Keep calm and carry on, says BNZ chief economist

Tony Alexander says rural real estate is selling well. Photo / Mark Mitchell

Though international dairy prices are falling, there should be no significant impact on rural property values

Suggestions that falling international dairy prices are going to devastate rural property prices have been dismissed by the Bank of New Zealand's chief economist, Tony Alexander.

Though there is likely to be some short-term fallout as a result of the fall in dairy prices, longer-term prospects for the dairy industry remain strong.

Tony Alexander agrees the sharp fall in international dairy prices has been a shock to some, and that farmers need to be cautious, but he says these drops are nothing new.

Pay-out projections by Fonterra indicate the $8.40 payment last season will fall to $6 this year, with further downside likely.

He points out the milk pay-out dropped by a similar proportion in 2003 and 2009.

"A shock pay-out decline is nothing new therefore the idea that this latest decline somehow signals a deep need to restructure the economy is ridiculous," he says.

"Equally ridiculous is the idea that this decline will munt the rural real estate market, though clearly it will put a short-term dent in some sales activity."

Alexander says it is also unlikely to stop foreign buyers wanting to buy property here.

The decline was driven by a combination of rising supply in many markets in response to better weather conditions and to higher prices in other markets such as the European Union and the United States.

The decline had been triggered in its speed by Chinese buyers pulling back because of a build-up in dairy inventories.

"This is not the last time we will see this in the dairy sector so the next time producers see good demand coming out of China they need to keep an eye on stock levels and budget for co-ordinated reductions in buying at some point," he says.

Prices were unlikely to jump in the near term, with countries from Australia to Indonesia to the European Union raising dairy production.

Tony Alexander says grain prices have fallen this year, which implied greater and cheaper production from grain-fed dairy operations, notably in the United States.

Real Estate Institute rural property statistics released last month suggest there has been a solid increase in volumes and prices of rural properties sold over the past year, three monthly figures to the end of July indicate an easing in both volume and prices.

The institute's rural spokesman, Brian Peacock, said it was expected at this time of the year when peak workloads dominated all other activity, dairy farm sales had virtually come to a standstill.

"By contrast, sales of finishing and grazing properties have maintained some momentum, with reasonable enquiry for beef farms in the north, for dairy support properties through the centre of the country, and for sheep, beef properties and dairy support farms in the lower south," he says

REINZ statistics suggest sales in the horticultural sector were steady during the three months to July.