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					BNZ Weekly Overview                                                                          17 April 2008



Mission Statement
To help Kiwi businesspeople and householders make informed financial decisions by discussing the
economy and it’s implications in a language they can understand.



In this week’s issue….


• Monthly REINZ data show weak house sales with buyers holding back as a flood of
  investment property hits the market – with more to come.
• Retail spending falling. This means most (not all) retailers should be considering a
  no-growth business model for now.
• We note the IMF estimate house prices are over-valued up to 32% in a wide range of
  countries.
• Inflation hits 3.4% showing why interest rate cuts remain a ways off.
• Dairying booms and hopefully the week’s rain means the drought is over.




The Weekly Overview is written by Tony Alexander. The views expressed are my own and do not purport to
represent the views of the BNZ. To receive the WO plus the Offshore Overview each Thursday night please
email me at tony.alexander@bnz.co.nz with ‘Subscribe” in the Subject line. To get off the list email
‘Unsubscribe”.

The Classroom Stove

I recall many years ago a teacher explaining the concept of average to me in the following way. In a school
classroom in Winter with the pot belly stove going strong 20% of kids would be too hot, 20% too cold, and
60% just right. On average the temperature would be right – but only 60% of kids would be happy. 40%
would not be sitting comfortably at all. Averages can be very deceiving.

An economy is like that. When things are chugging along at the trend rate of growth – near 2.5% say –
perhaps 20% of firms and people will be running hot (lots of profits, promotions, wage rises etc.), 60%
chugging along as per normal, and 20% losing business profits to better operators or failing to keep their
wages up with the pack.

In a boom perhaps 40% run hot, 50% average, and 10% are too cold. In a time of weak growth or
recession 10% run hot, 50% average, and 40% too cold. That is why even when the economy is strong
some businesses fail and some families still struggle to pay the bills, and when things get tight many
companies are still going gangbusters and individuals earning big dosh.

What this means at the moment is that when people see myself in the media talking about the economy
going through a weak period they think I am talking about everyone suffering. But that is not so. And that
means each week I get two kinds of hate email.
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One type is from people who’s companies are doing very well and they think talk of potential recession is
bollocks. The other type see badness and woe all around them and say I should not say anything negative
because such talk is only adding to the woe and the sooner we all smile and ignore the obvious economic
imbalances the better off we will be. In the Great Depression these are the sort of people who would have
been organising the Prosperity Week parades in 1933.

For your guide the best NZ Great Depression book is “The Sugarbag years” by Tony Simpson – my most
read NZ book after “A Good Keen Man”.

The problem we have is a mixture of people only hearing what they want to hear, and us economists not
having an adequate lexicon for describing a slow growth period. I try to use phrases like “weeding out the
under-capitalised and inexperienced” but still people only hear woe. C’est la vie.

In graphical terms what we mean by a weak growth period is shown in the third column on the right. What
we had for domestic focused companies from 2003-2006 was the column on the left.


                        BOOM                            NORMAL                             WEAK
    100%

     90%

     80%                                Hot
     70%

     60%

     50%

     40%
                                      Okay
     30%

     20%

     10%
                                       Cold
       0%

Note one of the most significant implications of the column on the right showing the weak growth
environment. Opportunities for firm closure and acquisition are very high and this is why a downturn can
eventually lead to a strong rise in an economy’s productivity growth. Valuable resources get reallocated from
the inefficient in the blue area to the efficient and hopefully well capitalised in the red area. In a just released
paper looking at productivity Treasury note OECD research suggesting turnover of firms can account for up
to 50% of a country’s labour productivity growth. Page 8 in the link here.
http://www.treasury.govt.nz/publications/research-policy/tprp/08-01/tprp08-01.pdf

Just to finish off and to put things into perspective, our forecast of 1.4% growth in the economy this year
means gross domestic product in nominal terms will add up to about $170bn from $165bn over 2007 and
$157bn over 2006. In other words, extra activity amounting to $5bn rather than $9b over 2007. That means
a lot of people and companies are going to be as busy or more this year than last year and some easy
examples spring to mind. Anyone involved in the dairy industry is likely to see improved sales along with civil
engineering firms boosted by the infrastructure boom.



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We have been given the example of a residential builder experiencing a flight to quality (long lasting brand)
as buyers shy away from poorly known fringe operators. And that movement of course is something which a
downturn is all about. As buyers we become a heck of a lot more discerning when making a purchase. When
times are good we tend to put the brain on hold and buy the shiniest thing in front of us. But now we seek
quality, value for money,

This is the climate when a business model built around strong consumer debt funded revenue growth can
lose out quickly to a strong long lasting brand.

