Dairy products account for about 22% of all NZ receipts from exports of goods and services (tourism and education included) and with global prices falling, those receipts are declining sharply.
This manifests itself in the payout made to dairy farmers supplying the largest cooperative Fonterra falling from $8.40 per kilogram of milk solids two years ago to $4.40 last season and $3.90 this season.
With another low pay-out of $4.60 likely next year, these three weak years in a row will see a number of highly indebted dairy farms sold, many farmers abandoning high cost supplementary feeding regimes, and some land being turned over to other activities – such as goats.
Businesses which service the dairy sector are experiencing major declines in spending by their clients and this will depress economies in regions highly dependent upon dairying, such as Waikato, Taranaki, Southland and South Canterbury.
However, as has been our central theme since 2009, as we monitored weakness in the New Zealand economy caused by the effects of the financial crisis offshore, there are plenty of ‘insulating’ factors at work in our economy.
These factors are so strong that we believe the pace of growth will stay above 2% for the next three years.
Booming sectors include tourism where spending is rising 38% per annum, and education of foreign students where a boom is underway in enrolment by students from India. Construction is slowing in Christchurch but rising strongly elsewhere.
Auckland is seeing a lift in spending on infrastructure, house building is rising at an annual pace of 25%, and falling vacancy rates suggest more commercial construction soon including of hotels.
Outside Auckland the rush of investors to source higher yielding residential investment properties with smaller mortgages than one would have to take up in Auckland is feeding through into a sharp rise in construction.
The number of consents issued for houses to be built outside of Auckland and Canterbury in the three months to January was a strong 39% ahead of the same period a year ago.
This surge in regional house building will make boosting house supply in Auckland even more difficult as tradespeople will feel encouraged to shift to the regions to work and earn the same wage as available in Auckland but with much lower living and housing costs.
Therefore, the small declines in average Auckland house sales prices seen in recent months are unlikely to be sustained.
Auckland Real state
In the coming year, Auckland house price gains averaging between 5% and 10% are likely, assisted by the return of Chinese buyers increasingly able to get capital out of some large Chinese cities, and having secured IRD numbers required by all buyers since October.
Most of this Chinese buying, and we suspect increasing buying by Indian investors also, will come not from people remaining offshore but migrants shifting to New Zealand or already here. In fact, New Zealand is experiencing a migration boom involving a net inflow of 67,000 people in the year to January.
This is almost 1.5% boost to the country’s population.
But with 60% of the net 67,000 gain going to Auckland the region’s population last year received a 2.6% boost.
With average household occupancy of three people this means last year Auckland needed an extra 13,000 houses just to house net migrant flows. But only 9,300 consents were issued.
Thus Auckland’s housing shortage is still getting worse. Hence construction grows, shortages of tradespeople worsen, building materials costs will increase, and prices will naturally rise.
With regard to borrowing costs, while there is upward pressure on interest rates from rising bank funding costs in offshore markets, inflation is too low in New Zealand at only 0.1% and some additional easing of monetary policy by the Reserve Bank of New Zealand cannot be completely ruled out. And in an environment of strong factors underpinning the pace of economic growth at a time when growth projections offshore are being lowered, the New Zealand Dollar looks like holding high against most other currencies in the coming year.
Tony Alexander is Chief Economist at Bank of New Zealand, Title Sponsor of the Indian Newslink Indian Business Awards 2016. Website: www.TonyAlexander.co.nz
The above article has been provided for general information only and should not be relied upon. To the extent that any information or recommendations in this publication constitute financial advice, they do not take into account any person’s particular financial situation or goals. Bank of New Zealand strongly recommends readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication.