Reserve Bank governor warns of cooling farm prices

Alan Bollard

The Reserve Bank is warning farmers not to buy land in the expectation that double-digit growth in farm property values will continue.

Bank Governor Alan Bollard - who is keen to see the heat come out of the property market as he fights inflation - told a Federated Farmers conference in Nelson yesterday that agricultural land prices had been "bid up considerably" in recent years.

This was a result of factors such as good commodity prices, farm aggregation and cheap credit.

One private sector estimate yesterday put the average annual increase in rural land values at about 15 per cent in the past five calendar years.

But Bollard said it was increasingly hard "to try to rationalise prices paid for land using estimates of the future flow of income from the land".

For land prices to continue growing as they had there needed to be improbably high increases in export prices and productivity, Bollard said.

"There appears to be a gap opening up between land values and expectations of returns. Future investment decisions should not be based on the expectation of ongoing double-digit growth in land values."

Bollard said agricultural lending of about $28 billion now represented about a third of registered bank lending to the corporate sector. But he emphasised the Reserve Bank saw no "generic signs" for financial sector concern over this exposure. Banks did not look over-committed and farmers were unlikely to renege on debt.

"What concerns us more is that we could be heading to a period of lower economic returns from over-investment in land."

One private sector economist said it was fine for Bollard to be "ringing the bell" on rural land prices but noted the cash return on farming assets was already generally lower.

He also said some commodity prices had not dipped far. "Commodity prices are quite good. Farmgate returns haven't been so good because there's somebody else in the middle, called the exporter."

Hayley Moynihan, a senior analyst with rural lender Rabobank, said she agreed with the suggestion that double-digit rural land price growth was unsustainable, although Rabobank had not made a projection on where prices were heading.

However, she also believed dairy and meat commodity prices in US-dollar terms would be fairly solid, despite coming back from highs recorded in 2004 and 2005.

"We see [prices] easing from the record highs but still on average to be better than they have been over a long-term historical period."

Bollard acknowledged there was evidence strong commodity prices might continue. "Medium-term prospects do look better than the turbulent 1980s and 1990s," he said.