Housing supply versus demand

A summary of how we have arrived at the current housing situation from Dene Mackenzie at the ODT:

Supply, demand key factors

Dwelling consents, bank lending and net migration were three of the main factors determining house prices, Milford portfolio manager Brian Gaynor said yesterday.

Supply in the form of dwelling consents, dropped off sharply in 2009 in response to the global financial crisis and the collapse of New Zealand’s finance company sector. The latter was a major supplier of credit for house builders and property developers, he said.

In the four years to 2012, an average of only 14,850 consents a year were issued compared with an average of 26,218 consents in the four years to 2008.

“Consents have picked up dramatically and it will not be long before the annual consents number exceeds 30,000.”

Annual consents in excess of 30,000 had only been achieved five times since records began in 1966. The record high was 39,636 consents in 1974, Mr Gaynor said.

The huge increase in net migration, to 68,432 for the May 2016 year, had a major impact on demand. It represented a net turnaround of 72,085 since the net outflow of 3653 in the May 2012 year.

However, the massive increase in lending to home purchases had also fuelled the housing markets.

There much talk about loan-to-value limits but the lending statistics illustrated the regulation had not been effective, he said.

“The gap between the value of new loans and the value of new dwelling consents has widened dramatically in the past year.”

The housing market took off a few years ago because of the very low build rate after the collapse of the finance company sector, Mr Gaynor said.

Actions by banks could slow down demand. Non resident (overseas) borrowers:

Westpac was one of several banks which stopped lending to non-resident borrowers with overseas income last month, and Bankers Association chief Karen Scott-Howman said lenders were responding to signals in the market and from the Reserve Bank.

And yesterday a cutback on the term allowed for interest-only loans:

Westpac’s New Zealand unit is cutting interest-only lending terms to a maximum of five years, in a market where investors are the driving force.

Interest-only loans were often used by property investors who met the interest repayments and left the principal untouched on the expectation they could pocket a capital gain on a house sale.

Reserve Bank figures showed interest-only mortgages accounted for about 41% of all new lending in May, up from 38% in January when it first started collecting the data. Of existing home loans, interest-only mortgages totalled $60.82billion as at March 31, or 28% of total loans.

A dramatic effect could be coming:

Supply was now increasing and any reduction in immigration and/or banking lending was likely to have a dramatic impact on house prices. Housing bulls should keep a close eye on the rising supply figures, he said.

The pushes to increase supply should eventually work, and with limits put on investors in the market supply may switch from lagging to exceeding demand.

It’s anyone’s guess whether the market will flatten or fall.

Contrasting asset sale dividend claims

Greg Presland did some “back of the envelope calculations” on dividends on assets part owned by the Crown in Imagine if National had not sold the shares in our companies 2015 version.

About 12 months ago I wrote this post on the loss of dividends that would otherwise have been paid to the Crown because of National’s privatisation activity.  I calculated the country had lost $360.7 million in dividends although there had been a saving in interest.  And the country had also missed out on $485 million in the increase of the value of the shares.

I did another back of the envelope calculation today based on the latest company announcements.  I am afraid that things are way worse.  It looks like we lost $471 million in dividends not to mention further capital gains in the value of the shares we sold.

My calculations may be wrong.  Back of the envelope calculations while watching Auckland v Canterbury even using Excel are not optimal.  And I have not tried to understand any changes in capital structure and what consequences they may have had.  But I think that the New Zealand nation has been royally rogered by the sale of the power company and Air New Zealand shares.

I repeated the calculations and the figures this year are worse.  Far worse …

The results are:

  • Meridian paid a total dividend of 18.23c a share compared to last year’s result of 13.01c per share.  If the shares had not been sold the dividends that would be paid to the Government would total $229 million this year not to mention $163.4 million last year.
  • Mighty River Power’s profit went down but it still paid a dividend of 19c a share.  Dividend loss to us, $128 million and last year $91.2 million.
  • Genesis Energy increased its dividend payout to 16c per share compared to last year’s payout of 13c per share.  Dividend loss to us last year was $61.9 million and this year is $78 million.
  • Air New Zealand had a bumper year and announced a total dividend of 16c per share.  The value of the shares National sold increased by $186 million and the dividend loss this year was $35 million.

My quick calculation is that since their sale the shares the Government sold have increased in value by $1.378 billion.  Over the past two years we have lost that in capital increase and $831.7 million in dividends.  We did receive $4.7 billion in sale proceeds although this is before the cost of selling the shares.

