Taken from Tea with Tony October 2021
Confidence remains in an economic bounce back
While Covid-19 restrictions continue, independent economist Tony Alexander remains confident in a strong economic bounce back once restrictions ease. And, although business activity and the economy are still restrained, Tony says we haven’t had the same level of fall away in consumer sentiment, business confidence, and real estate activity as we did in the nationwide lockdown of 2020.
Likewise, in terms of the housing market, Tony doesn’t expect to see the same 3% fall in average house prices, which we saw around the country in April and May last year.
“I don’t see prices falling at all, anywhere at the moment,” says Tony. “So, in that regard, it’s different as in less negative for the short term.”
Post lock down spending
In addition, Tony doesn’t anticipate the same’ spending frenzy’ happening that we saw in 2020.
“If you’re in a sector which has experienced a boom since the end of the first nationwide lockdown, you’re not going to get a boom coming out of this lockdown, but your activity will still be strong.
A greater point of interest will be in 2022 into early 2023 when the borders are presumably open, and we Kiwis will be trying to spend our 10 billion dollars per annum travelling overseas again.
So, I would expect to see quite a pullback in hardware, recreational goods, motor vehicles, furniture, and appliances sales,” Tony explains.
However, he doesn’t expect this to be a disaster for business operators, as many New Zealanders feel richer due to increased house prices, a strong labour market and additional money in our bank accounts beyond what should have been there without Covid-19.
When it comes to inflation
Tony believes inflation will continue to rise, with a higher-than-expected rise of 3.3% for the year to June and economic growth of 2.8%.
“Inflation indicators are screaming red hot at the moment so, people should fully expect that the Reserve Bank has to get these interest rates higher,” claims Tony.
However, Tony notes recent indications the Reserve Bank will still be relatively cautious and expects a 0.25% increase to the official cash rate on October 6.
Inflation vs interest rates
While a cautious rise in the official cash rate sounds good from a borrowing point of view, Tony cautions a slower-paced increase of interest rates can see them rise higher than predicted. And, as the market has already factored in predicted interest rate increases, lender rates are already rising.
And while, according to Tony, interest rates will rise to stabilise inflation before eventually falling again, the level of uncertainty is high so, he cannot predict when interest rates will begin to fall and advises borrowers to exercise caution.
The housing market cycle
In calmer times, buyers would plan further in advance for their purchase. However, according to Tony, the mindset of “If I don’t buy now, I may never be able to buy” is currently driving the housing cycle. Essentially, buyers are shifting their purchasing time frames to avoid escalating house prices.
However, at some point, Tony believes purchasers will say, ‘I think time is on my side,’ and they will wait – holding off on their planned purchases. So, while we’re not there yet, Tony expects we can start to see this shift over 2022.
In terms of selling, many would-be sellers are holding off listing their properties due to concern over the current housing stock shortage impacting their ability to repurchase. However, Tony believes this fear will also fall away, with vendors eventually looking to sell their existing properties before repurchasing.
“We are in the end game of the sharp increases in house prices over the past year, 10 years and the past 30 years,” Tony says.
However, while Tony predicts we will see a slowdown, he stresses that we’re not at the end game point of settling into a new normal just yet.
