Taken from Tea with Tony May 2022
This month, we step through the mixed bag that is the NZ economy and delve into what that means for everyday Kiwis: those with home loans, mostly petrol cars, and increasing living expenses.
Are we still in a credit crunch? What can we expect from inflation, interest rates, and housing supply? We explore what’s going well for the NZ economy, and more importantly, what’s not. Here’s Tony’s view.
Let’s start with the positives. At the top of Tony’s list would be the high prices for our export commodities, which are sitting 34% above where they were at the end of 2019, pre-pandemic. And although the costs for farmers and all producers have increased quite substantially, their returns have increased strongly.
Tony recognises that various sectors of the NZ economy are beginning to rebuild post-pandemic. For instance, tourism numbers are expected to grow over the next three years, but it will be a slow build. With winter upon us, Tony predicts that there should be a good flow of Aussies coming across the pond for the skiing season. Then, there’s the export education sector that will bring in foreign students over time. But that will depend somewhat on China re-opening.
Unemployment is also expected to go down from 3.2% to about 3%, which is another big positive for the NZ economy. Tony says workers today seem to have more job security than in previous periods in New Zealand, when we’ve seen the Reserve Bank fighting inflation. This increased job security will have a positive impact on the housing market and consumer spending. Other sectors are experiencing underlying growth include the healthcare sector, the aged care sector, much of the horticultural sector, and the space industry.
Despite the positives, Tony finds it a challenge to remain optimistic, especially when looking at Russia’s war against Ukraine and what’s happening in China, which has dug itself a hole with a failing eradication strategy for COVID-19 they can’t get out of. These global issues mean the supply chain is being disrupted, inflation rates are going to get higher, and staffing problems are probably going to get worse.
Inflation is the highest it’s been in 30 years at 6.9%. Only a year ago, New Zealand’s inflation rate was 1.5%. Rental costs are rising and the costs of building materials and construction have gone through the roof. But are high inflation rates caused by a domestic issue or an international one?
While the New Zealand Government has certainly played a role, Tony ascribes the bulk of these issues to conditions overseas, such as Russia’s invasion of Ukraine, supply chain problems, and shipping problems. The good news is that Tony believes the inflation rate could fall relatively quickly next year. But for the moment, the Reserve Bank has to promptly raise interest rates.
Overseas, there’s an accelerating scramble going on, especially in the United States by the federal reserve to catch up on getting interest rates away from levels that are too low. Our own Reserve Bank in New Zealand has explicitly said the level of unemployment and the number of people who work in New Zealand is not sustainable. We simply don’t have the resources to allow the NZ economy to keep growing at the pace it has been growing.
The truth is, the Reserve Bank considers a slightly higher unemployment rate in these circumstances to be more sustainable for the New Zealand economy. However, Tony says this is just a temporary phenomenon; the Reserve Bank will have reasonable confidence in getting back within the 1-3% band by either late 2023 or the first half of 2024.
So, will the de-flaming of the housing market also reduce building demand and inflationary pressures as things cool off? Tony says it’s difficult to see how this will manifest itself. He believes that the credit crunch is passed the worst now, and things are starting to get better with credit availability. So, there’s a little bit of extra support there, maybe for first-time buyers.
But Tony is more interested in house construction, where a lot of overly optimistic, undercapitalised, and inexperienced new developers don’t know how to manage in these extraordinarily challenging times. Even the most experienced developers out there are struggling. The bigger pain in the housing market is therefore not falling house prices but the weeding out of builders and people in the property sector. People are starting to outright question if there is really still a property shortage.
With the NZ border reopening, many New Zealanders are positive that a million Kiwis from overseas are going to come in and fill the country’s labour shortages. But Tony doesn’t necessarily share this view, given the current high cost of living in New Zealand. Businesses have to realise that they may not have a realistic way to produce their current output in 6-12 months, and will need to make some tough decisions.
Tony says Government support will be minimal, apart from specialised cases of trying to let in a few more staff from overseas on a one-off basis. Staff availability will get worse and many businesses will have to pay more wages. If businesses cannot afford to pay higher wages, they will need to restructure the nature of what they produce and how they produce it.
So, what is Tony’s final view of New Zealand’s current economic state? Tony would rate the NZ economy below a five, with five being the neutral area. He expects many sectors will have to trim back their operations because they cannot get the staff they want. Material and wage costs will continue to rise, as well as financing costs. The value of housing assets is also going to decline. But Tony reassures us that it’s not all bad. As mentioned earlier, we still have a lot of sectoral growth coming through, as well as the return of tourists and foreign students. So while the negatives may dominate in the short-term, things will likely look a lot different 18 months down the track. This includes a lower exchange rate helping out exporters more.
Tony also predicts an improving outlook for the NZ economy further down the track, with interest rates declining over 2024; they’ll come up, then they’ll come down. Tony’s advice to home-buyers is to focus more on the attributes of a property as opposed to being fixated on price, which tends to compromise the search. After all, many first-time home-buyers are looking at properties they are perhaps going to raise a family in for a good number of years. Now, with the supply increasing and listing numbers rising, Tony recommends looking at factors like walking distance to school and other important features of a good family home that they may have had to compromise on previously in their search. Prospective home-buyers have a greater chance of finding that property than hanging out for the next 3% fall in price.
As always, if you have questions about how a changing market impacts you and your home loan structure, we’re here to help. Book an appointment 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.