Overall in two years we have gained $4.7 billion less expenses but we have lost $1.4 billion in capital gains and $831.7 million in dividends.  That is $2.23 billion or nearly half of the sale amount.

Brian Gaynor looks at some different numbers at NZ Herald in Air NZ privatisation has paid off for taxpayers:

There is a widely held belief that the partial privatisation of state-owned assets is a complete ripoff, that taxpayers are being taken to the cleaners.

This opinion was expressed in a letter to the Weekend Herald following Air New Zealand’s recent profit announcement. The reader wrote: “Just a few years ago, the taxpayer bailed out the airline to the tune of $900 million. Wouldn’t it be lovely to run a company that when you make a profit, management takes credit and if you make a huge loss, the taxpayer bails you out. It is now time to repay its profits to the taxpayer.”

These comments are totally inaccurate, as an analysis of Air New Zealand – as well as Genesis Energy, Meridian Energy and Mighty River Power – illustrates that taxpayers have achieved fantastic returns from the Crown’s shareholdings in a number of NZX-listed companies.

That’s quite a different story. On Air New Zealand:

In September 1996, Air New Zealand acquired 50 per cent of Australia-based Ansett Holdings and in February 2000 it acquired the remaining 50 per cent.

Ansett went bust in September 2001 and Air New Zealand was in serious financial difficulty.

The company reported a loss of $1425 million for the June 2001 year, and in October 2001 the Crown agreed to put $885 million into the ailing carrier. This comprised a $300 million loan, in the form of convertible preference shares, and the purchase of new shares for $585 million. The convertible preference shares were switched into ordinary shares in 2005.

In 2004, Air New Zealand had a rights issue at $1.30 a share and the NZ Government purchased a further $150 million worth of new shares.

What has the Crown received in return for its $1035 million Air NZ investment?

• It has collected total dividends of $765 million.

• It received $365 million for the sale of 221.3 million shares in November 2013 which reduced its shareholding from 73.2 per cent to 53.1 per cent.

Thus, the Crown has received a cash return of $1130 million for its $1035 million investment. In addition, its remaining 582.9 million Air NZ shares were worth $1446 million at Thursday’s closing price of $2.48 a share.

It is inaccurate to claim that taxpayers have been shortchanged by Air New Zealand and its management team when the Crown’s total investment of $1035 million is worth $2576 million. This includes dividends received, the proceeds from shares sold and the value of its remaining shares.

The Air New Zealand investment has had an extremely positive outcome for taxpayers.

And on the more recet part asset sales:

The Air New Zealand investment has had an extremely positive outcome for taxpayers

Another issue is the partial privatisation of Genesis Energy, Meridian Energy and Mighty River Power and whether taxpayers have had a positive outcome from this strategy.

One of the major arguments against the sharemarket listing of these electricity generators was that the Crown would lose 49 per cent of its dividend income if it sold 49 per cent of these companies.

The figures in the accompanying table tell a different story.

The Crown will receive total dividends of $440 million from the three electricity generators for the year to June, when they are all 51 per cent owned by the Government, compared with $485.8 million two years ago when they were all 100 per cent tax-payer-owned.

Thus the Crown has received $4308 million from the partial sale of these companies yet its dividend income has fallen by only $45.8 million. This is a remarkably positive outcome for taxpayers.

The reason for this is that companies usually lift their performance after an IPO, mainly because they are subjected to far more scrutiny. It is somewhat similar to a football team performing much better in front of 50,000 fans compared with at a training run with only a few coaches.

For example, Genesis Energy has gone from one shareholder to more than 55,000 shareholders, Meridian Energy from one to nearly 49,000 and Mighty River Power from one shareholder to in excess of 100,000.

The combination of a large number of outside shareholders, directors and senior management owning shares, and greater scrutiny by these shareholders and the media means that partially privatised companies are likely to perform much better than 100 per cent Crown-controlled entities. As a consequence, they also tend to pay higher, more sustainable dividends.

Gaynor concludes:

It is patently clear that a sharemarket listing and 51 per cent Crown ownership has been a win-win situation for taxpayers and investors in Air New Zealand, as well as the three electricity generators.

That’s quite different to Presland’s back of an envelope claims.

Immediate and potential costs of NZ Power

The NZ Power announcement last week could be very costly to New Zealand.

