Archive for April, 2013

Power Price Data Shows Hypocrisy of Labours Claims

Labour and the Greens launch their electricity policy later today, and if the drought had not already broken the deluge of crocodile tears from opposition MPs would have done the job.

Expect to hear much about high power prices and their impact on the less well off when Labour leader David Shearer and Green co-leader Russel Norman announce their power prices policies.

The difficulty they face is the largest sustained household price increases for a generation or more happened between the end of 2001 and the end of 2008.

To get some comparison, look at the graph, compiled from Statistics New Zealand data.

In the 11 years to the final quarter of 2001, household electricity prices rose 47%. That was still above the compound rate of inflation over that time (21.2%) — but nothing like what was to follow.

In the seven years between the final quarter of 2001 and the final quarter of 2008, household power prices rose 63.5%. Over the same period, the compound rate of inflation rose 21.0%.

The reason for picking the final quarter of 2001 is because this marked a turning point in electricity prices — for households, as well as for businesses.

High in Labour and Green party demonology on electricity is the reforms of National’s late 1990s Energy Minister Max Bradford.

These chopped the old Electricity Corporation into four companies, split the industry between lines companies, generators, and retailers, and sold off Contact Energy.

Bitterly attacked

The changes were bitterly attacked, and when the government changed in 1999 Labour Energy Minister Pete Hodgson promised a more “active management” of the portfolio, with lower power prices.

There was an inquiry into the sector in 2000, with much consultation and much talk about “long-term thinking”.

As can be seen from the graph, this is not quite what happened. After a period of quiescence, households started to be hit with much higher power prices. Commercial electricity rates turned upwards as Well.

Taking place as they did three years after the Max Bradford reforms took effect, and two years after a change of government, it is a little difficult to see how these were much to do with decisions made in 1998.

To be fair, there were demand factors pushing up prices -the biggest being the high rate of conversions of former sheep and beef farms to dairying. Milking sheds, operating six or more hours a day, use quite a bit of electricity.

But the biggest factor was an aggressive dividends policy from 2002-07 dividends from the main electricity Companies averaged, in total, slightly less than $500 million a year.

So todays talkfest from the opposition parties is going to be so much hypocritical handwringing about the effect of higher power prices on the poor.

Lt would not be so nauseating if Labour had not been prepared to gouge those same poor with historically high power prices so as to fund the large, Statist empires in Wellington.

That though does not let the current government off the hook. Household power prices are still rising above the rate of inflation. Yesterday’s Consumer price index showed benign inflation of 0.9% but power prices up 5.2%.

It is not a one-off: household power prices are still rising above the rate of inflation. Since the end of 2008 they are up 15.6% when compound inflation is up 9.2%.

But it is still nothing like the power price gouge which took place between 2002-08.

Source: The National Business Review

April 19 2013 | Tim Manning | No Comments »

Capital Gains Taxes: Myths, Misconceptions and Lies

The country is going through another bout of bumper sticker economics over a capital gains tax.
With the Auckland property market performing its well-known impression of a runaway circus elephant whose keepers have shoved a cocktail of speed and hallucinogens into the feed — and with the New Zealand dollar also having one of its periodic bouts of hyperkineticism the calls have gone out again for such a tax.
The latest push seems to have been fuelled by Labour leader David Shearer’s claim on television that a capital gains tax would cause people to put more money into businesses.
As an example of muddled economic thinking, it takes some beating and it is worth quoting Mr Shearer in full:
“What I’m saying is that what we need to do is to grow the economy in a way that it’s not growing at the moment, and we’ll be talking about Tiwai Point in a little while … one of the big problems about— no, no, let me finish — one of the biggest problems about that is that the exchange rate is so low that we are seeing many of our businesses actually going out of business because they are not being able to succeed.
“We’re not putting our money in the profitable sector; it’s going into the property market because we don’t have a capital gains tax that will help us direct money into those areas.
“And if you are wanting to raise money, then at least put money into businesses — invest in businesses through the incentives of capital gains, and that brings, obviously, money into the government as well.”
Leave aside for the minute that Mr Shearer is under the strange misapprehension New Zealand’s exchange rate is on the low side. Even though it attracted quite a bit of negative comment, that part is not the most important part of his comment.
The more important parts are the claim that New Zealand is not putting money into its profitable sector, and that a capital gains tax would mean the country would start doing so.
None of those claims are true.
First, capital investment in New Zealand has held up remarkably well, despite some tough economic times.
Furthermore, residential investment has actually fallen.
Not what you’ve heard?
Then take a look at the figures from the most recent GDP figures, released last month.
Overall business investment rose 5.4% last year, dominated by 7.6% rise in investment in plant machinery and equipment.
And residential investment is now only14.4% of total capital investment in New Zealand in 2007 it was 20.4% of total capital investment.
In other words, a major shift in investment is happening. The notion that New Zealand firms are being starved of investment because of the absence of a capital gains tax simply is not true.
Not all capital gains taxes are alike
The second point is there is no reason to think the kind of capital gains tax being pushed by Labour and the Greens would do what they say it would do.

