Tony Alexander | The Year of Omicron?

Taken from Tea with Tony February 2022

It seems 2022 will be the year of Omicron.  What could that mean for the economy? Is the property boom over for New Zealand?  And what about interest rates, inflation, and that CCCFA legislation?  Despite challenges in all of these areas, Tony is also predicting some growth.  Read on to get his perspective.

The Impact of Omicron

By all accounts, Omicron seems to be more transmissible and less virulent, but with it undoubtedly comes another round of uncertainty for everybody.  So, is Omicron just a case of COVID economic response repeat, or do we see differences this time around?  We’ve seen in other countries such as Australia, the United Kingdom, and Canada about a four-week lag from when the numbers of infections start shooting up to when they peak and then start coming down the other side.

Tony believes that while this will cause some short-term interruption to our economy, it doesn’t fundamentally change his outlook and commentary on the housing market.  This is because the various factors he’s been speaking about which are driving prices up have not really changed.  However, as a result of Omicron, some extra inflation is likely from people not working and supply chain disruption both here and overseas.  This could eventually mean interest rates are a bit higher, possibly earlier than would otherwise be the case.  But the impact of Omicron on the market will be small in comparison to other factors in play.


Is the property boom over?

For some months, Tony has been commenting that we have entered the endgame for the boom in the property market and he believes the property boom is now actually over.  Some of the factors contributing to the boom included record low interest rates.  We’ve now got interest rates rising and more rises to come.  Pre-Covid migration was also a contributor.  From about 2015, migration numbers were unusually high, including Kiwis coming back home.  And while that all ended with COVID, Tony believes we’ll see a shift this year with a lot of Kiwis moving across to Australia for the higher wages.


Will there be a crash?

While the factors contributing to the boom move in the other direction, Tony believes none of them will add up to a crash or big fall in house prices.  Rather it’s more the absence of the very, very strong gains that we’ve seen over a three-decade period.  One thing he has observed is that the REINZ data for December 2021 was up 23% a year earlier but in the month of December, house prices around New Zealand actually fell by one per cent.  While one month does not make a trend, it does align with some of the weaknesses Tony’s been seeing in his surveys of NZ mortgage advisors, real estate agents, property investors, and consumers generally.  This type of coal face insight has been telling Tony for some time that the boom is over, and more official data will start to show that.


What about inflation?

When and how can it realistically be brought within that two to three per cent safe zone?  This is the big uncertainty here and overseas.  Initially, bankers were confident it would be transitory because a large part of the inflation was driven by supply issues which would eventually get sorted out.  But the longer it’s continued, the more prices have risen for businesses in general.  They in turn have been passing their higher costs onto their selling prices.  This then flows onto a demand for higher wages.

So, the length of time the transitory period has gone on has given momentum to inflation.  It’s pure guesswork as to how high inflation goes, how quickly it comes down, how high interest rates need to go, and how quickly and for how long it can be brought under control.  Tony suggests people need to allow for the uncertainty with interest rates by mixing and matching their loans with two-year, three-year, and maybe even some one-year fixed interest rates.  NZHL suggests you talk to a trusted adviser.

Will our central bank have to create a recession to get inflation back under control?  In short, Tony doesn’t think so, but he wouldn’t rule it out as they did in 2008 when we were in a recession and they were fighting inflation before the global financial crisis came along.


How does it fare internationally?

There are challenges internationally around Russia, Ukraine, fuel prices, and the international market.  So how does this affect us in New Zealand?  Tony comments that whenever there’s weakness in overseas markets, there will be some flow-through into New Zealand because we invest and borrow internationally.  If prices drop in investments, there’s a perception that the investor is poorer and so they tend to cut back their spending.  So, weakness in overseas markets will have a bit of a depressing impact on world growth, and of course, it will reduce the need for interest rates to go up unless oil prices soar—in which case we’ve got quite a bad 1970’s type situation.

Tony says no one knows what’s going to happen with Ukraine, but we can assume people will behave similarly to other uncertain times in history.  At the start of the pandemic, when people were nervous, they started selling shares before they fell further, but, as we’ve seen, the markets do recover.  So, when thinking about what to do when there’s a shift in the market, remember that markets recover and it may pay to stand back to see how they go.


About Rising Fuel Prices

Fuel prices are rising strongly and with a lot of discussion around rising fuel prices, what are the economic impacts of significant and sustained fuel increases?  Tony notes that generally, there is an anticipation of reasonable growth in the world economy over the rest of this year and next year.  This means oil demand will go up, and as there’s not been much new oil supply, the increased demand is pushing prices up.  Increasing fuel prices are something we notice more because we see the change each week as we top up our tank.  With inflation already rising, the additional fuel prices will continue to change consumer behaviour as people consider how they can cut spending and look at how they can save.  This will potentially mean a drop in income for anyone involved in retail, manufacturing, and product distribution as consumers look to pull back on spending because of a high rate of inflation.

This is where an organisation like NZHL can help.  We see many clients on very good incomes, who are not managing their money or utilising things as they ideally would like.  So, we sit down with them as part of their refinancing, work through a plan, and share tips and tricks to pay down their mortgage quicker.  Simple changes can shave years off their mortgage—like having a no-spend day—and sometimes just having a plan can be the difference.


The Credit Contracts and Consumer Finance Act

The revised Credit Contracts and Consumer Finance Act, commonly known as the CCCFA legislation, has had a lot of media coverage lately.  The target of the legislation was basically loan sharks. It was a well-intentioned piece of legislation designed to protect the vulnerable that has not quite worked out that way.

Tony says it’s a credit crunch and it’s not just the CCCFA that is the cause.  It’s also the changes to the LVR (Loan to Value Ratio) lending from the Reserve Bank, which came into place on November 1 2021.  From about the middle of last year, banks have also started experimenting with DTI (Debt to Income) ratio restrictions for their lending as well.

While the timing has been unfortunate, the key element here is the CCCFA.  The changes in the legislation essentially mean that if banks are deemed to have undertaken irresponsible lending, they could face fines of up to $200,000 for the senior managers and directors of the bank.  They cannot take insurance out against this.  While they probably don’t want to practice bad lending anyway, it’s a risk they don’t want to take.  So the lending criteria banks are applying has tightened up very, very considerably.


Find out how a changing market impacts you

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.

Click here to view the full Tea with Tony episode.   


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