Having said all that however we should all realise that growth risks in New Zealand and overseas remain on
the downside if for no other reason than this. The longer it takes for investors to regain confidence in the
lending practices of mainly US but also non-US banks the longer the period of the credit crunch when credit
is less available than normal. That means the longer the period of below average growth as fewer people
gear themselves into housing around the world, companies find funding expansion and modernisation more
difficult, and consumers cut spending in the face of falling housing wealth.

At the moment one would need to be very optimistic to interpret the bounce in the US sharemarket off its
lows as indicating any view that the collapse in investor confidence is over.



NZ ECONOMIC DEVELOPMENTS
Friday 11
Farm Sales Strong, Fonterra Payout Lifted = some insulation for a falling economy

In March there were 250 farms sold around New Zealand. This represented a 6.8% rise from a year ago
following a 76.6% annual surge in February. The rural real estate market is well supported by rising dairy
incomes with Fonterra this week reporting that this year’s milksolids payout will be lifted from the earlier
$6.90 estimate to $7.30 with the risk being it ends up higher than that. This payout compares with $4.46 a
year ago and means an overall boost to dairy incomes this season of almost $4.0b. This boost to rural
incomes easily swamps the effects of the drought and suggests that as the cities suffer from investors
offloading properties rural areas will be well insulated – unless they rely primarily on sheep and beef where
things remain depressed.
                                     FARM SALES                                                  FARM SALES
 3500                                                                 80
                                                                             %                             Number of sales in the
                  Annual total                                        60                                 past 3 mths compared with
 3000
                                                                                                                 a year ago
                                                                      40
 2500
                                                                      20
 2000
                                                                       0

 1500
                                                                      -20
             Source: REINZ                                                       Source: REINZ
 1000                                                                 -40
        97   98    99     0      1     2   3      4   5   6   7   8         98   99    0     1   2   3     4     5      6     7      8

Over the March quarter farm sales were ahead 36% from a year ago and over the year were up 23%.

Consumer Sentiment Still Weakening = no surprise given media focus

The monthly Roy Morgan measure of consumer confidence fell again in April to a reading of 99.7 from
107.6. This is the lowest reading since the survey started in 2004 and suggestive of weakness in retail
spending in the short term. In that regard the survey is in line with other indicators as we head into Winter.
Traditionally, the parts of retailing which suffer most when consumers close their wallets are furniture, white
wear and brownwear, automobiles, and foreign travel. Hardware takes a hit as the building trade declines.
People tend to eat out less but could buy more comfort items like ice cream and snacks. Discretionary
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spending tends to suffer affecting things like coffee, designer clothes, entertainment. In this environment
some stores will still do quite well, but that may be either because they offer the lowest cost basic lines
which are not much differentiated between brands, or they offer more specialised goods and services with
brands encompassing value for money, consistent quality etc.
                                                                   CONSUMER CONFIDENCE
                                      150


                                      140


                                      130


                                      120


                                      110


                                      100
                                                    Source : Roy Morgan

                                       90
                                            4               5                 6                   7                8




Housing Sales Hit 20 Year Low – Price Adjustment To Follow

The REINZ reported that in March there were 5,129 dwellings sold around New Zealand. This was the
lowest total for any month since January 2001 and the lowest total for March since 1988! Sales were down
53% from a year earlier – a decline in line with the 56% decline reported in last week’s Barfoot and
Thompson data. The result shows a real estate market generating very little income for agents, with all the
feedback showing the low sales result from a shortage of buyers rather than a shortage of sellers. That
shortage of sellers phenomenon is something we have seen in the rural real estate market at times over the
past few years.
                          DWELLING SALES
 60                                                                                                          NUMBER OF DWELLING SALES
                                                                              130000
                                 % changes from a year earlier                                                                                  121,623
 40                                                                           120000        12 month totals

 20                                                                           110000         Source: REINZ

                                                                              100000
  0
                                                                                  90000
 -20                                                                                                                     81,000                     80,860
                                                                                  80000
 -40
                                                                                  70000                         69,000
           Source:REINZ                                                                                                               64,727
 -60                                                                              60000
       1      2       3      4         5        6           7             8               91 92 93 94 95 96 97 98 99     0   1    2     3   4   5   6   7    8

A shortage of buyers means current prices are not at equilibrium levels and declines will be occurring.
However in March the median dwelling sales price actually rose to $349,000 from $338,000 in February to
lie 1.5% ahead of a year ago. This rise however is deceiving. The number of houses being sold in the below
$400,000 category has fallen sharply according to the REINZ and that of course is the price bracket the
investors piled into over the past three years thinking they were silly not to be gearing themselves up into an
already over-valued market to make easy money.