It would, first, apply to businesses, which are not Current subject to capital gains tax It is difficult to see how this is supposed to help such investment.

Second, it would not apply to two-thirds of the residential property market, because it exempts owner occupied housing. This is important, because opposition politicians are inclined to talk as if everyone who advocates a capital gains tax is advocating the same kind of CGT they are pushing.

True, Treasury, the OECD and the IMF have all talked of New Zealand having a Capital gains tax.

But not for the same reasons – and certainly not in the same form as what is being pushed at present.

There is no reason to think a Capital gains tax would stop any future property bubble: it certainly did not in Australia or the United States.

The reason Treasury, the OECD and the IMF all talk of New Zealand having a Capital gains tax is to broaden the tax base and to cover off an area of income not currently taxed.

Crucially, the idea is emphatically not to increase overall taxation: it is to allow tax reductions in other areas.
That is the last thing Labour or the Greens have in mind. In fact, they plan to increase, rather than decrease, income taxes, with the return of a 39% top tax rate imposed by the last Labour government.
In short, the policy is a tax grab under the guise of a concern about the current property bubble in Auckland.
It is the worst kind of bumper-sticker analysis to accept this claim at face value.
It is borne out neither by what is happening in the economy at present, nor by how such a tax would actually work.

Source: The National Business Review

April 19 2013 | Tim Manning | No Comments »

House Sales at Six-year High, Prices Rise to New Record

The number of New Zealand house sales rose to a six-year high last month and prices touched a new record as Auckland continued to drive up the national average.

Some 8128 houses were sold in March, up 23 percent from February and 11 percent from the same month a year earlier, according to the Real Estate Institute.

The national median price rose an annual 8.1 percent to $400,000, the first time it has broken the $400,000 mark.

About 90 percent of the increase in the median price has come from Auckland and Canterbury over the past year, meaning those markets – which account for just over half of all sales – are over-represented.

“There’s a real danger that the Auckland housing market is mistaken for the New Zealand housing market, and that regulatory decisions will be made on the assumption that conditions in Auckland and Canterbury are replicated across the rest of the country,” chief executive Helen O’Sullivan says in a statement.

“Across the rest of the country while activity is picking up, price gains are far more modest.”

The figures come after Finance Minister Bill English today flagged housing as a risk to New Zealand’s economy in a pre-Budget speech, saying it could drive up interest rates if the current level of property price inflation persists.

Quotable Value figures earlier this week showed property values continued to grow in March, albeit at a slower pace.

Auckland’s median sale price rose 5 percent to $565,000 from February, while Canterbury/Westland’s increased 1.1 percent to $359,000.

ASB economist Jane Turner says “improved household confidence and low interest rates are factors underpinning a lift in housing demand”, with Auckland underpinning growth.

Housing demand has steadily increased over the past year and a lack of listings in Auckland and Christchurch means “the true level of demand may be higher than the level of sales turnover suggests”.

The REINZ stratified housing price index, which smooths out peaks and troughs, rose 2.4 percent from February, and was up an annual 8.6 percent.

Auckland’s stratified housing price index jumped 16 percent on an annual basis.

The number of days to sell fell to 31 days in March from 39 in February.

