Auckland wealth effect. I can’t recall any other time where so much wealth has been created so quickly. The result is many property owners are experiencing a warm glow of financial success and are viewing the future with some confidence – all of which means they are spending up large on household goods like whiteware, very large screen TVs, and new vehicles.
The current property boom is a timely reminder of some realities about investment, at least in New Zealand.
• Property is cyclical in its nature, although the cycles are skewed in favour of the rises rather than the falls – the down cycles tend to be flat or relatively small falls, while the up cycles are quite quick and large. Predictions by some high-profile market commentators of large house price corrections have proved to be embarrassingly incorrect. During the global financial crisis, prices only fell 10% over 2008 and recovered by the end of 2011. They fell 7% during the 1998 Asian Crisis. Predicting the timing of these cycles is difficult so it’s better to be invested in the market than not. The key issue is moderating one’s debt level to the market conditions of the day.
• Property investment should be seen as a long-term proposition and being in the market is more important than timing. Property trading is a very different scenario and generally requires boom conditions.
• Low interest rates are likely to remain low for longer. Low interest rates are making fixed term deposits less attractive, so those with savings in the bank are likely to look elsewhere for an investment opportunity.
• Property investment remains the most attractive investment market and is likely to remain so in the future. The sharemarket lacks the depth and trust to compete for long-term investment capital, although exchange listed index funds may be of interest to some investors.
But the good news story is not only about property and people. It’s also good news on the trade front. Exports of goods increased 7.6%, which is the highest increase since 1998. Dairy exports rose 13% and meat exports 8.5%. That bodes well for the provinces.
There are now signs that the dairy sector is in an early recovery phase – albeit that the light at the end of the tunnel is some distance away. Many farmers are still operating at below break-even level and my guess is that it will be another year or two before dairy prices are at levels where farmers are back in the black. The sector also appears to be doing a good job of moving towards more value-added product with better profit margins and greater resilience to commodity price changes. Generally the sector is well placed to take advantage of what is likely to be greater world demand for protein-based products.
The good news is that farm values have not plunged as some had expected so there has not been any domino effect from the banking sector, and with improved commodity prices the risks of that happening have reduced.
Tourism too is likely to continue its impressive growth, particularly as travel costs remain low and Chinese tourism expands. There is also huge potential in niche areas, particularly for Northland and the East Coast, where the Manuka honey sector is expected to boom within the next few years.
All of this bodes well for property values in provincial areas.