Santa's economic present

If we related Santa’s sack to the economy, then it would indeed be a merry Christmas. Despite all the negative publicity about falling dairy prices, overall our economy is in good health especially when compared to many other OECD nations.

Growth in the New Zealand economy in the year to September 2014 was 3.2% with growth having averaged 2.5% over the past two years. Domestic demand is strong with investment growing over 7% a year. The unemployment rate has fallen to under 5.5% and we have extremely strong net migration (mainly due to lower departures), which is testament to a certain confidence that New Zealand is a good bet as a place to live and work.
The construction sector pipeline is still massive - especially in Christchurch and Auckland. Commodity prices, other than dairy, are strong which bodes well for many sectors of the agriculture industry. Add in better productivity growth, rapidly growing connections with Asia, gains from utilising an abundant natural resource endowment, and a reasonable political climate, and you have a decent economic script. (ANZ Economic Outlook December 2014)

The OCR is on hold and the economic consensus is that interest rates may now not increase until later in 2015. Therefore, there is no longer a strong imperative to move to fixed rate mortgages. The overheated Auckland housing market is definitely a worry and the Reserve Bank is watching this closely. We may see some steps taken in 2015 to moderate price growth.
The New Zealand economy is still susceptible to economic downturns - especially from offshore - but at this stage in the economic cycle, our economy is in better shape than in previous growth periods. According to the ANZ, the New Zealand economy is structurally in better shape than before the GFC.

From an investment perspective, 2015 will bring challenges in finding good quality income producing assets for our clients. Many will have maturing bonds which have paid over 7% before tax but finding similar quality investments and yields will be hard. The danger will be clients wanting to chase yield while not being fully aware of the risks associated with that.

There are still too many New Zealanders in KiwiSaver default schemes or conservative funds when they are not likely to be accessing the funds for 10 or more years. Our challenge will be to explain why in many instances, longer term savings should be in higher risk KiwiSaver funds.

Those entering or already in retirement should contemplate the viability of retaining a residential rental property. If the rental is in a strong capital gain but poor rental yield location such as Auckland, then work out what the true return on capital of the property is using today’s market value. If additional income is required in retirement and the return on capital of the property is only 1-3% then advice needs to be sought around whether to retain it or sell in today’s inflated property market. Capital gain is appealing while it is there but unfortunately, capital gain does not buy the new car, pay for holidays or meet day-to-day living expenses. If the property is in a provincial town where there is a high return on capital (assuming it can remain rented), then consider the sustainability of tenants and capital values. Areas such as Northland, Hawkes Bay, Manawatu/Wanganui, Taranaki, Canterbury/Westland, Central Otago and Southland are experiencing  falling house prices and one needs to consider whether to ‘hang in there’ hoping values will recover, or sell now and reinvest into other areas.

Talk to us about your property investments and we will guide you through a decision making process to assess the best course of action for you.