TONY'S VIEW - Tony Alexander
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TONY’S VIEW
Input to your Strategy for Adapting to Challenges
Feel free to pass on to friends and clients wanting independent economic commentary
ISSN: 2703-2825 Thursday 14 May 2020
To subscribe click this link https://forms.gle/qW9avCbaSiKcTnBQA
Speaking enquiries tony@tonyalexander.nz
Back issues at www.tonyalexander.nz
My Aim
To help Kiwis make better decisions for their businesses, investments, home purchases, and people by
writing about the economy in an easy to understand manner.
“Gizza Job. I can do that.” Just as an aside, this website from MBIE needs an
update, but it contains something I’d not seen before.
It describes how you can download an app called
We Kiwis are shy. The Americans find us not “Occupation Outlook” which will help you with a
emotive enough. Asians consider us too trusting. choice of potential new career, the relative expense
Australians think we are not assertive enough – all of training, and likely end-demand. The end-demand
these comments based on research undertaken a piece clearly needs updating. But if you are
few years ago by NZTE and which I used to discuss undertaking a course of study lasting maybe a
in my Brain Gain publication. couple of years the current state of the labour market
is not all that important.
What does that mean in the context of the Covid-19 https://occupationoutlook.mbie.govt.nz/
crisis? It means that if you’ve just been laid off or
you’re going to be, you’ll look for work on sites like
Seek and Trademe, and ask around a bit. But you’re Uniqueness
almost certain not to stand on the corner with a sign
saying you’re out of work and you’ll do anything. I was asked during a webinar this week to describe
how this recession is unique compared with others
You’re almost certain not to work your LinkedIn in recent decades. The unique aspect is that this is
contacts saying you’re up for a go at something new. a temporary voluntary crushing of the economy
undertaken in order to save the lives and long-term
You’ll basically keep your head down and try to do health and happiness of tens of thousands of people.
your best. Blow that. The world belongs to those who
put themselves out there, take a risk of having others This recession does not result from a collapse in our
laugh at or look down at them, and plough on export prices for which we tend to see a 12-month
regardless. Meaning what? lag before it hits the cities, then extended urban
weakness while the farming sector eventually starts
If you’re laid off or about to be and want to advertise coming back up again assisted by a belated
your skills and what you have to offer, email me. I weakening of the NZD and falls in interest rates.
don’t want a CV, I don’t want your life story, I don’t
want details of your experience. You’ve got 100 This recession does not result from a global financial
words to sell yourself to the now 10,000 people who system shock in response to excessively bad lending
directly receive Tony’s View each week and the and excess construction of houses in many
many more who receive it second hand or access it countries, as was the case with the GFC. The unique
from one of the many links people place on their aspect of that downturn was the seizing up for some
websites or in their social media posts. 6 weeks of the global credit system and deep worries
that many banks might collapse around the world.
I will publish your blurb as an add-on to my weekly Worries about a repeat of the Great Depression
for the following week. caused weakness in share prices and sustained
declines in house prices, household wealth
You choose what to write, but make sure to include destroyed and willingness to spend along with it, and
your location and whatever form of contact you want sustained lending restraint by banks rebuilding their
to share so people can get in touch with you directly balance sheets.
if they want, rather than going through me. What
have you got to lose? Your job? Too late. This recession is not because of entrenched high
inflation necessitating sustained high interest rates
(Ref. = Yosser Hughes, Boys from the Blackstuff.) to crush inflation and inflation expectations – as
happened in New Zealand in the late-1980s. Such
Tony’s View
inflation fights are often of long duration and much
hope of better times is lost by consumers and Then there is the other structural factor driving higher
businesses, and this can weaken willingness to unemployment. We have entered my predicted
spend and willingness to hire and invest. period of “weeding out’ of businesses across all
sectors, challenged by new technologies, social
Which brings us back to this downturn. It does not pressures, finance shortages etc. The restructuring I
come about through an income shock or a financial figured would take 2-3 years will probably all happen
shock or a need to fight high inflation. Only for a short before the end of this year.
