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Current Interest Rates

Indicative rates current at 21 May 2020

Floating 4.40
Fixed 6 months 3.09
Fixed 1 year 2.79
Fixed 2 years 2.95
Fixed 3 years 3.35
Fixed 4 years 3.49
Fixed 5 years 3.59
Revolving Credit 4.40

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Market Commentary – 1st May
This Commentary has been brought to you by the renowned New Zealand Economist, Tony Alexander:

Last month I wrote about some of the broader impacts of the lockdown and the virus outbreaks here and overseas, painting an obviously negative outlook for our economy, but one with many nuances. And that is where the challenge lies for all businesses and investors thinking about what to do in response to this big shock. Pulling back from adopting a negative perspective applied equally to every aspect of the economy and instead trying to identify some of the relative bright spots, as well as some areas overdue for correction even before this shock.

So, here are some things to think about. First, we have embraced videoconferencing and shown telecommuting is a viable option for hundreds of thousands of Kiwi employees. Once we exit Level 3 and are able to return to work if we choose, it is likely many people will opt for working from home 2-3 days a week.

This change will help unclog the roads, and that will make life easier for businesses who have been finding congestion-related costs rising and being highly variable these past few years in our major cities. Staff will save money on petrol, parking, public transport, and be less stressed. Time spent with family will improve and this means, when taken in conjunction with the obvious effect of high unemployment on wages growth, that businesses can save wage costs by getting ahead of the automatic working from home jump in two weeks’ time and bargain with it. That is, say wages need to be cut x%, but point out average staffer savings from telecommuting.

More parent time at home will reduce demand for after-school childcare. But demand for day-time childcare services is also likely to decline – potentially sharply. People who lose their jobs will not need childcare. Those who lose hours of work may no longer be able to afford extra hours beyond the free 20. Unemployed people will look to generate income (home-based hairdressing etc.) and it is easy to imagine someone offering to look after a few neighbourhood kids for a low fee each, thus saving parents money. The rules may say no more than two children can be cared for in this way – but it’s easy to imagine such a rule being ignored.

There has been a surge in construction of early childcare centres in recent years and it is likely that once government funding comes up for renewal in November and new, lower, attendee numbers are revealed by the owners, that we will see a wave of closures and restructuring run through the sector.

Hospitality is clearly a sector currently suffering and set for a big reduction in operator numbers. Some good locations are going to become available and canny investors may want to keep an eye out for such premises which have to be abandoned by operators because their debt level was just a tad too high to be able to keep functioning.

Which brings me to bank loan considerations. If anyone’s business was in marginal state before the lockdown, probably no bank is now going to advance additional money to keep it going. For businesses in viable position, extra funding will be available, but owners best be prepared to give a far higher level of security to the bank than they ever previously contemplated. This will include security over one’s family home.

Some business owners may be prepared to do this. But it is incumbent on their accountants to ask them to think seriously if they are prepared to lose everything if their potentially optimistic view about this crisis and their ability to trade well through it and out the other side may be misplaced. In truth, the high security demands now being made by the banks are perhaps delivering their unspoken opinion on the firm’s viability – much as this would violate responsible lending requirements.

Switching to housing, there will be a swathe of developers who require extra finance which their banks will not advance. These builders may have unsold units, and may have buyers walking away from their commitments. These developers will seek out second-tier financiers. But those organisations are going to be very busy managing their lending exposure to clients which the banks did not want because of high risks.

This means desperate developers will look to either offload their entire complex at a heavily discounted price, or just the last few units not sold.

New residential construction is going to fall away, probably 15% – 20% but potentially a lot more. Not only will demand fall away sharply, but bank finance will not be forthcoming. Banks are going to write big losses from this deep recession and simply won’t have the capital base to allow them to take on any but the safest lending risks.

That is actually positive for house buying by investors and owner occupiers and chances are good that once things settle down and bank staff can take a break, we will see loosening of lending criteria. Specifically, once LVRs are eased banks will follow suit. But a return to the likes of 5% deposit lending is not conceivable in an environment when house prices nationwide will probably fall 5% – 10% on average.

Queenstown and Auckland inner city apartments will record falls far greater than that. And the former will be good news for Kiwis with good asset bases and income prospects who would like a holiday home in a beautiful location but have seen prices race away on them in recent years in a tourism-related boom.

Tourist numbers are likely to take many years to get back close to where they were, and borders may not open until the second half of next year. Apparently up to half of NZ’s large hotels have closed their doors for now. One imagines some might end up being converted to apartments once the need for capital becomes much worse for owners and willingness to discount brings such a conversion project into the viability range for potential buyers.

Thinking still about housing, increased telecommuting will boost the attractiveness of living on the outskirts of cities like Auckland and up the Kapiti Coast from Wellington, over and above the natural impact from long-term transport infrastructure improvements – such as Transmission Gully Motorway. Telecommuting will also impose however a new challenge for the centre of Christchurch.

Some people might shift out of our big cities to the regions. But recessions bring people to the cities looking for work. And when Kiwis overseas start coming back in bigger numbers as I believe they will, it is to the cities they are likely to head rather than the countryside. They are likely now used to big city living. But a big consideration will be the partner they bring with them who might not know the difference between a sheep and an alpaca and for whom the countryside could be frighteningly empty.

Finally, I want to finish off with a reminder about something I’ve been writing about for nearly three years now. Our business sector has been overdue for a period of “weeding out” of operators across all sectors. There are new pressures afoot which require potentially radical changes in what businesses produce, how they produce it, how they sell it, who they sell it to, etc.

These pressures include loss of pricing power, reduced bank credit availability, online shopping, accelerated speed of market change, social licence pressures related to plastics and climate change, and labour shortages. That last item is off the agenda for most sectors now, apart from those with vital staff offshore unable to enter NZ for probably at least another year.

I picked that the weeding out process would start this year and last 2-3 years. The timing is right, but virtually all the overdue restructuring will occur before the end of this year. Already we have seen Bauer Media close and look to sell off publications because they did not adjust to advertising revenue going online. Mainstream media are going to have to undergo big changes in this regard, probably with government support.

Businesses are reaching the end of the longest period they have ever had available to them to work “on” their business rather than “in” it. Major changes in what gets done and how will occur over the next few months. Come 2021, when sentiment levels are likely to be trending upward and a glass half full sentiment embraced, there are likely to emerge some big new winners across most sectors of the NZ economy. They are more likely to be those changing what they do in coming months rather than staid incumbents. If one were able to identify such firms, listed on the stock exchange or not, the potential wealth benefits long-term could be large.

By Tony Alexander  (Market Commentary sourced from NZFSG Adviser Services, 1 May, 2020)

Email tony@tonyalexander.nz to subscribe to his free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

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