Source : The National Business Review

April 17 2013 | Tim Manning | No Comments »

Interest Rates Staying Low

Bond yields have fallen around the world over the past week driven lower by weak jobs data in the United States and Bank of Japan extraordinary policy easing. In the United States the March jobs report was much weaker than expected with employment ahead only 88,000 rather than the near 200,000 expected and February’s rise of 268,000. The unemployment rate actually managed a decline to 7.6% from 7.7% but that was because people left the workforce. The participation rate is now the lowest since 1979 showing just how despondent people are about finding a job. Had the rate sat at the long term average of 65% the current unemployment rate would be 10%.

The weak data mean that the Federal Reserve is not close to easing off in its money printing exercise and that weight of money argument is a factor which limited the decline in the US share market following the jobs news and saw bond yields fall.

But yields have also been pressed lower by the larger than expected money printing programme announced last week by the Bank of Japan. There are expectations that investors will seek better yielding assets outside of Japan and hence falls in bond yields around the planet – including our own.

Domestically we have seen NZ wholesale interest rates edge down during the week as detailed in the table below. Given the continuing easy policy stances offshore, the effects of the drought on the immediate speed of growth in the NZ economy, March’s weak debit and credit card data, and the extra upward pressure on the NZD due to events overseas, there is little prospect of NZ monetary policy tightening for a year or so.

This means borrowers can look forward to a continuing low interest rate environment which as history tells us is both a negative and a positive. For conservative investors it is a negative which as each month goes by will see more and more people look for higher yielding assets than bank term deposits. This is what happened in 1992 when inflation and interest rates plunged and old folk started throwing their money at finance companies. This time around that option is not so easy (yet) but the search is underway and some will be taking their money into residential and commercial property investment.

As I have noted here a number of times in recent years, it is up to those of us with a bit above average nous to say to our elderly friends and relatives that if they chase yield then they are taking on higher risk and should things go wrong their ability to recover is going to be very low. They should sit down, take a breath and simply admit that one of the ways in which NZ is hit by the ongoing effects of the global financial crisis is that conservative investors in little old New Zealand and in fact all around the planet, get penalised through low returns. Accept it and go back to watching ducks and TVs.

But what about borrowers? Isn’t this ongoing low rate environment great for them? Not as great as you might think. Young people freshly leveraging themselves into a dwelling are going to start thinking that these low rates are the norm. They will take on too much debt, fail to maximise principal repayments in the early years of their loans, and get badly caught out when our central bank eventually has to respond to inflationary pressures over 2015 – 17.

The Reserve Bank knows that this cycle it has time on its side – it can sit back waiting to see how things go knowing that because hardly anyone is borrowing at 3 – 5 year fixed rates the impact of a cash rate change will be very quick. That quickness will come not just through most borrowers sitting floating and being hit straight away by official cash rate rises, but young people being surprised that rates can go up and getting eventually terrified by people like myself warning of how high floating rates have gone in the past.

Source: Tony Alexander | Economic Commentaries

April 17 2013 | Tim Manning | No Comments »

BNZ-REINZ Residential Market Survey

Mission Statement

To help Kiwi businesspeople and householders make informed financial decisions by discussing the economy in a language they can understand.

Market Very Strong

All of the eight key measures we use to gauge strength in the residential real estate market edged slightly lower in April. However almost exactly the same thing happened in last year’s April survey and the trend in all measures remains upward – apart from requests for appraisals which are below average, and perhaps interest from first home buyers which has settled at a high level though is no longer rising.

Overall the survey results show that the residential property market is strongly in favour of sellers and showing no sustained signs of easing off.

Is the number of people going through Open Homes increasing or decreasing?

Interest average

A net 18% of responding agents this month reported that they are seeing more people going through Open Homes. A quick look at the graph below shows that this result is comfortably in line with the historic average and therefore does not suggest any particular change in buyer interest at the moment.

Click on the below link for BNZ-REINZ Residential Market Survey details.

http://tonyalexander.co.nz/wp-content/uploads/2013/04/BNZ-REINZ-Survey-April-2013.pdf

Source: Tony Alexander | Economic Commentaries

April 17 2013 | Tim Manning | No Comments »