Whether a Labour-Green government get the opportunity to implement the policies or not there is an obvious immediate cost – the timing of the announcement is almost certain to adversely affect the price Government gets for the Mighty River Power shares see Spooked investors off the hook:

Business Herald columnist Brian Gaynor estimates that the Government could pocket $400 million less for its 49 per cent sale of Mighty River Power because of the effect of the policy.

Gaynor’s estimate is probably on the high side, $200 million has been a more widely mentioned estimate. That is still substantial, and would be a direct cost to the taxpayers (that’s us).

Labour and Greens continue to deny any deliberate attempt to sabotage the MRP float:

Greens energy spokesman Gareth Hughes said the purpose of the planned purchasing agency, NZ Power, was not to frustrate the asset sales “but to drive down power prices and eliminate the excessive profits of the electricity companies”.

But Hughes was caught out on 3 News last night,  unsure if revealing glee at disrupting the share float was appropriate. When asked about his reaction to the temporary suspension of the share float he was shown asking his media minder:

Hughes: “Hey Clint. Are we pleased?”

Clint: “That is not why we did the policy”.

Hughes: “I know, but…”

The doing of the policy is not the issue, it’s the timing of their announcement that is highly questionable.

And Labour continue to play their political games:

Labour state-owned enterprises spokesman Clayton Cosgrove said that “after five days of going troppo, National has finally calmed down and allowed those who have applied to buy shares in Mighty River Power the opportunity to reconsider”.

But in Govt gives MRP investors chance for refund

“Investors need time to consider the changes we are proposing. National would be well advised to stop repeating its wild and silly accusations of socialism and communism and let cool heads prevail. The ridiculous allegation of economic sabotage has been demolished,” Cosgrove said.

The allegation of economic sabotage is far from demolished.

If Labour were serious about giving investors time to consider the changes they would have announced their policy well in advance of the beginning of the share float, not after it had started and people had already applied for shares – and paid for them.

Claims by Hughes, Cosgrove and others that there was no intent to sabotage the share float are either dishonestly devious or incompetently ignorant of the likely outcome of their actions.

And this is just the immediate affect of the timing of the announcement.

Should Labour and Greens form the next Government and implement a yet to be determined version of their policies (there are significant differences in what the two parties propose) there could be much greater costs to the country.

Mark Warminger, a Portfolio Manager at Milford Funds has blogged Rolling blackouts could be our future where he points out the flaws in the proposals and potential costs:

This analysis is naïve and does not take into account the full direct and indirect costs.

A 1% increase in debt servicing costs for New Zealand’s overseas borrowing, in time would add up to NZ $2.5bn a year to the debt bill.

The state owned power companies would need to write down asset bases by around 30% on an asset base of $15bn. This equates to $4.5bn of capital destroyed.

The flow on effects to New Zealand’s listed power companies is just as detrimental.

This will adversely affect many KiwiSaver schemes that have direct exposure to these companies.

It seems inevitable should the Labour/ Greens proposal be enacted that the listed power companies would take legal action, based around property rights. This is likely to be lengthy and costly with the Government footing much of the bill.

And the potential bottom line:

In conclusion, to save $700m per annum from our total electricity bill the direct and indirect costs of such a scheme would be in the order of the following;

  • $2.5bn in additional debt servicing costs, $450m reduction in dividends, $4.5bn asset write-downs from State owned enterprises,
  • $1bn of capital destruction of the listed power companies and a reduction of $100m of dividends per annum to New Zealand shareholders. 

In addition, there will be highly skilled jobs lost as power companies reduce capital expenditure and development.

That is speculation from someone with an obvious interest in the share market, but it is representative of significant concern about potential substantial costs to the country. Another financial analyst suggests Power policy a ‘hand grenade’ for listed firms:

The Labour and Green parties’ power policy could wipe as much as $1.4 billion off the values of Contact Energy and Trustpower, says a Forsyth Barr analyst.

In a research note published today, analyst Andrew Harvey-Green described the Opposition’s policy as a “hand grenade” with far-reaching implications for the industry.

See also: Experts criticise Labour’s power plan

There are huge implications for the New Zealand economy.

At best Labour and Greens have been too focussed on trying to win political points and have not considered the wider ramifications of their proposals.

At worst they are cynically risking possibly billions of dollars to try and advance their political ambitions.

And regardless of whether they succeed politically or not they have already cost us perhaps $200 million.