time will it affect the willingness of you and I to spend,
and of businesses to hire and undertake capital Finally, there is the new structural element of
expenditure. That perhaps is the big difference, more decreased capital costs associated with sustained
so than the short-term depth of this downturn and the low interest rates. In recent years businesses have
unique shocks to inbound tourism and hospitality. facilitated their growth by hiring people. Now, with
the hurdle rate for undertaking capital spending so
Because the worst of this downturn is hitting now and low, some will embrace greater labour-saving
in the next few months, and job losses are radically production techniques.
front-loaded, the recovery will appear much sooner
than in previous downturns. The willingness of A quick reduction in our unemployment rate will
people to spend and businesses to hire is going to happen later this year. But it will still leave a new pool
return earlier than in previous recessions, with of potentially long-term unemployed people. How
assistance from the biggest set of fiscal and depressed should we be about this? Maybe not as
monetary stimuli that we have ever seen. much as in earlier years when work structures and
roles were more rigidly defined.
In the words of former Federal Reserve Board
Chairman and student of the Great Depression Ben As mentioned here before, young people may not
Bernanke, “The expected duration is much less, and have much resilience (though they are getting some
the causes are very different.” The US economy now), but they are highly adaptable. They know
shrank for 43 months in a row from 1929-33. This nothing other than the new. New technologies, new
time shrinkage will be limited to just a few months. ways of shopping, new ways of working. They will
The IMF predicts that the world economy will shrink willingly embrace new roles, set up new businesses
about 3% this year versus 10% shrinkage during the from home with minimal overheads, and perhaps
1930s downturn, with growth resuming around the ultimately disrupt existing operators in a way we
world over 2021. have not seen before.
Ultimately then the unique aspect of this recession So that then becomes a warning to existing
may not be its magnitude or even the speed with companies getting through this okay. You are about
which it has struck. Instead it may be the focus right to be challenged with the greatest wave of people
from the start on recovery – which sectors first, which having a go perhaps in your sector, that you have
last. ever seen. If you want to keep up with the ways they
will undermine your business model, it would
My gut feel is that we will individually reach for the probably be a good idea to hire them or buy out their
light at the end of the tunnel far earlier than in past start-ups as quickly as possible. There is ultimately
recessions. That ultimately will drive consumption, one thing we know which always emerges from
new hiring and investment, and that will produce crises. A sharp acceleration in innovation. Next year
growth through 2021 and quite possibly from the through 2022 will be fascinating.
early part of the December quarter.
And just to finish off with the issue of how unique this
However, this is not to say that underlying downturn is. In every previous recession I have lived
unemployment will disappear quickly. That is through people have talked about New Zealand
something different. The inbound tourism sector has being stuffed and that we should leave and the last
gone and unless businesses believe Kiwis will one out turn off the light. For this recession we are
undertake a huge surge in domestic travel, there is happy to be here, intend staying, expect many Kiwis
no point keeping staff on. The hospitality sector is offshore to eventually return, and anticipate a wave
also experiencing a structural reduction in customer of foreigners wanting to get in.
flows with many people likely to avoid crowded
locations for potentially years rather than just the
next few weeks. That factor, added to the generally
high turnover rate of hospitality businesses, will see
many closures and many people displaced from the
sector.
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Tony’s View
US 14.7% Unemployment Not Confidence Measures
What It Seems You might have noticed that in contrast to my normal
practice over the years I’ve not been reporting on all
On Friday night we learnt that the United States relevant economic indicators, including the business
unemployment rate jumped in April to the highest and consumer confidence gauges. That is because
level since the 1930s at 14.7% from a low of 3.5% in in the short-term they cannot yield useful information
February. This resulted from 20.5 million people for my purposes which is gauging likely changes in
losing their jobs in April. spending, hiring, and capital spending and
conveying those thoughts to yourselves.