Not that many people were expecting the sort of correction underway now. But that is what can happen in
asset markets. Optimism reigns for a long time then nerves set in and everyone looks to quit the market at
the same time – up the escalator and down the lift shaft.




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                                                                                                DWELLING PRICES
                                                25
                                                          % changes from
                                                20         a year earlier


                                                15


                                                10


                                                 5


                                                 0

                                                                                  Source: REINZ
                                                -5
                                                     91   92   93       94   95   96       97    98   99     0        1    2   3    4     5   6   7       8

Our belief is that there are literally tens of thousands of unsatisfied first home buyers planning to buy. These
are the ones outbid by debt-laden investors at auctions in recent years. But these buyers will not be entering
the market for many months. Debt servicing costs are prohibitive for most – especially at a time when petrol
and food prices are rising. These buyers can also see all the negativism around them and daily reports of
stressed property investors and collapsing investment vehicles.

The mortgagee sales resulting from various schemes collapsing look like they have yet to start. Potential
buyers know prices are going to fall further. The message in this for vendors is that if you want a sale within
a reasonable period of time you are going to have to cut your asking price and do it quick. If you don’t your
property could still be sitting there come Summer. And don’t blame the agents. Having sold a house some
years ago one’s temptation is to blame lack of a sale on the agent. But in this market even the best will be
struggling unless they can quickly convince the vendor to “take a haircut” as one of our survey respondents
noted this month.
                           SELLING TIME PERFORMANCE                                                                                DAYS TO SELL AND HOUSE PRICE INFLATION
 20                                                                                                        20                                                                                    -5

 15         Extra Days                   Market weak                                                       15                                                              Inversed
                                                                                                                                                                                                 0
                                                                                                                                                                      % annual change
 10                                                                                                        10
                                                                                                                                                                       in prices - RHS
                                                                                                                                                                                                 5
  5                                                                                                         5

  0                                                                                                         0                                                                                    10

  -5                                                                                                        -5
                    Days taken on average                                                                                                                                                        15
 -10             to sell a dwelling each month                                                             -10
                                                                                                                                        Days to sell vs. average
            compared with the average for that month                                                                                                                                             20
 -15                                                                         Market strong                 -15                                   LHS
                       the past ten years
 -20                                                                                                       -20                                                                                   25
       96     97    98   99    0     1      2    3         4        5         6        7         8               96       97   98       99    0       1       2   3     4    5    6      7   8

On average in March it took 40 days to sell a dwelling. This was a reduction from 50 in February and a 13
day increase from a year earlier. This is interesting because February was 18 days worse than a year earlier
and 7.1 days longer than the February average whereas the March result was just 4.1 days longer than
average. What gives?

There could be some problems with the data because REINZ actually delayed release of these numbers one
day because of data issues. In addition perhaps as people get frustrated with one agent they shift to
another. That means the days to sell for that property hop back to zero – because it did not sell. We have no
anecdotal evidence to back this theory up but would be interested if anyone in the know could tell us if this is
in fact happening.

All up the March data in our opinion show a housing market in freefall when it comes to turnover – which
simply means a price adjustment is needed to restore volumes. That adjustment is underway now and is
likely to continue through Winter – much to the huge delight of those first home buyers appallingly squeezed
out of the market in recent years by unsophisticated investors.

Just to finish this section, the outlook for residential construction is fairly bad. The graph below shows a
strong correlation between the annual rate of change in dwelling sales and the annual rate of change in
dwelling consents. Perhaps the time is approaching when people who have been holding off getting some
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renovation work done because of the prices being charged by contractors could think about inviting quotes –
again, in the depths of Winter may be best.
                                                 DWELLING SALES & CONSENTS
                  130000                                                                                             35000
                                                                                                                     33000
                  120000     12 month totals
                                                                                                                     31000
                  110000
                                                                       Consents                                      29000
                  100000                                                 RHS                                         27000

