City Rising From New Zealand’s Deadly Earthquake Spells End for Low Rates
A year after an earthquake wrecked New Zealand’s second-largest city, the first steel piles are appearing downtown, signs of reconstruction that Westpac Banking Corp. says will spur inflation and end record-low interest rates.
A block from Christchurch’s ruined cathedral, a two-level retail and office project is among the first in the cordoned-off heart of the South Island city, which today marks the anniversary of the country’s deadliest quake in eight decades. As many as 26 commercial buildings are under way in the inner city, Prime Minister John Key said this week.
“Its sort of like spring for buildings, they are starting to appear now,” Warwick Issacs, general manager of operations at the Canterbury Earthquake Recovery Authority, said in an interview. Ninety-six piles are being sunk for realtor Harcourts Grenadier’s four-story office block and its owners “want it up as soon as they possibly can,” he said.
After 12 months of demolition, clearing and temporary repairs, hampered by more than 5,700 aftershocks, a NZ$20 billion ($17 billion) reconstruction program is gaining momentum, moving from the rebuilding of suburban homes to the offices and malls downtown. While that will bolster spending and create jobs, it will also drive up prices and wage costs, said Dominick Stephens, New Zealand chief economist for Westpac.
“It’s going to put pressure on resources, pressure on inflation and therefore require higher interest rates,” Stephens, who previously worked at the central bank, said in a telephone interview. “Implications will be larger than the market currently believes.”
Swap rates imply the three-month bank bill yield will be about 3.4 percent by late 2013. Westpac forecasts 4.3 percent. Stephens expects officials to boost the cash rate from a record- low 2.5 percent in December, reaching 6 percent by late 2015.
Nine out of 16 economists surveyed by Bloomberg forecast the cash rate will rise between September and March. Consumer prices (NZCPIYOY) gained 1.8 percent in 2011, while wages in the country rose the most in three years in the fourth quarter, boosted by an increase in demand for construction workers.
A report this week showed the cost of road-building rose the most in two years, bolstering predictions that construction inflation will accelerate rapidly this year, said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington, who expects a rate increase in September.
Central bank Governor Alan Bollard last month said he expects a gradual lift in construction this year, with work “getting under way in earnest” in 2013.
In Cathedral Square, dust-covered demolition workers gather at two trucks selling sandwiches and hot food, replacing the 40,000 tourists and office staff who once filled the heart of the city. The 130-year-old stone cathedral stands broken and deconsecrated, with stained-glass windows shattered and the west wall propped up by girders.
Across the square, The Press newspaper’s century-old building has vanished, one of about 200 heritage buildings that will be fully or partially demolished.
“The government is committed to rebuilding this great city,” Key told a service for families and rescuers today remembering the magnitude 6.3 temblor that killed 185 people a year ago. “We will rebuild a new Christchurch, a Christchurch with a new future, a city that looks different but carries a renewed vibrancy and energy.”
Repairs have been slowed by aftershocks, with 12 of magnitude 5.5 or higher since a 7.1 earthquake struck on Sept. 4, 2010. That includes a level-6 earthquake as recently as Dec. 23.
Fletcher Building Ltd. (FBU), the nation’s biggest construction company, today lowered its full-year earnings forecast, citing weak demand and delays to Christchurch rebuilding caused by the aftershocks in December.
The aftershocks diverted contractors to emergency fixes and temporarily slowed work on final repairs, which are mow accelerating, said David Peterson, general manager of earthquake recovery at Fletcher. He oversees a project on behalf of the state-owned disaster insurance agency to repair at least 100,000 homes that have suffered damage of as much as NZ$100,000. His contractors have returned 9,180 properties to their owners and are working on 30,460 more.
“We’ve got a wee way to go,” Peterson said in an interview in his Christchurch office. He said the project is averaging about 1,600 completions a month and that will increase to between 2,200 and 2,500 in order to complete 80 percent of the NZ$3 billion repair job by December 2014.
Bollard told reporters last month that he wasn’t uncomfortable with an outlook for no change in rates through 2012 as inflation remained benign. Price pressures “may be a little less than they would have been had there been an earlier rebuild,” said Bollard, who announced he would step down in September after helming the central bank since 2002. “We think there will be less likely bottleneck inflation as result.”
In the inner city’s so-called “red zone,” more than half the 2,700 commercial buildings need to be fully or partially demolished, and around 1,060 have already been removed. Those that are sound are being restored, including four hotels.
“Three want to open no later than the middle of this year,” said Issacs at the Earthquake Recovery Authority, who wants to reduce the size of the cordoned-off area by early April.
The return of workers and tourists to the city center can’t come soon enough for Rick Hellings, chief executive officer of Smiths City (SCY) Group Ltd., which reopened an appliance and furniture store just outside the red zone in November.
“Our midweek foot traffic is well down because we don’t have those people working in the central city,” he said in an interview. “The central area won’t go ahead until such time as they’ve got those 40,000 people back.”
Smiths City plans to rebuild its head office next to the store, said Hellings, who is working from a converted house in the west of the city.
“I don’t see any reason we wouldn’t go back,” he said.
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