The RBNZ continues to face headwinds in the form of historically low levels of inflation and last quarter, employment numbers failed to impress. With employment figures now forming a key part of interest rate decisions, this number has taken on greater significance.
The RBNZ will release its quarterly monetary policy statement on Wednesday 13th February. It is expected that rates will be kept as is while forecasts on New Zealand's GDP and inflation rates are cut back.
The focus of economic news headlines is mainly on inflation, employment, GDP and trade balance data when analysing interest rate decisions. But what is the influence of the property market on the New Zealand dollar relative to other currencies?
This month we look at the residential housing market, the changes made by the Labour government, and those mooted by the RBNZ.
1. Foreign Buyer Ban (implemented)
Stats NZ provided data which shows foreign buyers make up around 3% of the residential property market. That said, a much larger group of foreign buyers that are successful at closing property deals are putting upward pressure on prices.
2. Bright-Line test extended from 2 to 5 years (implemented)
Replacing the original two year Bright-Line test, this measure has a strong impact on curbing speculative behaviour and reaches those who have one investment property with no intention for resale.
3. Ring-fencing of property losses (proposed)
The IRD forecast that removing this tax break will cost investors Adam Cracroft ex.com around $2,000 per property each year. Investors will no longer be able to use losses on investment properties to offset against their other income.
4. Increased capital requirements for local banks (proposed)
The Reserve Bank’s consultation paper is proposing an increase of between 20-60% from current levels of capital for the ‘Big 4’ banks, eating into their profits over the coming years. This will increase the cost of borrowing as banks’ will look to offset this impact on their profits.
Together, these four factors reduce the attractiveness of property investment in NZ and should have the intended impact of relaxing house prices. Investors may have to focus on housing developments, which will help to increase the supply of housing and in turn will limit price increases. However, construction activity is set to peak this year and tail off as a number of developments are finished.
The State of the New Zealand Economy
The NZ economy is going through a shift of capital investment as investors look for other avenues to make a return. The impact on the housing market may led to a reversing of the wealth effect limiting inflationary pressures. We hope that this will lead to an increase in investment into local businesses, both listed and privately owned. The NZ stock market currently lacks local investment beyond Kiwi Saver funds.
Many exporters will benefit from a lower NZD, which will in turn benefit terms of trade. As the NZ economy makes the transition from housing to business investment, the NZD should remain under pressure until we see the long-term benefits of these fundamental changes.
Coupled with the increased cost of borrowing, for banks, the RBNZ might feel pressure to reduce interest rates in order to encourage business investment. The property market changes are leading to a restructure of investment in NZ and historically this has resulted in a lower NZD.