                   90000                                                                                             25000
                                                                                                                     23000
                   80000
                                                                                                                     21000
                   70000
                                                                     Sales                                           19000
                   60000                                                                                             17000
                           91 92 93 94 95 96 97 98 99                  0     1       2    3    4   5   6     7   8

Monday 14
Retail Spending Falling = consumers reining spending in

Total retail spending in New Zealand fell by 0.7% in February after making adjustments for the usual
seasonal factors. This means annualised spending growth in the three months to February was just 4.4%
compared with growth averaging 5.7% p.a. over the past five years. That is not too bad really – but the data
will be biased upward by higher inflation and the extra day for Leap Year. If we exclude the volatile
automotive categories to try and get a better picture of what is happening underneath we see core retail
spending grew for the fourth month in a row gaining 0.2% to give annualised growth in the past three months
of 3.5% versus 5.6% average for the past five years.
                                       RETAIL SPENDING GROWTH - THREE MONTHS ANNUALISED
                              14

                              12

                              10
                                                                                                       All
                               8

                               6

                               4

                               2

                               0
                                         Source: Statistics NZ
                                                                                         Ex-auto
                              -2
                                   5                             6               7                      8


Motor vehicle retailing was really weak with a fall of 5.8% in the month. This would be consistent with the
very negative comments about sales activity for new cars in particular contained in our monthly Confidence
survey. And such weakness is not surprising because when people find debt servicing costs too high they
cut back on things usually purchased with credit – like houses and cars.
http://www.bnz.co.nz/About_Us/1,1184,3-29-643-2973,00.html

In fact in the past three months car retailing has fallen 8.9% in total, furniture 2%, hardware 5.8%, and
appliances 1.3%. Total retail spending has fallen just 0.3% in the past three months driven by 4.3% growth
in supermarkets. That is not normal growth for the grocery sector so one suspects a big price increase
element giving an upward bias to the total number and that underlying retail volumes are shrinking.

The first important thing to note here is that in volume terms there appears to be a small annual decline in
retail spending most pronounced for durables. This will be a problem for stores relying on continued sales
growth and who have poor inventory control which becomes important when financing costs are high. Most
retailers are likely to notice weakness in spending, customers getting fussier and less impulsive in their
purchases, and perhaps more willing to bargain for cash purchases in particular.

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The second important thing to note is that the only minor underlying decline in retail spending means the odd
thing out for the household sector is the housing collapse. It reflects something specific driven by investors
rather than widespread consumption retrenchment driven by the likes of job fears.

Tuesday 15
Inflation Hits 3.4% - monetary policy easing is not imminent

New Zealand’s annual inflation rate rose to 3.4% in the March quarter from 3.2% over calendar 2007 and
2.5% a year ago. Inflation has been settling at higher levels in recent years with the average rate in the past
four years coming in at 2.9% compared with 2.4% in the four years before that and 1.3% in the previous four
year period. This creeping up in our structural inflation rate helps explain why scope for the RB to ease
monetary policy is so limited for the next few months. If they had stomped harder on inflation four years ago
there would now be greater scope to ease policy to fight global and building domestic economic woe without
seriously risking inflation consolidating above 3%. That risk currently is high.
                                  FOUR YEAR AVERAGE INFLATION                                                                INFLATION
 4                                                                              9
                                                                                           %             Source: Statistics NZ
          %                                                                     8
                                                                                7
 3
                                                                                6
                                                                                5
 2                                                                              4
                                                                                3
                                                                                2
 1
                                                                                1
          Source: Statistics NZ                                                 0
 0                                                                              -1
     94   95      96      97      98   99   0   1   2   3   4   5   6   7   8        90   91   92   93   94   95   96   97    98   99   0   1   2   3   4   5   6   7    8

Having said that, this inflation issue is a major problem in many economies including Australia where interest
rates have been increased 1% recently, the UK where the Bank of England Governor anticipates writing a
letter to the Chancellor explaining why inflation is so high, and the Euro zone where inflation is well above
the 2% official target at 3.5%

Over the March quarter the CPI rose 0.7% which was about equal to market expectations. Rents rose 1.2%
in the quarter to be up 3% from a year ago, petrol prices rose 4% in the quarter and 20.5% from a year ago,
while food prices rose 1.8% and 5.1%. Without petrol the CPI increase would be 2.5% and without food and
petrol the rise would have been about 2.2%, so yes rising international oil prices are badly affecting inflation
and preventing monetary policy easing. A lot of things are actually falling in price with international airfares
down 8.6%, audio visual gear and computers down 3.6%.

