September has been an eventful month in the property market with New Zealand becoming the most overvalued property market in the world. As shown in the table below, when we take an average of the house price divided by average income, and the house price divided by the average rent, New Zealand property is currently trading at 62% above its historical averages, making it the most overpriced in the developed world.
Chart 3 – Global Property Prices
Source: OECD, Deutsche Bank Global Markets Research, monthly chart pack
New Zealand Dairy
Over the last month dairy prices have rallied globally, which will be a welcome relief to New Zealand farmers. In the last 2 auctions, being mid-August and early September the global dairy trade prices have risen by 15% and c11% respectively. This is still leaving the price per kg of milk solids low, and Fonterra has not revised their forecast from $3.85 ($4.25-$4.35 including dividends)
To date farm land in New Zealand has continued to hold its historically high prices, and hence banks are still supportive of farmers drawing on lending to fund them through this cycle, but if we see dairy prices stay lower for longer, and this recovery in global dairy trade (GDT) prices isn’t sustained, land prices may start to weaken and we may see banks start to sweat when asked to extend further credit to already overleveraged farmers.