The news is bad and it is expected that in May the
unemployment rate will exceed 20%. However, there We all know the economy is extremely weak at the
is something important to note regarding labour moment. But my commentary will not be altered by
market dynamics in the US. In New Zealand during a measure falling 60% rather than 40%. These
times of demand weakness companies tend to changes do not reflect true underlying trends in what
reduce work hours of employees. In the US they we are doing with our money but the effects of a
place them on furlough. That means that they are temporary health scare and actions taken on a
unemployed but there is an expectation that temporary basis to fight it.
conditions will allow them to be rehired down the
track. This also means that very shortly, as we receive high
frequency data showing big bounces upward in
And that is the key characteristic of this jump in many measures, I will ignore them as well. But it gets
unemployment in the US and around the world. worse. At the same time as we soon will receive
Soaring job losses have not come about because these positive measures reflecting the transitions to
companies believe customer demand has Levels 3 then 2, we will also receive the more usual
permanently declined and they have to become data released with a lag showing the extreme
smaller businesses (though there are elements of weakness of lockdown. Plus, we will have data
this in aviation, tourism, and hospitality). releases showing what happened in the March
quarter just before lockdown started on March 26 –
Job losses do not reflect unaffordability of such as last week’s employment numbers.
employees because of legislated high pay rates, a
sudden escalation in debt servicing costs, loss of Focus on the underlying trends, not the contradictory
markets to competitors in other countries, the economic data and its massive volatility for the
development of completely new products stripping remainder of this year.
away demand for existing outputs, or a collapse in
bank financing requiring drastic action to try and
reduce debt.
Buying NZ-Made
The job losses arise because governments forced
businesses to close in order to stop the spread of I have mentioned that it would be in our best
Covid-19. When that spread is contained interests to support NZ producers of goods and
employment growth will soar as furloughed people services as much as possible when we re-engage
get re-employed and new businesses start up to take with the retail sector. Business NZ own the New
the place of those without sufficient capital to make Zealand Made trademark registration process (I
it through the period of shutdown. believe), and if you want to get their much-
recognised sticker of a Kiwi within a curved triangle
The economic impact of shutdowns will be severe you can commence the process to do so here.
and will negatively affect levels of economic activity https://buynz.org.nz/
for a long time. But the sustained impact will be
nowhere near the short-term outcome of soaring This website will show you goods produced by those
unemployment and closed businesses. who have registered for the New Zealand Made
trademark and have goods to sell online.
So be careful not to get overly depressed by http://www.buynzmarket.org.nz/
comparing these sorts of numbers with those from
the 1930s. This is a short, sharp shock with a long
tail rather than the extended collapse back then.
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Tony’s View
Will taxes need to rise? Not necessarily. In 1972 the ratio of government net
debt to GDP was 6%. It soared to 55% in 1992. It
then fell to 6% in 2008, rose to 26% in 2013, and a
You’ll all have seen the Budget details by now, the few months back was below 20%. Under Budget
media and your in-boxes will be awash with projections the ratio will exceed 50% very shortly.
descriptions of what was in it and dissection of the Will taxes need to go up in order to get the ratio back
financial details. As per my tradition the past couple down to a low level in readiness for the next crisis
of decades I will limit Budget reporting to a summary such as an earthquake in a major NZ city or new
of the high-level details and some comment on likely health scare?
impact.
Not necessarily. Over the 16-year period from 1992
As regards the Budget highlights we have the to 2008 when the ratio fell from 55% to 6% the rate
following. of GST was unchanged at 12.5%. The top marginal
income tax rate was raised by Labour
• A $50bn fund has been created to fight (unnecessarily) in 2000 from 33% to 39%. But core
economic effects of Covid-19. $14bn has Crown revenue as a proportion of GDP fell from near
already been spent, the Budget allocates 36% in 1992 to 33% in 2008.
$16bn, leaving $20bn to be spent on other https://www.wgtn.ac.nz/sacl/centres-and-
unannounced initiatives as the government chairs/cpf/publications/pdfs/2016/WP_04_2016_Th
sees fit. e_Changing_Role_of_the_State.pdf
• The $16bn new spending announced today
includes $3.2 for the wage subsidy extension, The government did not have to boost its tax receipts
$3bn on infrastructure, $1.6bn for fees-free in order to get the net debt ratio down. Instead they
trades training, more students, and retention of exercised restraint in spending over a long period of
current apprentices, $1.1bn for “green” jobs in time. That is what needs to happen this time around,
the regions, $5bn for an extra 8,000 state although on current projections Labour may not be
houses, $0.6bn rent subsidies, $0.4bn tourism the government capable of doing it.
recovery fund, and miscellaneous other things
like school lunches.