Taking a backward looking stance one would say scope for policy easing this year is zero. However
influencing inflation is always about what lies ahead and while capacity use and pricing measures are all
very high, coming on strong is a major slowing in economic activity growth. This is coming partly from the
worsening credit crunch and housing markets overseas, and partly from the crunching domestic sector here
in NZ. We expect monetary policy will be eased in December but the risk is it happens sooner.




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INTEREST RATES
With the March quarter inflation number coming in at the 0.7% and 3.4% changes as expected, but with
other data tending to come in weaker than expected, we have seen wholesale interest rates decline over the
past week. The yield on 90-day bank bills has ended near 8.88% from 8.89% last week while the two year
swap rate has ended near 8.16% from 8.3%.
                   WHOLESALE INTEREST RATES                                                                             2 YEAR SWAP RATE
 9.5
                                                                                         9
       %
  9                                                                                            %
                                                                                        8.8
 8.5
  8           90-day bank bills                                                         8.6

 7.5
                                                                                        8.4
  7
                                      10 year Govt. bonds
                                                                                        8.2
 6.5
  6                                                                                      8
                                                                                                    2007                                        2008
 5.5
                                                                                        7.8
   2-Jul- 23- 13-   3-  24-    15-     5-  26-  17-   11- 1-Feb- 22- 14- 7-Apr-




                                                                                                                                         17/1
                                                                                                           27/9




                                                                                                                          22/11




                                                                                                                                                   13/3
                                                                                              2/8
    07 Jul-07 Aug- Sep- Sep-   Oct-   Nov- Nov- Dec- Jan- 08 Feb- Mar- 08
               07   07   07     07     07   07   07   08         08  08


Market expectations remain for an easing of monetary policy later this year but the risk is those expectations
start shifting more toward September than December as we get increasingly weak numbers on the domestic
parts of the NZ economy. By that we mean retailing – already revealed weak with a 0.7% fall in February
sales – and housing – also looking weak as sellers overwhelm the market.

The domestic economy also includes business spending and government spending however and in those
two areas things don’t look so bad. Imports of capital equipment are growing near 11% p.a. Having said that,
growing business pessimism is going to eat into activity soon we think. For the government however the
worse things look in other areas the lower the likely fiscal surplus this year but the greater the scope to boost
spending and give tax cuts in the Budget and ahead of the election while not too seriously reducing the
chances of a pre-election rate cut from the RB.

Not that what happens with the official cash rate is the best indicator of what will be happening with housing
interest rates. The global environment has changed so that the old relationships between the OCR, bank bill
yields, swap rates and lending rates have gone out the window. Investors internationally are still willing to
fund bank lending but not at the interest rates they would have accepted in the past. Trust in US banks has
been shattered on the back of the sub-prime crisis and this has affected willingness to take exposure to all
banks – though mainly the US ones.

Given that we NZ banks have to get around one-third of the money we lend to you from foreigners we are
vulnerable to shifts in the willingness of those investors to lend us money. This manifests itself in equilibrium
prices changing with some of that change coming through the exchange rate and some through interest
rates. We can see the unwillingness to accept a high exchange rate entry level for NZD exposure in the Kiwi
dollar’s decline from last year’s levels against currencies other than the USD.
                                                                     NZD vs. 2007 MONTHLY AVERAGE PEAK
                                             5
                                                  %
                                                                  USD
                                             0

                                                                                                    GBP
                                             -5
                                                    TWI
                                                                                  AUD
                                            -10



                                            -15                                                                                   EURO

                                                                                                                  JPY
                                            -20


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The interest rate effect is not obvious and does not appear in the swap rates we have been discussing here
for years. Instead it manifests itself as the spread we banks have to pay above government securities in
offshore markets blowing out from perhaps a stable 0.3% spread to 1.3% in one example over the past two
months. This extra cost has so far only partly been fed through into current fixed and floating lending rates.
That means we could see bank lending rates rising in coming months even without any change in the OCR –
and even if the OCR gets cut!

Speaking of which, the RB will review the OCR next Thursday and we expect no change. The challenge for
the RB will be to acknowledge the worries about domestic and foreign growth without signaling an easing
bias and prompting a rally in wholesale interest rates that will raise questions about inflation further out.


