Tony Alexander | Cyclone Pending | NZHL

Taken from Tea with Tony November 2022
It feels like the economy has gone from being in a mild storm state to a cyclone pending – with precursor wind gusts that continue to hurt Kiwis from the petrol pump to the grocery aisle.

Is it too late to batten down the hatches?

Here’s Tony’s take.

Economic Cyclone

It’s not all doom and gloom when it comes to our economy. The Kiwi dollar is still relatively low (good for the export sector), tourism has picked up, and foreign students are set to return next year.

Plus, the Governments accounts look pretty good explains Tony.

Coming into an election year, Tony believes there will be an easing of fascial policy, which he notes has already started with the extension of childcare subsidies.

While there is a good chance of a world recession, and our unemployment rate will go up – Tony believes we are relatively well placed in New Zealand if a recession hits – which he predicts will be reasonably mild.

As Tony sees it, we are a capacity-restrained economy where businesses are not struggling for customers who are looking to purchase, they struggle to find staff.

Tony urges businesses to get their structure in order and consider ways to increase the efficiency of their staff resource, perhaps by focusing on the most profitable products, customers, or locations.

Monetary Policy Cycle

Tony cautions the Reserve Bank is looking to slow the economy down and that monetary policy will work to bring inflation down but what we don’t know is how high-interest rates will need to go in this cycle.

Tony notes we haven’t had a proper duration of monetary tightening since 2004 (through to 2007) and we behave differently now, almost twenty years later, which increases the interest rate uncertainty.

Furthermore, at .7% higher than expected the latest inflation data – Tony attributes roughly half of this to airfares – signalled to the banks it’s time to increase retail mortgage rates as borrowing costs were unlikely to drop and more likely to rise further.

The recent interest rate increase (approximately .5%) has already slowed the residential housing market – Tony claims we should see this filter down to lower consumer spending shortly.

Considering this, Tony says it’s important to understand your risk tolerance – your exposure to interest rates needs to be factored in when refixing your home loan. Currently, the market is showing more people are choosing certainty (2 years instead of 1 year fixed) over the lowest interest rates as they want to limit their risk in case interest rates rise for a prolonged period.

Official Cash Rate (OCR) Peak

Tony stresses that while the markets are pricing in 5.5% (at the time of writing) nobody can accurately predict what will happen from here.
Tony explains there is a risk that this prediction is too high. In his opinion, we may get to 5% with decreases as early as the middle of next year.

A drop in the OCR will first see a decrease in longer-term (3 – 5 years) rates before we see decreases in shorter-term rates over 2024.

Open Slather for First Home Buyers

However, while monetary policy has tightened, Tony says, there is more to come as we are yet to see the evidence of reducing inflation.

Already interest rate rises have seen investors running away from the market, leaving an opportunity for first-home buyers to step in and take advantage of the higher stock available (up 72% on last year).

Rather than waiting for the bottom of the house price market, which no one can predict, Tony encourages those looking to purchase to take advantage of this unusual opportunity to pick and choose.

Tony’s advice?

Focus on your reasons for purchasing. Is it a family home you’re planning to be in for 20-30 years? If so, look at your strategy to reduce debt over time.

House Values

Tony holds steady in his predictions for the housing market with his view we’re in the end game of house price decreases.

While house prices are still falling, the rate that they are falling has slowed, meaning we’re closer to the bottom of the market.

However, if you’re waiting for the bottom of the market Tony says, you’re taking a bit of a punt.

Tony points out that while we’re going through a period of economic unease, employment is holding strong and once we see inflation begin to ease, the backlog of those looking to purchase will step back into the market. Which could see a quick increase in sales and a fall in housing availability.

Although Tony cautions house prices might not increase so rapidly.

Population Deficit Auckland

Tony’s calculations show a fall in population in the Auckland Region of approximately 71,000 fewer people than expected.

Tony explains alongside a surge in townhouse builds, the population deficit has contributed to an increased housing market fall – 17% compared to 8-9% outside of the region.

In Conclusion, Positives, Negatives, and the Reserve Bank

Finally, Tony stresses the uncertainty will remain for some time, and people should keep this in mind when making decisions about their home loans.

While Tony notes he could give a number for economic growth, it doesn’t really matter – overlying it all is the Reserve Bank – they will do whatever it takes to slow growth and force businesses to slow down passing on cost increases with higher selling prices.

And as strange as it may sound perhaps the most positive thing for the economy would be if we had some negative growth numbers to limit the upside in interest rates.

Find Out How a Changing Market Impacts You 

If you have questions about how a changing market impacts you and your home loan structure, we’re here to help.  Book a free chat  with your local consultant today. 


*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.