In his speech Alan Bollard said "A particular development of interest to us has been the increasing integration of housing finance into these liquid International markets".

And he finishes by saying "As for New Zealand we need to see realisation amongst borrowing households and lending banks that this period of cheap international money has been unusual, and at some point, will revert to more normal financial conditions."

Well the realisation’s here now.

Easy, cheap money is no longer available. And we’re seeing the results of this in the New Zealand residential property market as follows.

• The residential property boom has peaked as the increasing cost of servicing residential mortgage loans bites in. There was some delay in this due to the Reserve Bank’s increase in the Official Cash Rate not affecting fixed rate mortgages, but now rates are up everywhere. House sales are now half the levels of 2003 – the peak of the boom.
• It’s harder to get a residential mortgage now. The proliferation of non-bank lenders and easy credit with few questions asked has ceased. They’re still out there lending but don’t expect much difference from the questions your bank manager would ask. This will further slow the residential market.
• Commentators do not expect the downturn here to be anything like what may be seen elsewhere like the U.S. and the U.K. (see later in this newsletter). Financiers here did not reach anywhere near the level of risky lending that was available in other countries. Here the level of arrears by more than 30 days for residential mortgage backed securities is low at 1.89%.
• The New Zealand economy is enjoying high commodity prices – our terms of trade rose 3.6% in the third quarter to a 28 year high - unemployment is low, and there is still a lack of housing supply, especially in prime locations. While this remains I cannot see a substantial drop in housing prices.

The booming residential market has been a major issue with regard to the direction interest rates have taken here. The RBNZ kept the Official Cash Rate on hold on 6 December at 8.25% and Alan Bollard’s statement recognised that the housing market had slowed. But he also said inflationary pressures were increasing due to a tight labour market, high food and oil prices, and to quote "as recent dairy price gains reach farmers".

So we have persistent inflation pressures but with a major one removed. (Housing has a major effect as the increased house price is accompanied by increased equity in the home, which encourages spending.)

Latest figures from the Real Estate Institute show an expected spring recovery in November from October but as REINZ president Murray Cleland says this "suggests that the market is levelling off at a very gentle rate more akin to a glider than a stone". There’s no question that buyers are more circumspect with investors in the under $400,000 bracket and first home buyers feeling the pinch.

The uncertainty in the global financial markets and the so called "credit crunch" have caused central banks in the U.K and America to reduce the official interest rates. The U.S Fed cut its official rate by 0.5% as a result of this, a further 0.25% in November and another cut of 0.25% today. Their rate is now 4.25%. The Bank of Canada cut its key policy rate by 0.25% to 4.25% on 4 December and the Bank of England cut its rate from 5.75% to 5.5% on 6 December. The European Central Bank held its rate at 4% but the inflation warning from the President indicated that were it not for the turmoil in the financial markets, rates would have gone up.

All in all it doesn’t look like interest rates in New Zealand will go down. I would expect them to stay at current or higher levels for a long time to come.

Even if rates were to drop in Europe and America – as a result of the credit crunch – I can’t see it making much difference here unless there was a major blow-out which severely impacted on the New Zealand economy. The uncertainty and volatility in the global financial markets have increased risk premiums. Consider Australia where the Reserve Bank kept its official rate at 6.75% but mortgage interest rates have risen and are expected to rise further.

Talking about the credit crunch, the news there is going from bad to worse.

In recent days:-

• Swiss investment bank UBS has written off another US$10 billion in debts linked to the U.S. sub-prime mortgages, bringing total write offs to US$13.5 billion. To see this article and a list of write offs to date for other prominent banks click here
• Investors in France’s Society Generale bank have shunned placing money in structured investment vehicles owned by the bank, which has now had to take US$4 billion back on to its balance sheet. This restricts its ability to make further loans and is a typical cause of the credit crunch. To see article click here
• The Royal Bank of Scotland has warned it expects to write off 1.2 billion pounds due to exposure to U.S. sub-prime mortgages. To see article click here
• The Bank of America is liquidating a $12 billion cash fund due to losses tied to the collapse of the sub-prime mortgage market. To see article click here
• The number of U.S. borrowers behind on mortgage payments is at a 20 year high as they become unable to refinance or sell their homes. To see article click here 
• Home sales and prices have been falling in the U.S. since the credit crunch hit home. And things are getting worse with even California now under pressure. To see article click here