Taken from Tea with Tony | August 2023
Inflation, inflation, inflation.
In this blog, independent economist Tony Alexander dives into the latest numbers alongside interest rates and the housing market.
Plus, Tony shares his thoughts on unemployment expectation and the relevance of political polls to the housing market.
Interest Rate Increases
At the time of filming, Tony noted a recent rise in fixed mortgage rates despite the Reserve Bank holding steady on the OCR (official cash rate). Tony notes this was influenced by global factors, specifically inflation concerns raising the cost for New Zealand banks to borrow.
Tony believes bank margins (their profits) are now sitting at about average for one-to-three-year fixed rates but are still below average for four and five-year rates which could see further increases in the latter terms – with minimal impact as most borrowers are currently opting for shorter terms (1 year, 2 years, or 18 months).
Inflation in a Post-Pandemic Environment
Tony emphasises the unique nature of the current post-pandemic economic environment – with high uncertainty making accurate forecasting challenging.
After a recession, job numbers usually go down – however, after our economy shrank 0.7% (approximately) late last year, job numbers rose by 1.3% – causing a tight labour market and driving average private sector earnings up 7.6%.
Migration Boom and Rental Markets
With a population boost of 78,000 people, businesses are reporting an easing in the struggle to find employees, especially for unskilled roles.
Filling a skill-specific role is also back to an average ‘toughness’ – easing pressures for the business sector and making it easy for landlords to find good tenants.
Additionally, the extra people requiring rental properties or a place to live have caused a rise in average rent costs (+9% on the year prior), and the evolving shift in migration patterns has sparked a shift in the housing market.
Reserve Bank Caution
While the annual inflation rate is down to 6% (from 7.3% peak) Tony cautions against expectations of a fast drop in the Official Cash Rate and interest rates.
Due to tradable inflation (what’s traded within New Zealand), a measure the Reserve Bank uses to look at what’s happening in underlying inflation factors when considering changes to the Official Cash Rate (OCR). Unfortunately, at the time of writing, the latest numbers show tradable inflation is still sitting at 6.6% – higher than the expected 6.3%.
What does this mean?
Essentially, the Reserve Bank is watching and waiting and will not be in a hurry to drop the OCR quickly with many expecting the first cut to come mid–late next year.
However, Tony believes there is a reasonable chance we will begin to see a downward movement of shorter-term rates late this year.
The Housing Market
The June quarter saw a 20% rise (seasonally adjusted) in sales around the country. While prices we on average flat in April and May, they rose approximately 0.7% in June. Nationwide, prices are down on average 18% from the peak at the end of 2021 while Auckland and Wellington are down approximately 24% and Christchurch is down 10%.
Tony expects to see average prices rise a further 5% this year and increase an additional 10% across 2024.
According to Tony’s latest surveys, buyer FOMO (Fear of Missing Out) has significantly risen to 19% and he expects this to keep increasing while most of the country is still in a buyer’s market this has switched towards a seller’s market in Auckland.
The number of properties listed for sale was down 14% in June from December 2022. Christchurch, listings are down 10% from their peak while Auckland is down 18%.
Meanwhile, Wellington listings are down approximately 44% from their peak in August 2022 while Tony believes will see a rise in FOOP (Fear of missing out).
Tony’s 4 Key Factors impacting the upswing of the housing market:
- Migration awareness: Tony states many New Zealanders are still despondent about the economy and are focused on the loss of Kiwis who are moving across to Australia without factoring in the net migration increase from other parts of the world.
Tony believes at some stage people will connect migration numbers with increasing house prices and what has happened in previous market cycles which will of course kick buyers into action.
- Interest rate decreases: with an expectation of interest rate decreases – as long as the economy doesn’t head into a deep recession – more people will be able to prove affordability and take out a loan as stress test rates lower from the current high of 9.5%.
- Decreasing House Construction: at some stage Tony believes people will recognise house construction quantities falling away quickly with standalone house construction already decreasing Tony expects an impact on multi-unit developments (townhouses, apartments, etc.) which combined with a rising population will push buyers into the market.
- The Election: with political polls suggesting we may see a change in Government come October 14, Tony believes the possibility of the restoration of interest expense deductibility (National Party Policy) would cause investors to strongly step back into the market.
However, if Labour were to retain Government Tony expects more investors to move out of the market as they face another 25% decrease in interest expense deductibility and relatively high interest rates.
*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.