by Nick Clark, Federated Farmers Manager General Policy
Housing tax shakeup
The big news for the week was the Government’s much anticipated housing package aimed at tilting the playing field in favour of first home buyers over speculators and investors. It came after a surge house prices surged (up 22.8% for the year to February 2021) and becoming severely unaffordable.
Most of the package’s elements were predictable, including additional funding for housing supply, tweaks to income and house price thresholds for its First Gome Grants and Loans, supporting Kainga Ora to borrow to acquire more land for housing, and more funding for trades training. Even the doubling of the brightline test for residential property investment came as no surprise.
There was a big surprise though and it was the Government’s decision to remove the ability for residential property investors to deduct interest payments from their investment income – immediately for future investments and phased out for existing investments.
Although the Government has called this ‘removing a loophole’ it is no loophole. Every other business can deduct interest payments from their income, including farmers. And although the Government said that people who live in their own homes can’t do this, that isn’t entirely true either. Anyone who uses their home offices for business purposes can deduct a portion of their interest payments.
Business NZ considers the change reminiscent of the 2018 shock decision to ban oil and gas exploration and its concerned it could have a chilling effect on business confidence. It pointedly questioned what is to stop other sectors being targeted in this way in the future? A scary thought.
There is uncertainty over what sorts of residential investment property will be captured. While properties rented to the public will clearly be captured, what about rental accommodation provided to farm workers as a condition of employment, either on-farm or off-farm?
And what about renters, the people this policy is designed to help by getting them into home ownership? Almost everyone seems to think that rents charged by landlords will have to rise to compensate them for the additional tax they will be paying (not to mention all the other costs being lumped onto them through recent changes to the Residential Tenancies Act).
Most unsettling though is the way this policy has come about. There doesn’t seem to have been much in the way of official advice on the implications of this big and un-signalled change, including from Treasury, the Government’s key economic policy advisor. It wanted the Government to not make the move until analysis had been undertaken. It was ignored.
Economists and the markets seem to think this change will have teeth, with some thinking house prices will not just slow but could even fall as some investors choose to divest properties rather than pay extra tax. 10 year government bond yields fell and the exchange rate slumped in the wake of the announcement.
This reaction was most probably due to expectations that taking the wind out of house prices will delay the Reserve Bank having to increase the OCR. But the surprise decision could also have been perceived as harming New Zealand’s reputation for sound and steady economic policy. If so, that would be a worry.
Farm debt up in January but still down for the year.
Lending to agriculture increased slightly in January, according to the Reserve Bank’s latest Sector Lending Statistics.
In January 2021 agriculture lending was $62.60 billion, up $65 million (0.1%) compared to December 2020 but it was down $508 million (0.8%) compared to January 2020. Dairy continued to bear the brunt of banks’ efforts to reduce their exposure to the sector. In contrast lending to horticulture continued to be up strongly. This is shown as follows:
- Dairy cattle farming: $38.78 billion, down $53 million for the month and down $1.52 billion for the year.
- Sheep, beef cattle, and grains farming: $15.11 billion, up $14 million for the month and up $119 million for the year.
- Horticulture: $5.69 billion, up $79 million for the month and up $610 million for the year.
- Other agriculture on farm: $2.33 billion, up $24 million for the month but down $40 million for the year.
Although lending to agriculture was down for the year, lending to housing increased 8.6% with its growth accelerating over recent months in line with the booming housing market. Business lending was down 3.7% and personal consumer lending down 12.4%.
Farm sales strong.
The Real Estate Institute of NZ’s latest Rural Property Data has shown continued strength in farm sales. For the three months ended February 2021 there were 458 farm sales. Although this was down 11.4% on the three months to January 2021 it was still 39.2% higher than for the three months to February 2020.
For the full year to February 2021, 1,542 farms were sold, 23.1% more than were sold in the year to February 2020. Dairy farm sales were up 51.3%, grazing farms up 3.1%, and finishing farms up 42.9%, but arable farms were down 30.1%.
The median price per hectare for all farms sold in the three months to February 2021 was $25,665, up 24.8% on the three months ended February 2020, although it was down 0.8% compared to the three months to January 2021.
The REINZ All Farm Price Index for the three months to February 2021 was up 7.4% on the three months to February 2021, although down 1.0% compared to the three months to January 2021. The REINZ All Farm Price Index adjusts for differences in farm size, location, and farming type, unlike the median price per hectare.
Exports down again.
Goods exports continued its recent run of falls, according to Statistics NZ’s monthly Overseas Merchandise Trade Statistics.
