Some of that was probably a one-off – falling petrol prices contributed about 1 percent, and we would guess the Cricket World Cup boosted spending a little as well. But that still leaves underlying growth of more than 1 percent a quarter. That is nothing to be sneezed at, and a testament to how much consumer and tourist demand have firmed up over the past year.
As always, the question is how long the trend will last. On the one hand, booming construction is continuing to boost jobs growth, migration is showing little sign of slowing, and Auckland property values are soaring. But other developments have been less favourable for retail demand.
One is the increasingly gloomy outlook for dairy incomes. Our view is that dairy exporting regions face significant pain ahead, but other parts of the country may not feel the impact for a while yet. The key way in which lower dairy prices typically filter through to urban consumers is through the exchange rate – when dairy prices fall, so does the currency, spreading the pain by raising the cost of imports. But that hasn’t happened this time. Largely thanks to booming construction, our economy still looks stronger than many others. That has kept the exchange rate high and is likely to do so for some time.
Secondly, the Reserve Bank and government have both announced measures squarely aimed at Auckland property investors, raising the question of what will happen to Auckland house prices further down the track. This is a tougher call. On paper, the proposed policies don’t look particularly aggressive. The Reserve Bank’s proposed policy will restrict new lending to 70 percent of the value of an Auckland investment property. But that was probably the bare minimum needed to have any impact at all, as very little investor borrowing is above 80 percent. As for the government’s proposed tax rules, they will broaden the definition of property flipping (taxing any investment property sold within two years of purchase) but leave capital gains more generally untouched. So in theory, they should have no material impact on the value of a house.
But in a speculative and investor-driven market such as Auckland’s, confidence matters – and at this stage, no-one knows how investor sentiment will react.
Further complicating matters, neither the Reserve Bank nor the government want the wider economy to slow. The Reserve Bank plans to tighten lending restrictions in Auckland, but loosen them elsewhere. And with inflation at rock bottom, it has been happy to encourage the idea that it will respond to any material slowdown in growth with interest rate cuts, which has pushed down mortgage rates. That’s in contrast to previous housing market slowdowns – in 2010 and 2013, for example – which went hand in hand with rising interest rates.
Likewise, this year’s Budget was more growth-friendly than it could have been. The government stuck to its spending plans, despite low inflation and falling dairy prices eating into its revenue forecasts. And the new mix of spending and saving initiatives looks more stimulatory than the old. The government is clearly hoping – not unreasonably – that axing the Kiwisaver kick-start and introducing a border levy will have relatively little impact on either consumer spending or visitor numbers. By contrast, higher benefits for low-income families are sure to be spent, and ACC levy cuts are perhaps the sneakiest tax cut of all, putting more money in motorists’ pockets while further lowering inflation.
Clearly this is a delicate balance, and we suspect the Reserve Bank and government won’t be able to have it both ways. If the Auckland property market takes a hit, consumer spending will also slow. But at this stage it’s too early to tell what the impact on Auckland property values will be. We recommend keeping an open mind and will keep you updated on the housing market as it evolves through the year.
This story was originally published in NZ Retail magazine issue 738, June / July 2015.