Tony Alexander | Cautious Optimism with a Ray of Sunshine? | NZHL

Taken from Tea with Tony August 2022

The highest inflation in 30 years, continued rising interest rates, and a negative economic outlook is bearing heavily on Kiwis as we struggle with Covid and the Flu.

We need some sunshine, and one economist might have some to share, with cautious optimism (for the mid-long term). Here’s Tony’s take.

Reasonably optimistic, mid-long term

While Tony warns things are still tough out there for everyday New Zealanders and will remain so for the short-term, he can see signs of a time down the track where things are better.

Tony’s monthly spending survey shows people have cut their spending even further over the last few weeks – an indication the Reserve Bank is getting the economic restraint it wants. Tony believes this is a result of the rising cost of living rather than interest rates.

While rising interest rates impact around a third of the population (one-third are renting and one-third are mortgage-free), the soaring cost of living (7.3%) – a high we haven’t seen in 30 years – hits everybody.

Unusually, at a time when Kiwis are restraining spending and need to put extra money aside for groceries, we’re also putting aside money for overseas travel. According to Tony, Europe is showing similar signs of determination to travel which is good news for New Zealand as we head into summer.

Although the tourism industry looks set to get a boost, Tony says our focus on travelling drags money away from other things – specifically items Kiwis were bingeing on when we couldn’t travel overseas. Tony warns a decline is coming for businesses selling the likes of spas, gazebos, and kayaks with many Kiwis already trying to resell excess items such as home exercise equipment.

However, Tony notes our Kiwi Dollar is currently below average which is stimulatory for both the regions and our export sector – with export prices on average 25% higher than they were three years ago. And, with an unemployment rate of 3.2%, there is high job security which is positive for the housing market.

Has inflation peaked?

Tony believes we’re likely at the peak of inflation with a pullback on international oil and petrol prices in New Zealand falling around 30 cents.

As evidenced in his monthly rental survey, there is a smaller number of property investors planning to increase their rent, while those looking to increase rent indicated smaller increases than in previous surveys.

Additionally, Tony says there is an oversupply in the rental market with some investors delaying selling their properties – due to reduced selling prices – and the cost-of-living driving or keeping more young people at home.

And while this is positive news, there won’t be an immediate falling away with Tony predicting we will reach around 3% inflation towards the end of 2023.

But what about interest rates?

Considering the rate of growth in the economy overseas, there is a view that the world could be heading into a recession – although Tony notes this won’t be a repeat of the GFC.

While the market is showing interest rates may keep increasing quickly in the short term, Tony predicts the Reserve Bank will begin cutting interest rates by the end of 2023 as inflationary pressures can fall away relatively quickly in a recession.

Tony claims the cost to banks to borrow and lend at a fixed rate peaked in mid-June and has dropped to 3.9% (from 4.5%). The reduction has already seen cuts to some 2-year fixed-term interest rates. When looking at longer terms (3,5, 7 years) Tony believes we’re at the peak and there is room for banks to reduce the rates.

Currently, the Official Cash Rate is at 2.5% – Tony expects to see this peak at 3.5%, rather than the 4% indicated by the Reserve Bank. However, we will likely see further rises in floating interest rates, and potentially 1-year fixed terms over the next few months.

Tony is quick to stress, that interest rate forecasts haven’t been reliable over the last few years, and you should always talk to your advisor about the best terms for your circumstances.

Where will house prices land?

Tony describes the current housing market as weak: with a 35-40% drop in house sales and on average properties are taking 13 days longer to sell than the year prior. While there is an 86% rise in house listings, the average house price is down 9% nationally, with a 13% and 17% fall in Auckland and Wellington City respectively.

Tony also claims the housing market is getting weaker with fewer buyers at open homes and auctions. However, Tony says the pace at which the market is weakening is slowing concluding that while it’s bad, it’s not as bad.

Notably, a key dynamic for this cycle is the near absence of distressed sellers which Tony accredits to a tight labour market. And while buyers currently appear to be holding back waiting for a further fall in house prices, Tony predicts they will begin looking to purchase again before the end of the year.

As for house prices, over the last three years (2019 – 2021) we’ve seen an increase of approximately 48% nationwide. Tony estimates house prices will fall another 5% to a total of around 15% from the peak of November 2022. A fall which Tony states is simply a correction of the sharp price increases – a restoration of reality.

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*Please note – Tony Alexander is an independent economist. His views are his own and not necessarily shared by NZHL or vice versa. Tea with Tony is brought to you by NZHL in a sponsored capacity.