•
Recent Publications
There are no changes in tax rates or tax reform
of any kind, and no changes in welfare
payments.
• Budget deficits are predicted for 7 years What real estate agents are seeing.
http://tonyalexander.nz/resources/Tony's%20View%20Real%20
through to 2028 with this year’s deficit to be Estate%20Survey%20May%202020.pdf
almost 10% of GDP at $28bn, then $30bn over
2020/21 and $27bn over 2021/22. Kiwi consumer plans for spending.
• The net debt to GDP ratio will rise from 20% to http://tonyalexander.nz/resources/TV%20Spending%20Plans%2
peak at 54% in 2023/24 then ease to 42% come 0Survey%20May%202020.pdf
2034.
• However, because some announcements Things which might be better as a result of this crisis.
differed from what Treasury was led to believe http://tonyalexander.nz/resources/TV%20Covid-
19%20No.8%20Supplement.pdf
at the cut-off date for making their forecasts, the
numbers if they generated them now would be
Things which will slightly limit housing weakness.
slightly worse. https://www.stuff.co.nz/life-style/homed/121227636/heres-why-
• The spending by the government will provide a house-prices-may-not-fall-as-far-as-you-expect
6.5% boost to the economy this year, offsetting
direct weakness related to Covid-19 and Recession elders passing on their knowledge to
producing growth in the year to June 2020 newbies of what to do when these bad times arrive.
expected at -4.6% then -1.0% to June 2021 http://tonyalexander.nz/resources/TV%20Covid-
19%20No.7%20Supplement.pdf
before +8.6% to June 2022 and +4.6% to June
2023. There are both upside and downside
risks to these growth forecasts.
• The unemployment rate is seen peaking just
below 10% in the September quarter, then
falling to 7.6% in June 2021, 5.7% in June 2022,
and 5.2% in June 2023.
Will taxes need to go up in order to get debt levels
down again?
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Tony’s View
Emailed Queries demand. Investors are facing extremely low returns
on simple assets like bonds and term deposits and
will be searching for higher yields from assets
Is this a credit crunch which will cause banks to expected to produce reasonably reliable income.
restrain lending all through 2021?
Additionally, the experience of other countries post-
NZ banks pre-GFC got 45% of their funding from GFC was that the printing of money resulted in
offshore, but that is now below 20%. This is not a upward pressure on asset prices including housing,
banking crisis and current strong offshore demand shares, and commercial property. In the United
for NZ government bonds, and maintenance of credit States commercial property prices fell on average
ratings with positive outlooks by the rating agencies, near 30% during the GFC then doubled in the ten
in conjunction with the lauding of our virus progress years following
overseas, means investors will willingly continue to
supply NZ banks with the funding they need. If they What impact will there be from the predicted fall in
don't then the RBNZ have already made clear that the dairy payout to below $6.00 a KG of milk solids?
they will provide whatever funding is desired by and The dairy industry accounts for near 3.5% of New
large in the short-term. Zealand’s GDP. A reduction in the payout from a
projected $7.00 - $7.60 plus dividends this season to
When NZ banks can see recovery appearing and the as low as $5.75 would see some a reduction in on-
end of the layoffs period, they will become more farm dairy income of about $2.5bn or some 0.8% of
willing to lend. Until then some extra constraints GDP. The payout would be the lowest since the
could easily appear. Property buyers will just need to 2015-16 year and would come about as a result of
stay engaged with the market, build up their deposit, not just weaker world growth/recession, but the
and be ready to move when the lending restraints special reduction in demand for dairy products from
are eased off again, perhaps coming into summer the deep cutbacks in eating out.
this year.
Payout projections can be highly volatile.
