Economics Christmas Cheer Caution

Sitting down to Christmas dinner, real estate agents can look back on particularly satisfying 2003, thanks to the property boom. Builders and their suppliers will have prospered similarly.
Mind you, it’s been hard yakka. In Auckland, Barfoot & Thompson was reported to have called in counsellor to help its agents handle the pressure of work and to discuss their eating, sleeping and exercise habits. The advice included recommendations that they drink more red wine and eat more red meat.
Business would have been much less brisk if Reserve Bank governor Alan Bollard could have had his way. His concern was that boom might quickly turn to bust, when interest rates rise again and debt-burdened householders struggle to finance their borrowings.
But hey – who was listening to the governor?
The latest available data at time of writing showed 10,687 dwellings were sold in September, up 34.5 percent from year earlier and the third highest monthly total on record. The housing market was still surging, despite Dr Bollard’s cautions. True, the median dwelling sale price held steady from August at $215,000, but it was 16.2 percent higher than in September last year and the median number of days taken to sell dwelling was record low 24, down from 25 in August and 33 year ago. Properties were not sitting unsold for long before eager buyers snapped them up.
Bollard’s concerns were with household balance sheets. Householders have been borrowing heavily over the past 10 years or so, as nominal interest rates have halved and finance has become easier to obtain. Household debt has climbed to record 130 percent of income, up from just 65 percent in 1990.
The Governor’s concern was not just with individual householders who might find they have made bad investments when interest rates and property values taper. The financial health of households is important for the stability of the country’s financial system and the economy, and lending to households makes up about 40 percent of total bank lending.
But shouldn’t the Governor be just as troubled by boom in rural property sales?
Real Estate Institute figures showed September quarter sales were 17.5 percent higher than in the same quarter year earlier, up from 9.4 percent in the June quarter. The median selling price in the September quarter was $610,000, up 20.4 percent from year ago.
Growth in agriculture-sector borrowing outpaced the growth in household lending for housing, in the 12 months to August. It burgeoned from $13.7 billion in August 2001 to $16.6 billion year later and $19.5 billion in the 12 months to August this year. Household borrowing for housing in the same period rose from $63.6 billion to $68 billion, then to $78.1 billion. Farm sector debt in August was 80 percent higher than six years ago, while household sector debt was up 67 percent. But farm debt growth had been matched by asset growth; this was not the case with household sector debt.
With farmers bidding hard for each other’s land, however, BNZ chief economist Tony Alexander mused, “they may be setting themselves up for harder hit the next time incomes decline through combination of rising exchange rate, weak world growth and firm interest rates.”
The surge in rural-sector borrowing wasn’t necessarily directly related to the surge in farm land sales, of course. BNZ head of market economics Stephen Toplis suspected rising property prices were making farmers feel more comfortable about taking on debt at time when their incomes were shrinking, and they may be borrowing for regular commitments, such as fertilising their land and investing in tractors and new buildings and to pay their taxes.
If we believe there is price bubble in the housing market, however, the same must be concluded for the rural market, said Toplis. In some ways the rural price moves may be more insidious because prices in that sector should reflect future expected earnings from the land, and land prices were soaring at time when the agriculture sector’s fortunes were deteriorating.
Fair enough, if the longer-term outlook for the sector is promising. But were other forces at work?
Toplis cast his analytical eye over farm profitability, both now and prospective, and other factors. His conclusion: the impact of low financing, poor alternative returns and speculative behaviour was propping up the rural market. Future expected returns for the sector were improving, giving some justification for price movements unlike those in the housing sector. But let’s keep an eye on things.
Meanwhile wealth gains down on the farm helped to explain why New Zealand’s overall activity was brisker than might have been expected, after the fall in rural incomes, and why this Christmas generally will be cheerier than it might have been.

Bob Edlin is Management’s regular economics writer.

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