 FINANCIAL MARKETS DATA
                    This                   Week          4 wks           3 months        Yr         10 yr
                    week                   ago           ago             ago             ago        average
 Official Cash Rate 8.25%                  8.25          8.25            8.25            7.50         6.2
 90-day bank bill   8.88%                  8.89          8.86            8.74            7.80         6.4
 10 year govt. bond 6.39%                  6.44          6.31            6.31            6.12         6.5
 1 year swap        8.73%                  8.71          8.69            8.82            8.21         6.6
 5 year swap        7.70%                  7.89          7.98            8.13            7.87         7.0


If I Were a Borrower What Would I Do?

Late this year we expect the Reserve Bank will start cutting interest rates. But there is a risk that when they
start doing this wholesale funding costs facing us banks internationally are high and still rising. That means
even before the official cash rate gets cut we could see some further increases in floating and fixed housing
rates – as is happening in other countries. For instance in the UK last week banks increased fixed housing
rates in spite of the Bank of England cutting its cash rate 0.25% to 5.0%.

This means if I were a borrower at the moment I would fix two years if I was more nervous an individual than
I am, and fix six months if I were more of a gambler than I am. I’d fix 12 months. Note that if you choose to
fix two years you’ll be doing what most other borrowers are doing at the moment and that is very reasonable
given the massive uncertainty about where interest rates are going over the coming 18 months.



HOUSING MARKET UPDATE
Queenstown Debate

Last week we included the comment from a property developer in Queenstown trying to counter the
anecdotes of weakness in his market – for obvious reasons. Property developers are being crunched in the
current environment as their previous source of credit from finance companies dries up, banks demand more
professional and risk appropriate security, interest rates and pre-sales, and buyers back off recognising the
need to make a purchase early in a development’s life cycle is reduced now given the widespread housing
market correction.

Here is an extract from an emailer currently living in New York looking to shift home to NZ and buy a
Queenstown property. “In Queenstown in February with my American fiancé who just loves it - we are
getting married at Lake Hayes in the New Year - and we were looking at property with my agent. I had
owned residential property there for 12 years until selling out 12 months ago. Disagree with the person
stating that QT prices are holding. Prices are very weak at present in QT. Admittedly we were looking in the
$1.5 million -2.2 million range but everybody was negotiable first time through these places. Saw maybe 8
properties and for all we were invited make an offer. There was a list price and then I would extract what the
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property was really worth. At least 10% lower straight off without even haggling. One property is now listed
at $1.495 million from $1.75 million and negotiable.”

Globally House Prices Frequently Over-Valued According to IMF

For your guide, in their World Economic Outlook report released last week the IMF have a big section on
housing at the following link. It takes you to a pdf document of almost 1mb.
http://www.imf.org/external/pubs/ft/weo/2008/01/pdf/c3.pdf

They note that the housing cycle appears to have become a more significant influence on economies and
inflationary pressures in recent years and that central banks should pay greater attention to the housing
cycle when setting monetary policy. This sounds very much like our own thoughts from 2004 when we
recommended in strong terms that the Reserve Bank act more quickly and aggressively to get the housing
bubble under control. The fact that it took maybe perhaps three years longer to achieve this than they were
targeting helps explain why the downward correction now is so sharp.

This does not however automatically translate into a conclusion that the downward leg of the housing cycle
will be necessarily longer than normal. It all frankly comes down to how fast the market equilibrium average
price adjusts to the obvious imbalance at the moment between what sellers are asking for and what buyers
are prepared to pay – keeping in mind that the sellers are mainly investors who have stopped thinking
capital gains will easily flow, while the buyers are owner occupiers these investors priced out of the market
three years ago.

Were the economy set for a typical recession involving a 1.5% or more rise in the unemployment rate then it
would seem appropriate to think of our 30% over-valuation estimate in terms of prices falling that much. But
given the tight labour market a correction of another 10% or so from current levels could be enough to
restore turnover volumes to more normal levels rather than the worst since 1988 (in March). But one must
keep in mind that it is impossible to pick where equilibrium for an asset market may be at any point in time
because it comes down to things like how desperately investors want to sell, how many don’t need to sell so
boost rents and hold for the long term (sounds like a good idea), and when buyers think other buyers will
hop in.

One final point, it is conceivable that the average house price required to clear the market over the next
three months could be lower than the clearing price in a year’s time. Think about this in terms of a short-lived
imbalance at one point in time between buyers and sellers – like too many farmers seeking to sell their
sheep on one day whereas only a few buyers have shown up.