We are thinking of selling a retail property in Nevertheless, the coming reduction means it would
Hamilton soon. Is there likely to be much demand? be unreasonable to think in terms of our economy
being pulled out of recession by the farming sector.
For Hamilton over the medium to long-term I see It is more the case that farming exports have
excellent growth prospects on the basis of proximity assumed even greater importance in generating
to Auckland and vastly improving transport export revenue and the government needs to take
connections. Regarding the next 18 months or so, I that into account as it considers a range of legislative
expect the economy to be performing very well by changes which would retard growth in our long-
the end of 2021 with an assumption that a vaccine running economic and export base. Will the
exists for Covid-19. government look toward the farming sector as a
potential area for rapid short-term jobs growth? No.
In the near future banks are not going to be willing
providers of funding for anyone contemplating a How do I go about finding out what to invest in?
property purchase in the areas of hospitality, The options for what one can do with investable
retailing, tourism, or offices. Therefore, anyone funds are near endless. You need to speak with a
selling a commercial property will find the pool of financial advisor. They will try to get a gauge for how
funds able to be utilised by others to make a much risk you are willing to tolerate, what your level
purchase will be much smaller than in more normal of understanding is of various options, when you
times and it is likely that this will influence selling plan using the saved funds and so on. For your own
prices for non-residential properties. research I'd suggest either finding an online course
or a book on the subject. Certainly not anything on
In addition, given the uncertain outlook surrounding social media, and nothing from any of your mates or
not just the economy but the retailing sector in relatives. You know deep down many of them are
particular and how people will shop, the willingness morons, but you might have forgotten it under
of people to purchase or build retail premises is likely pressure these days not to express honest views
to be further reduced. about people.
If older people want to keep working then they
Therefore, until underlying factors like population should continue to do so.
growth assisted by net inward migration and
eventually shortages of commercial property caused
by weak construction become dominant, prices for
these assets are likely to be compromised. Note
however that this is not to say there will be no
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Tony’s View
New Zealand’s Housing Markets
Early days as yet Waikato was also weak, but everywhere else
around the country more investors are being seen.
On Monday I sent out the results of this month’s Both investors and first home buyers hunt at the
monthly Tony’s View Real Estate Survey. You’ll lower-priced range in each market. This suggests
find the pdf here in case you missed it. it will be at the upper and maybe upper-middle
http://tonyalexander.nz/resources/Tony's%20View%20Real%20
Estate%20Survey%20May%202020.pdf sections that we will see greatest price weakness.
The 236 respondents reported an unusually high Responses from agents suggest that we can put
level of interest from investors and first home buyers roughly into at least four categories.
buyers and the latter result at least was backed up
by Trademe Properties. They reported a 38% rise 1. Early lookers hoping for some bargains and
throwing in very low offers.
compared with a year ago in the number of 18-29-
2. Buyers who intend selling in the same market
year olds recently browsing their site. The result
so are not worried much about what prices will
will be biased upward by people having time on do and just want to get on with their lives.
their hands and that probably explains also a 3. First home buyers sensing that they might
130% rise in all property viewings online for the finally be able to find a place they want and
Queenstown-Lakes area. Property porn one hoping banks might ease up on their lending
suspects. criteria now that LVRs have been abolished.
4. Buyers prepared to wait until the six-month
My survey found that a net 27% of agents mortgage deferrals start, at which time they
responding feel this is a buyer’s market. But a net expect more weak sellers will be out there.
10% in Wellington think this is still a seller’s
market, as did a net 7% in wider Nelson and in
Canterbury only a net 2% view things as in favour For your guide. In Australia, one small lender has
of buyers. Why might this be? suspended financing of off-the-plan purchases
because of uncertainty about where prices may go
Ahead of the GFC the number of properties listed and the extra risks attached to such ventures.
for sale on www.realestate.co.nz was 58,000 in
April 2008. The number listed in March this year RB House Price Assumption
was under 19,000. We went into this with a listings
shortage. In their Monetary Policy Statement released on
Wednesday the RB predicted that this calendar year
average house prices around New Zealand will fall
by 9%. Is this likely?
