N.Z. Set to Lift Rates as Quake Rebuilding Fuels Prices
Ariana Gifford didn’t think things could get much worse when the Christchurch quake traumatized her children and smashed possessions. Three years on, she’s struggling to make ends meet after a 30 percent jump in rent.
“The nightmare is never ending,” says Gifford, 32, a single mother with three young daughters who expects another 18 percent rent increase soon. “There’s such demand for rentals that landlords are just charging whatever they want. Day-to-day living is a constant struggle.”
Surging housing costs are adding to inflation as the rebuilding of Christchurch fuels a construction boom that has also pushed up wages. The dynamic is putting pressure on the central bank to raise interest rates, the opposite end of where it found itself three years ago today. It cut the cash rate to a record-low 2.5 percent in the aftermath of the quake that killed 185 people and destroyed thousands of buildings.
Reserve Bank of New Zealand Governor Graeme Wheeler is set to become the first central banker of a major developed economy to shift away from the current era of record-low borrowing costs. He’ll raise his benchmark rate by 25 basis points on March 13, according to all 15 economists surveyed by Bloomberg News. The median estimate is for a rate of 3.5 percent by the end of the year.
As the NZ$40 billion ($34 billion) Christchurch rebuild gathers pace, there are signs that rising construction costs are starting to spill over into the rest of the country, Wheeler said in a speech in the South Island city on Jan. 31, when he also reiterated he’s likely to increase rates “soon.”
Booming house prices in Auckland, the biggest city, are also worrying Wheeler, who last year introduced mortgage restrictions to try to curb demand.
“Cost pressures are probably most acute down in Christchurch,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland. “Across the rest of the country those pressures are more subdued. But if the economy continues to grow strongly for the next six months or so, you just know you will get a higher rate of inflation.”
Inflation will accelerate to 2.1 percent by the end of this year, according to economists in a Bloomberg survey, exceeding the midpoint of the 1 percent-to-3 percent range that Wheeler targets. Consumer prices rose 1.6 percent in the fourth quarter from a year earlier, more than the RBNZ projected.
Nationally, house construction costs rose 4.7 percent last year, the fastest annual pace since early 2008, according to Statistics New Zealand. In Canterbury, they surged 9.5 percent.
“There’s no question costs are going up and are going to continue to go up,” said Julian Mace, a director at quantity surveyors Rawlinsons Ltd., whose projects include the NZ$50 million Awly Building in inner-city Christchurch. “The local market has become saturated and it has become hard to get competitive pricing.”
Economic growth may climb to 3.5 percent this year, the RBNZ projected in January. It reviews its forecasts this week. Export prices have surged, fanned by Chinese demand for dairy products, and business confidence rose to the highest in almost 20 years last month. Manufacturing volumes rose 5.7 percent in the fourth quarter from the third, the most in 19 years, a report showed today.
By contrast, the Reserve Bank of Australia last week kept its benchmark at 2.5 percent and reiterated it sees a period of steady rates as likely. Central bankers in Canada, the U.K. and Europe have held borrowing costs at record lows.
The prospect of higher rates in New Zealand is underpinning the local dollar, which has gained 3.3 percent against its U.S. counterpart this year -- the best performer among 16 major currencies tracked by Bloomberg. The so-called kiwi has surged 19 percent since the first in the series of earthquakes hit Christchurch and the surrounding Canterbury province in September 2010.
The city’s center was reduced to a wasteland after hundreds of buildings damaged in the earthquakes had to be demolished. More than 7,800 homes were destroyed and at least 100,000 needed repair following the quakes, including the temblor on Feb. 22, 2011, that killed 185 people.
“The building across the road from us fell down,” says Gifford. “Our toilet split in half, the shower tiles broke, everything in my house that could fall over fell over. Our TV and fish tank smashed. The kids saw people running from town that were quite badly injured.”
The rebuild has attracted foreign workers to the city like Simon Szlatki from Stuttgart, Germany, who’s working as a laborer on a construction site.
“Even if you don’t have any kind of work experience, there’s a lot to do here in Christchurch,” Szlatki, 30, said in an interview. “A lot of buildings have been knocked down in the city center because of the earthquakes, it’s pretty sad. But there’s lots going on, a lot of activity.”
Workers like Szlatki are adding to pressure on the city’s property market at a time of severe undersupply. Many homes that used to be rented out are being used by small businesses shut out of the central city or have been sold to owner-occupiers.
Average rents in Christchurch surged 20 percent in the fourth quarter from a year earlier, according to Trade Me Ltd., which has one of the nation’s largest online listings of properties.
For Gifford, higher interest rates may end up making life tougher still, even though she doesn’t have a mortgage.
“My landlord has a mortgage, so what affects them affects us,” she says. “If their interest goes up, their expenses, they put the rent up to cover it.”
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