The IMF paper referred to above includes a graph (Page 11 of the report) estimating how much average
house prices are over-valued in a range of countries – not including New Zealand unfortunately. The
numbers they come up with are approximately as shown in the following table.

Ireland                          32%                 Sweden                            16%
Netherlands                      30%                 Italy                             11%
United Kingdom                   28%                 Japan                             11%
Australia                        25%                 United States                     11%
France                           23%                 Finland                           6%
Norway                           22%                 Germany                           3%
Denmark                          18%                 Canada                            -3%
Belgium                          17%                 Austria                           -6%
Spain                            17%

This link takes you to an article about housing markets falling around the world.
http://www.nytimes.com/2008/04/14/business/worldbusiness/14real.html?pagewanted=1&ei=5070&en=851a
863f6b357ead&ex=1208836800&emc=eta1

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BNZ WEEKLY OVERVIEW

Rents Rising

We have plenty of anecdotal evidence in hand of rents rising and in this week’s Consumers Price Index
release we saw proof. The rents index rose 3% from a year ago in the March quarter but was up 1.2% in just
the three month period. This pace of increase is likely to be sustained this year with potential house buyers
preferring to rent and wait for house prices to fall while landlords seek recompense for rising costs including
debt servicing. Plus we must not forget that even before house prices started falling there was a shortage of
rental accommodation which became quite apparent early last year. The graphs below compare house price
and rent movements with the second graph giving yet another example of how the housing market is in a
corrective phase.
                                      HOUSE PRICE and RENTS                                                           RATIO OF HOUSE PRICES TO RENTS
 30                                                                                  3.1

 25          % annual changes                                     House prices       2.9

 20                                                                                  2.7


 15
                                                                                     2.5                              Actual ratio is meaningless, only the change
                                                                                     2.3
                                                                                                                                         matters
 10
                                                                                     2.1
  5
                                                                                     1.9
  0
                                                                          Rents      1.7

  -5                                                                                 1.5
            Source: Statistics NZ, QVNZ
                                                                                                Source: Statistics NZ, QVNZ
 -10                                                                                 1.3
       91         93          95          97   99     1       3       5          7         90   91    92   93    94    95     96   97   98   99   0   1   2   3   4   5   6   7   8




Exchange Rates & Foreign Economies
See the Offshore Overview


Data Sources
Interest rates & exchange rates RBNZ at                  http://www.rbnz.govt.nz/statistics/
House mortgage data – RBNZ                               http://www.rbnz.govt.nz/statistics/monfin/rbssr/rbssrpartE/data.html
House price information - REINZ http://www.reinz.org.nz/reinz/public/market-information/market-information_home.cfm
NZ economic data, most from Statistics NZ                http://www.stats.govt.nz
Government accounts, NZ Treasury at                      http://www.treasury.govt.nz/financialstatements/
Parliament, select committees, publications etc.         http://www.parliament.nz/en-nz

Want more detailed background information on the NZ economy? Start in these places.
http://www.treasury.govt.nz/economy/overview
http://www.oecd.org/country/0,3377,en_33873108_33873658_1_1_1_1_1,00.html
http://www.rbnz.govt.nz/monpol/statements/
http://www.fco.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPage&c=Page&cid=100702939
4365&a=KCountryProfile&aid=1019041559387

This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the
contents should not be relied upon or used as a basis for entering into any products described in this publication. BNZ strongly recommends
that readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Neither the
Bank of New Zealand nor any person involved in this publication accepts any liability for any loss or damage whatsoever that may directly or
indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.