In December 2008, just after the world’s financial
markets seized up, in their Monetary Policy
Statement the RB predicted a 16% fall in NZ house
prices from the peak of 2007 through to the end of
2010 – with downside risks. In fact, prices only fell
over that period by 7.7% and they reached their
absolute low point in the very month the RB
predicted the 16% decline.
That is, they fell 11% from mid-2007 to December
2009 then rose 3.8% by December 2010. Ultimately,
The survey also showed that a net 16% of agents their forecast was out by about 9%.
are seeing more investors in the market (sniffing
opportunities) and a net 4% said they were seeing Our central bank has an unfortunate history of over-
more first home buyers (hoping for availability and estimating house price declines.
excited by LVRs disappearing). Investor interest
was weakest in Otago with a net 14% of
respondents there seeing fewer investors.
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Tony’s View
Interest Rates
The chances are strong that following some small China has a history of using trade access as a
reductions in one- and two-year fixed mortgage weapon against countries which upset the CCP.
rates this week, further reductions will happen This is not a new practice but something which
soon. The Reserve Bank is clearly frustrated at has been around for centuries. The new elements
behaviour by banks, writing the following in their however of this approach are the communities of
discussion of the expansion of their money Chinese nationals in countries which act to further
printing operation China’s interests and suppress local pushback
against China’s goals. Plus, the role of China in
“We expect to see retail interest rates decline the world economy has become extremely
further as lower wholesale borrowing costs are important – though it has yet to regain its previous
passed through to retail customers. It remains in standing of accounting for near one-third of global
the best long-term interests of the banking sector GDP over two centuries ago. The current
to promptly maximise the effectiveness of our contribution is near 21% from less than 2% in
LSAP programme.” 1980.
It sounds like something an authoritarian state The reputation of China is falling around the world
might say to a wayward country. in response to the authoritarian state’s covering
up of initial information about the virus outbreak in
In response to the RB’s comments, the sharp Wuhan, and the damage appears greatest in the
jump in their quantitative easing plan size, and the United States and Australia. But Europe along
fact that they have not yet 100% ruled out a with the UK are starting to push back and many
negative cash rate, this week wholesale interest other countries are reacting, if not because of the
rates have fallen slightly. The three-year swap outbreak, because of the poor quality of medical
rate has decreased to 0.14% from 0.24% while the goods shipped by China to other countries once
five year rate has declined to 0.22% from 0.37%. the outbreak spread elsewhere.
NZ Dollar It is difficult to know where this will go, and given
the trade dependence of NZ and Australia on
China it is hard to imagine full shirt-fronting of
The Kiwi dollar initially firmed this week in China. There is no economic upside to that
response to a couple of factors. approach. President Trump might do this anyway
with rising need for an issue to galvanise US
• Improved risk tolerance generally in financial voters ahead of November’s Presidential election
markets as investors focussed more on plans now that he cannot tell a story of great economic
for gradual reopening of economies rather success, and his administration’s management of
than economic data showing the depth of the the virus in the US has been and remains
current downturn. incompetent.
• Some improvement in minerals commodity
prices taking the AUD higher and ourselves We are likely to see enhanced volatility in financial
along for the ride. asset prices in coming months as concerns about
the deepening cold war between the United States
But then there was some mild selling pressure and China wax and wane. The challenge for the
associated with AUD weakness in response to the NZ and Australian governments will be
deepening chagrin of China with Australia’s call maintaining strong trade relationships with China
(supported by NZ) for an enquiry to figure out whilst adhering to the values key to our way of
where Covid-19 came from. China has banned living and culture.
imports of meat from four Australian abattoirs and
a hefty tariff on imported Australian barley is The NZD this afternoon was trading just below US
expected – though the process for doing that 60 cents from just above this level last week. No
started a long time ago in the context of concerns trend is apparent.
about dumping.
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Tony’s View
The chances are we may lose some slight extra
ground against the AUD, but not all that much.
Since 2014 the Kiwi dollar has sat above 90 cents
practically the whole time, and respective
monetary policies are unlikely to diverge much
from current settings in the near future.
