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Investors confident but some concerns emerging

Monday 9th July 2007

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Investor confidence hit its highest ever quarterly level in the June 2007 quarter at net 29%, adding 4 percentage points to continue an upward run that began after confidence troughed at the start of 2006.

However, there are warning signs the strength of optimism may have peaked with sentiment shifting within the quarter, according to the latest ASB Bank Investor Confidence survey.

The results showed respondents surveyed during April were significantly more optimistic than those surveyed in the first quarter of the year. But this fleeting burst of optimism was short lived - by June, the last month of the quarter, optimism was still high, but had dropped back in line with Q1's level.

"The quarter was very much one of two halves," ASB Bank Head of Investment Services Jonathan Beale says. "The strong burst of investor confidence in April subsided almost as soon as it started. Part of the explanation may lie in the two further official cash rate increases the Reserve Bank delivered at the end of April and the start of June."

"The RBNZ's efforts to slow the economy, rein in inflation and curtail the rising dollar appear to be triggering more caution about future investor returns."

Despite the continuing rise in interest rates this year, rental property investment is showing remarkable resilience, remaining the most favoured investment vehicle this quarter at net 22%. Consistent with the results in the April ASB Housing Survey, in which the Auckland region had by far the most optimistic outlook for house prices, confidence in rental property investment was strongest in the upper North Island.

Not surprisingly, confidence in rental property returns and house price growth are showing strong correlation, with house price growth enjoying a strong run since late last year and rental property confidence climbing higher in its wake. However, with the RBNZ intent on reining the housing market in, and early signs it is starting to have some success, house price growth is likely to start softening over the second half of the year.

"Looking forward, the strength of optimism in rental property may now soften," Beale says. "There have been renewed calls for measures to slow the housing market, with a focus on property investment. Interest rates have increased markedly of late, which will bite into the cash flows of highly geared investors. Going forward, the sums for future investment property purchasers may be less palatable."

He says that interest rate rises may be unwelcome for mortgage holders but are great news for those with cash to invest.

The last time short-term interest rates were this high was the first half of 1998 when the Asian financial crisis was in full swing and the NZ dollar was plummeting.

Unsurprisingly, given the marked lifts in interest rates, term deposits have climbed in favour significantly, up a net 3 percentage points to 14%.

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