                                                                                                                                                                              Page 11

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BNZ WEEKLY OVERVIEW
ECONOMIC DATA
All %                                                            Latest     Previous       Latest        Year    2 Yrs
                                                               qtr only      qtr only        year         ago      ago
Inflation              RBNZ target is 1% - 3% on average          0.7%            1.0          3.4         2.5      3.4
GDP growth             Average past 10 years = 3.0%                 1.0           0.5          3.1         1.5      2.7
Unemployment rate Average past 10 years = 5.3%                      3.4           3.5         ......       3.8      3.6
Jobs growth            Average past 10 years = 1.9%                 1.1          -0.3          2.5         1.4      1.6
Current a/c deficit    Average past 10 years = 5.5% of GDP          7.9           8.4         ......       9.0      9.0
Terms of Trade                                                      2.9           3.7          8.8         3.8     -1.9
Wages Growth           Stats NZ experimental series                 1.6           1.2          4.9         4.9      5.1
Retail Sales ex-auto Average past 9 years = 3.8%.                   0.0           0.1          5.2         4.1      6.1
House Prices           Long term average rise 5% p.a.               0.3           2.8        11.4        10.1     14.0
Net migration gain     Av. gain past 10 years = 10,400          +4,644       6,590yr          ......   13,160    8,277
Tourism – an. av grth 10 year average growth = 5.0%. Stats NZ       2.2           2.4          2.2         2.0      0.9
                                                                 Latest     Prev mth      6 mths         Year     2 yrs
                                                              year rate     year rate         ago         ago      ago
Consumer conf.         10 year average = 2%. Colmar survey          -25           -16            -8         -2      -29
Business activity exps 10 year average = 26%. NBNZ                 -6.4           2.4        17.2        24.1       5.2
Household debt         10 year average growth = 11.3%. RBNZ        11.5          11.9        13.6        13.5     14.6
Dwelling sales         10 year average growth = 3.5%. REINZ       -32.1        -21.6        -11.3        19.4    -17.6
Floating Mort. Rate 10 year average = 8.1%                       10.69         10.55       10.55         9.80     9.55
3 yr fixed hsg rate    10 year average = 7.9%                      9.49          9.54        8.75        8.80       7.5
ECONOMIC FORECASTS
Forecasts at Apr 10 2008          March Years                December Years
                                   2006 2007 2008 2009 2010     2005 2006 2007 2008 2009
GDP - annual average % change
Private Consumption                  4.7    2.7 3.6 0.7  1.4        5 2.5   4.3   1     1
Government Consumption               5.1    4.3 4.4 4.2  4.2      4.2 4.7   4.4 4.2   4.2
Investment                           5.2   -2.3 5.1   1  3.3      3.9 -1.6  4.9 1.7   1.9
GNE                                  4.2      1 4.9 1.4  2.3      4.3    1    5 1.8   1.8
Exports                             -0.1    3.1 2.9 0.6  2.1     -0.4 1.7   3.6 1.3   1.3
Imports                              4.1   -1.7 9.4 3.1  2.8      5.4 -2.8  8.9 4.1   2.7
GDP                                  2.7    1.5 3.2 0.8    2      2.7 1.5   3.1 1.4   1.3
Inflation – Consumers Price Index    3.3    2.5 3.4 3.3  2.5      3.2 2.6   3.2 3.2   2.7
Employment                           2.6    1.7 1.8 0.2  0.4      1.6 1.4   2.5 0.7     0
Unemployment Rate %                  3.9    3.7 3.4 3.7    4      3.6 3.8   3.4 3.6     4
Wages                                4.6    5.5 4.6 4.2  3.3      5.1 5.5     4 4.6   3.5
EXCHANGE RATE
ASSUMPTIONS
NZD/USD                            0.64    0.7    0.8   0.69   0.65        0.7   0.69   0.77   0.72    0.66
USD/JPY                            117    117    101    112    119        119    117    112    107     118
EUR/USD                             1.2   1.32   1.55    1.4   1.32       1.19   1.32   1.46   1.45    1.32
NZD/AUD                            0.87   0.88   0.87   0.78   0.78       0.94   0.88   0.88    0.8    0.79
NZD/GBP                            0.36   0.36    0.4   0.38   0.37        0.4   0.35   0.38   0.38    0.37
NZD/EUR                            0.53   0.53   0.52   0.49   0.49       0.59   0.52   0.53    0.5     0.5
NZD/YEN                            74.6   81.9   81.1   77.3   77.4       82.7     81   86.3     77    77.9
TWI                                65.6   68.6   71.6   65.4   64.1       71.9     68   71.6   66.7    64.8
Official Cash Rate                 7.25   7.47   8.15    7.5   5.75       6.99   7.44   8.19      8       6
90 Day Bank Bill Rate              7.55   7.78   8.83   7.54   5.81       7.49   7.64   8.77   8.19    6.06
10 year Govt. Bond                 5.71   5.91   6.35   6.15    6.1       5.89   5.77   6.38    6.2     6.1
2 Year Swap                        6.99   7.76   8.44    6.5   6.35       7.24   7.48   8.58   6.72    6.26
All actual data excluding interest & exchange rates sourced from Statistics NZ.
The BNZ Weekly Overview is prepared by Tony Alexander, Chief Economist at the Bank of New Zealand. Ph 04 474-
6744.
                                                                                                                 Page 12

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