Against the Australian dollar we have ended near
92.9 cents from 93.8 cents last week. The trend
here has been down since the brief trades above
parity in mid-March.
The biggest risk may be if dairy prices start to
adjust to the demand and supply situation
offshore.
CHOOSING YOUR FIXED MORTGAGE RATE TERM
Finally – some rate cuts.
When fixing a mortgage rate term most people take whichever rate is the lowest. So, each week I shall
calculate what rates would have to be in the future to make this option better than some alternatives. Note,
there are far, far more alternatives than calculated here. And always remember, it is worth paying a premium
for rate certainty over a longer period of time. It’s also worth using a broker to get the best deal. Broker use
is far higher in Australia than New Zealand but we will probably catch up.
Current minimum fixed rates across the main banks. *
1 year 2.89% down from 3.05%
2 years 2.99% down from 3.35%
3 years 3.39% down from 3.65%
4 years 3.49% down from 3.79%
5 years 3.59% down from 3.89%
I can fix 1 year at 2.89%.
Is this better than fixing 2 years? Yes, if in 1 year the 1-year rate is below 3.09%.
Is this better than fixing 3 years? Yes, if in 1 year the 2-year rate is below 3.64%.
Is this better than fixing 4 years? Yes, if in 1 year the 3-year rate is below 3.69%
Is this better than fixing 5 years? Yes, if in 1 year the 4-year rate is below 3.77%.
Is it likely that in one year’s time the one-year fixed rate will be above 3.09%? No. So if two years was
as far out as I was looking, I would personally opt to fix one year currently. In a year’s time what are the
chances that the two-year rate is above 3.64%? Again, not strong. So, I again would fix one year then
look to fix two years one year from now if a three-year exposure was my preference. We Kiwis tend to
fix at whatever the lowest rate is, and the balance of probabilities suggests doing just that currently will
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Tony’s View
yield the lowest debt cost for the next few years. However, I personally am a conservative borrower. If
someone were to offer me a three-year fixed rate at 3.3%, I’d probably take it. Westpac offer a nice
3.39% three-year fixed rate and that will suit people just slightly more conservative in their det
management than myself.
*Minimum 20% deposit, owner occupiers, 6 largest lenders.
Compounding is minor so is ignored.
IS A FIXED RATE CHANGE IMMINENT?
Perhaps behind closed doors the Reserve Bank expressed their frustration at bank tardiness in cutting
lending rates before they near explicitly warned them of consequences in yesterday’s Monetary Policy
Statement. Whatever, banks have moved and margins have declined. But they remain high, so
eventually further rate cuts are likely.
You can form your own opinion as to whether banks might be about to raise or lower their fixed rates by
looking at the following graphs. They compare published fixed rates with the most frequently changing
component of the total cost of funds – the swap rate. Note that there are other funding costs which will not
be captured here, but they change infrequently. But be warned. There is no real forecasting insight delivered
by a thing (equity, exchange rate etc.) moving further from some concept of fair value or average. If a thing
is 10% above trend, it might simply be on its way to being 40% above trend. For good bank rate comparisons
access www.interest.co.nz
Page | 9Tony’s View
My daughter Lilia Alexander (finalist in the Youth category for Wellingtonian of the Year 2019) owns and runs
Social Media based Wellington – LIVE (>200,000 followers)
https://www.facebook.com/WellingtonLIVENZ/
“…the largest go-to social media-based updates and news platform for the Wellington region…” Wellington – LIVE offers
advertising options for local events and businesses.
Email: info@wellington.live
She also now has a photography site. https://www.liliaalexander.com/photography
This publication is written by Tony Alexander, independent economist. You can contact me at tony@tonyalexander.nz Subscribe here
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This publication has been provided for general information only. Although every effort has been made to ensure this publication is
accurate the contents should not be relied upon or used as a basis for entering into any products described in this publication. To the
extent that any information or recommendations in this publication constitute financial advice, they do not take into account any person’s
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or otherwise, contained in this publication.
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