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C & D

The Predictable Budget

19 May 2013

Last Thursday’s budget was very predictable. There was little in the way of major spending announcements. There is also continued prioritising of spending, particularly in the large items areas of social welfare, education and health. Essentially it was steady as she goes.

There was the predictable announcement that Meridian would be partially privatised. The partial privatisation of Meridian will be the largest Initial Public Offering since Telecom was floated in 1990. It is expected to list on the New Zealand Stock Exchange late September or early October. Before then, there are likely to be several other IPO’s.

Investors worldwide currently seem to have a healthy appetite for stocks that have high dividend yields. For much of the last twenty years, high dividend yielding shares usually had a dividend yield north of 7%. Now with interest rates so low, yields of 5% seem attractive.

One of the key take outs of the budget was the announcement to speed up the development of residential land, particularly in Auckland. Provided land can be developed quickly and in large quantities it should be possible for developers to sell sections at lower prices that what is currently prevailing. This should enable the overall cost of a new home to be significantly reduced. If this is achievable, and large numbers of homes are constructed, this should reduce the rate that property prices increase in the Auckland area. However one of our concerns is how the government proposes to stop developers from simply making higher margins profit if there is still a pent up demand for sections. After all, the free market approach to pricing is based on supply and demand.

The Reserve Bank also has been provided with additional tools to try and dampen the property market. This focuses on banks needing to increase their capital adequacy for lending to people wanting high loan to valuation ratio loans. This in some ways is a double edged sword for first home buyers who are unlikely to have greater than 20% deposits. This may have the unintended consequence of making it easier for property investors as they compete in the same market space. Property investors usually have greater levels of collateral to provide to the lenders.

Just as an aside from the budget, there are major concerns about the New Zealand property market being overheated. During the week, Standard & Poor's, the global credit rating agency, has put eight local banks on notice over the rising risk of a housing bubble bursting in New Zealand. These are the smaller lenders being Cooperative Bank, Heartland Bank, TSB Bank, Credit Union Baywide, Credit Union South, First Credit Union, New Zealand Association of Credit Unions and Police and Families Credit Union. They have all had their outlooks dropped to negative from stable, giving them a one-in-three chance of being downgraded in the next two years if the country's economy deteriorates, S&P said in a statement.

Given the perceived risk with these small lenders, investors should take note and demand a significant risk premium on their deposits over the interest rates being offered by the major banks such as ANZ, BNZ, ASB, Westpac, Rabobank and KiwiBank. The outlook for these banks was left unchanged due to expected support from their parents.

Overall, investors should be reasonably pleased about the budget. There appears to be no new taxes to be concerned about, and there will be another power company to invest in. For those in employment or who are self-employed, there is the prospect of a slightly increased pay packet when ACC levies are reduced.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.