Plain language and professional plundering

“Our challenge is to speak in plain English”. The new Reserve Bank Governor, Adrian Orr , was clear about interest rates last week.

“The Official Cash Rate (OCR) will remain at 1.75 percent for some time to come. The direction of our next move is equally balanced, up or down. Only time and events will tell.”

Those two sentences pretty much summed up the most recent OCR announcement. No change to interest rates is likely until the end of next year – and when there is a change it’s anyone’s guess as to what the change will be.

This is useful information for property investors as it lets those who have mortgages coming off fixed rates know that there is no need yet to lock in their long-term rates.

The Governor’s announcement also included the release of the Monetary Policy Statement. It contained the text of the new Policy Targets Agreement with the new Government, which adds an employment objective to the long-standing inflationary targets. It said the role of the Bank is to, “…conduct of monetary policy [that] will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.”

Unlike the inflation target, which is very specific and set at between 1-3%, the employment target is not yet quantified.

About immigration they say, “We assume net immigration will fall due to the strengthening Australian labour market, tighter visa requirements, and people with temporary visas departing. With lower population growth, consumption growth and house price inflation are expected to decline.”

Immigration has been a significant driver of house prices, particularly in Auckland, and will continue to be so. It is probably the most critical risk factor for property investors, especially given Auckland’s house prices have been flat for the last year, despite the high immigration inflows.

It is now clear that speculators have left the market because the quick-flick easy-money opportunities are no longer there. According to the Real Estate Institute, there are estimated to be half the number of investors in the Auckland market than a year ago. Some are now looking to the provinces which are still experiencing strong house price growth, but the flight of investors from the Auckland market is a seismic shift in sentiment.

This flow of capital out of Auckland into provincial property markets may give those markets some price momentum, but in my view, this is a red flag signalling provincial property prices are somewhere near the top of the house price cycle. I expect the provinces will soon experience the Auckland effect with prices flattening out and falling sale volumes.

The Reserve Bank effectively says as much in not so plain English: “House price inflation is expected to remain relatively subdued, reflecting the decline in net immigration, affordability pressures, and government policy changes such as restrictions on foreign buyers. Consistent with this, consumption growth has eased in the past year and is expected to decline further.”
If immigration numbers do drop away as the Reserve Bank is predicting, then the housing market could turn negative very quickly. Politicians in Wellington may need to change their anti immigration stance if they wish to avoid a backlash from homeowners who see the wealth in their homes declining.

Immigration seems to be the only grey cloud on the horizon. Generally, the Reserve Bank is expecting the economy to perform well in a low interest rate environment. One thing that is likely to support demand is the huge difference between the cost of building a new home and buying an existing property. In Whangarei for example the average building cost is likely to be close to $800K while the average house price is more like $500k.

In a column appearing on, Duncan Garner was highly critical of New Zealand’s inflated building costs.

“Building products cost 30 per cent more here than in Australia. It is daylight robbery, and we allow ourselves to be plundered by the day. How do I know? I just built an investment property on the Gold Coast. She’s brand new. It cost me a $1000 deposit to get in, and $510,000 all up. Four bedrooms, media room, double garage, air conditioning units, landscaping, letter box, fences, a garage remote, everything, even tenants. A nice 220-square-metre house at a realistic price. It cost me about $1000 a square metre to build; in New Zealand the same house costs $3000 a square metre.”

He’s right, we are getting plundered. Horror stories include the example of an engineer who quoted a client $8,000 for house calculations, but charged $20,000! The same engineer charges $800 for a site inspection. No wonder building a new home costs so much.

Perhaps this is an area the politicians in Wellington should be investigating, given they have no fewer than 76 reviews and enquiries on the go at present!

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