Total goods exports were worth $4.47 billion in February 2021, down 8.5% on February 2020 and the sixth monthly drop in a row. Movements for key commodities follow:
- Milk powder, butter, and cheese down 14.7% to $1.26 billion.
- Meat and edible offal down 1.0% to $805 million.
- Logs, wood, and wood articles up 27.5% to $405 million.
- Fruit up 6.2% to $57 million.
- Preparations of milk, cereals, flour, and starch (largely infant formula) down 4.0% to $167 million.
- Wine down 14.1% to $147 million.
In addition, exports of eggs, honey, and other edible animal products was down 5.6% to $34 million live animals down 47.3% to $18 million; and wool was down 11.5% to $26 million.
Goods imports were also down 1.1% to $4.29 billion in February 2021 compared to February 2020. The drop was mainly due to a 47.6% drop in petroleum imports.
The net result was a monthly goods trade surplus of $181 million, which was down from a $551 million surplus for February 2020.
For the year ended February 2021, goods exports were worth $59.05 billion, down 2.3% compared to the year ended February 2020. Looking at the key export commodities:
- Milk powder, butter, and cheese down 3.8% to $15.44 billion.
- Meat and edible offal down 2.8% to $7.97 billion.
- Logs, wood, and wood articles down 5.3% to $4.61 billion.
- Fruit up 16.1% to $3.95 billion.
- Preparations of milk, cereals, flour, and starch up 4.5% to $2.43 billion.
- Wine up 4.2% to $1.98 billion.
In addition, exports of eggs, honey, and other edible animal products was up 40.4% to $542 million; live animals up 43.7% to $452 million; but wool was down 30.2% to $364 million.
Goods imports for the year ended February 2021 were worth $56.69 billion, down 11.0% compared to the year ended February 2020. The biggest drop was for petroleum products, down 40.2%.
On an annual basis, the net result was a goods trade surplus of $2.36 billion. This was down from $2.75 billion for the year ended January 2021, but it is still quite a turnaround from the $3.28 billion deficit for the ended February 2020.
Statistics NZ observed that exports were down to all New Zealand’s top trading partners except China, which saw an increase of $369 million from February 2020.
Consumer confidence slips.
The Westpac McDermott Consumer Confidence index slipped slightly in the March quarter.
The index for the March 2021 quarter was 105.2, down 0.8 points on the December 2020 quarter, and sits below its average level of 110.7. Many households are concerned about prospects for the economy with many younger people highlighting concerns about their financial situation.
The regions pre-COVID.
Statistics NZ this week released its annual Regional Gross Domestic Product statistics for the year to March 2020.
The stats show that nominal GDP of 14 of the 15 regions increased. Bay of Plenty and Tasman/Nelson had the largest percentage increase, both at 6.1%, followed by Auckland (5.9%). The national GDP increase was 5.4% (not adjusted for price effects). West Coast was the only region where GDP decreased, falling 1.4%.
Looking at regional GDP by industry, agriculture was the biggest contributor to regional GDP in Southland and its share of the region’s total GDP was 16.9%, the highest in the country. Other regions to have more than 10% of GDP contributed by agriculture were West Coast (12.6%), Marlborough (10.9%), Gisborne (10.1%), and Hawkes Bay (10.1%).
The national share of agriculture to GDP was 4.1% but this was dragged down by Auckland (0.3%) and Wellington (0.5%). Note, ‘agriculture’ is on farm activity and does not include downstream processing.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 25 March) show most of the North Island’s soils significantly drier than usual, especially western Kaipara, western Waikato, East Cape, and Tararua. Apart from the West Coast, it is a similar story across most of the South Island with it especially drier than usual in Hurunui and eastern Southland.
Exchange Rates
The NZ Dollar slumped this week, falling 2.8% against the TWI and it was down against all of our key trading partners.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week the yield for the 90 Day Bank Bill was up 1 basis point, but the 10 year Government Bond yield lost 25 points.
The Reserve Bank will next review monetary policy settings (including the OCR) on 14 April.
| This Week (25/3/21) | Last Week (18/3/21) | Last Month (25/2/21) | Last Year (25/3/20) | |
| OCR | 0.25% | 0.25% | 0.25% | 0.25% |
| 90 Day Bank Bill | 0.35% | 0.34% | 0.29% | 0.51% |
| 10 Year Government Bond | 1.54% | 1.79% | 1.79% | 1.06% |
Source: Reserve Bank of NZ