Opinion
Nervous times - positive signs

By Richard Michael, chief executive of the Construction Industry Council

While few areas of business will have remained untouched by the global financial slowdown, the construction industry has been hit particularly hard. A major reason for this is that construction is about housing, Sub Prime was all about houses and so the Sub Prime crisis and construction are inextricably linked in most people’s minds.

So, while banking communities have currently closed their doors on a lot of investment, they have closed them particularly firmly on the construction sector. In some parts of the world there is a perceived over supply of housing stock – many people have lost their homes or walked away from them.

That has not happened in New Zealand but the legacy of international events has led to a reluctance by banks to invest in construction per se. This effect has extended to the civil sector too but the property development market has suffered most of all.

Examples include the $580 million Kensington Park and the $250 million Whisper Cove developments, both North of Auckland, and placed in receivership in September. These projects were well supported with good pre sales and being carried out by reputable developers and building firms. Planning would have been started several years ago when times were good. The downturn was sudden and unexpected and they fell apart purely because funds ran out.

The same could be said for Queenstown’s Five Mile retail and housing development which has been stagnating since July when financiers called in a $70 million dollar loan.

While many of the financial institutions may have previously been too lenient in their lending practices, they are now taking the opposite approach and not funding even solid, high quality projects. Property developments rely heavily on borrowed money and developers have generally sourced funding through mezzanine financing from finance companies rather than banks.

That is the nature of the business, the way it works across the world, but the credit crunch has meant these people have no access to credit themselves so they are not in a position to lend.

However, despite the current bleak situation, there is reason to believe there is light at the end of the tunnel. Government bail-outs around the world are having an effect and, while these are early days, share markets have steadied and there is good reason to believe that a global meltdown will be avoided.

This should mean that, in a relatively short period of time – hopefully within two to three months – we will see the world economy gradually returning to where it was. Undoubtedly, the property sector will be among those that will take the longest to recover.

There is currently oversupply in developments and sub divisions but I think that the regional housing market, in terms of people buying and selling houses, will probably start to recover quite quickly. People will always need to move, for a variety of reasons. Over recent months buyers have held back from buying because of the falling market and sellers have been unwilling to meet the market.

A latent demand will have built up and, once the situation begins to improve, the market could turn quite quickly – although probably not to the levels it had reached before sub prime.

Overall New Zealand has been in a reasonably good position to take the blows. The New Zealand economy is still fundamentally strong. While the Treasury’s long term predictions are fairly pessimistic it is important to remember that these are only predictions. Just a small increase in GDP growth above Treasury predictions could mean our economy performing well over the next three to four years.

The underlying drivers for our economy are International Commodity Prices. While these have dropped in recent months they are still very high compared with two years ago. That reduction in commodity prices is likely to be offset by the dropping value of our dollar – meaning exporters will have more money in their pockets.

Equally, the low dollar makes imports more expensive so people slow down on consumption of imported goods, which tends to rebalance the economy. Generally, both the New Zealand and Australian banking sectors are in good shape – well managed and having avoided overextending in the way US banks have.

The New Zealand government’s deposit guarantee scheme should add further stability to our financial sector.

The weeks before a general election are always a jittery time for industry and business but once the election is out of the way and we see the make up of the new government, then that should provide a boost to the economy. A number of companies also take the approach that it is good to invest counter cyclically and a number of commentators have been suggesting that this is a good time to be investing – while prices are low. Fletcher Building’s recent purchase of steel company Fielders Australia Pty could be seen as a good example of this.

Now could also prove a good time for companies to recruit staff who may have found themselves unemployed for the first time due to the slow down in the market.

Yes, things are ‘nervous,’ but there are a lot of positives in the New Zealand economy. It will take the construction sector longer than the general economy to recover but there is nothing, based on our economic fundamentals, to suggest that will not happen.

I will be looking for positive signs from the beginning of next year.