Taken from Tea with Tony | April 2023
This month, Tony discussed his expectations for the Official Cash Rate (OCR) review on April 5th and examined ongoing flood risks for home loan borrowers, lenders, and the wider economy, as well as the latest news from the housing market downturn.
Read on to find out more.
Monetary Policy and Silicon Valley Bank
According to Tony, in November 2022, when the Reserve Bank rose the Official Cash Rate (OCR) by a record 0.75% with a warning of an upcoming recession – it was a ‘big thing’. And alongside high inflation, had a large impact on consumer confidence and the real estate market.
Tony noted that there was an expectation for a 0.25% increase in the OCR on April 5th driven by the collapse of Silicon Valley Bank (SVB) in the United States, which led to a bout of nervousness around the world. However, since filming, the Reserve Bank has announced a 0.5% increase.
Tony says bad lending was not the cause of the collapse – bad depositor policy management by this highly specialised institution and a couple of similar institutions was to blame. Tony explains this is not a generalised problem like the Asian Financial Crisis (1997/1998) or the Global Financial Crisis (2008/2009). According to Tony, this was the fastest-ever depositor run as tech-savvy people moved money electronically very swiftly led to the collapse.
After ‘pretty strong actions’ from central banks to ensure banks remain liquid and give depositors confidence the market has begun to settle.
However, there is an expectation around the world that banks will pull back on their willingness to lend – meaning less credit creation, less economic growth, and less inflationary pressure. Furthermore, the collapse of SVB acts like a tightening of monetary policy leading to an interest rate decline in the United States – while locally, we’ve seen a smaller decline.
Inflation Expectations and Unemployment Rate
Tony believes that inflation expectations and further inflation are still factors that the Reserve Bank is fighting against, despite the negative factors affecting the New Zealand housing market and economy.
The expectation for economists and businesses alike is that businesses will plan to increase prices under extreme cost increase pressure and recent extreme weather events will add to inflationary pressure.
He believes the very tight labour market in New Zealand is a permanent structural change (for businesses to adapt to), providing job security for households, and there is little chance of the Reserve Bank’s 6 percent unemployment prediction coming to life.
Given the labour shortage, Tony believes the unemployment rate is unlikely to go above 4.5%.
Tony says it’s too early for the Reserve Bank to confirm we are safely on track to lowering inflation to 2%.
Flood Zone and Climate Change Risks
Tony also highlighted that research by the Reserve Bank showed 12% of home loans held by banks related to houses in flood zones, and approximately 2% of homes are at risk of inundation from sea level rise.
Tony believes insurers will eventually be unable to afford to insure these properties or will dramatically increase the premiums. He cautions that this will impact banks’ ability to lend as they can only lend if the property has insurance and will impact property prices.
The Housing Market
Tony notes that the number of dwellings sold by licenced real estate agents over January and February was the lowest on record since the records started in 1992, and prices are still falling.
Tony says it’s reasonable to expect turnover to remain low and prices to fall further over the next few months with business confidence surveys showing a high level of concern and pessimism with the economy, interest rates still at an above-average level, and talk of Monterey policy tightening further.
While it is commonly assumed that homeowners rolling off fixed rates in higher rates will directly impact the housing market, Tony believes that this is not relevant to buyers. What is relevant is the higher interest rate itself, but due to SVB, expectations for interest rates going to extremely high levels are off the table.
Tony also believes first-home buyers are still in the market to buy, but there is zero sign of investors re-entering the market. As for when the market will bottom out, Tony predicts towards the middle of the year, but he cautions there isn’t an imminent turning of the market with people likely holding off until after the election.
Finally, Tony reinforces that first-home buyers are looking to buy, given the current lack of competition, a range of stock to choose from, and vendors willing to negotiate and accept conditions.
Tony concludes that while no one has been through a post-pandemic economic environment before, and you should bear this in mind when looking at forecasts there is more weakness to come, and this is still an uncertain environment.
*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.