Tony Alexander | Economic Impact of Delta Lockdown

A temporary interruption

While the initial impact of the Delta lockdown in New Zealand is negative, with so much of the economy closed down, independent economist Tony Alexander says based on last year’s behaviour, we’re looking at a ‘temporary interruption’ and potentially even more interest in housing.

“A lot of people quite frankly are going to take advantage of this time, to accelerate the searching they’ve been doing with increasing momentum over the past three months to be looking for houses again.”

Tony says that the Reserve Bank is still indicating that they’ve got to raise interest rates soon.

“The finance minister is saying the economy still has some fairly good momentum there, so we’re basically looking at just a temporary interruption to the economy, not a prolong sort of deep recession.”

What about Auckland?

Tony concedes that a prolonged lockdown in Auckland will obviously further impact economic activity but weighs this with the rest of the country’s ability to continue to barrel along (once restrictions ease) and Auckland’s now proven ability to recover strongly.

OCR / Interest Rates

Tony agrees with the Reserve Bank’s action to temporarily pause raising the official cash rate and interest rates at the outset of the Delta outbreak.

However, he also cautions that the Reserve Bank have “made it very clear, the economy is growing faster than it can actually handle. We don’t have the people, and we don’t have the resources. Inflation is 3.3%, the unemployment rate is 4%, and we’ve just learned our retail spending volumes grew almost 3.5% in the June quarter. So, the economy’s growth rate has to be slowed down”.

Meaning interest rates will need to rise to get a handle on inflation.

“I still think we’re looking at a range of 2 to 2.5%, going on top of what people are paying for the likes of that one-year fixed mortgage rate.”

BUT as Tony points out, the market has been given an interim reprieve.

“We’ve actually got low-interest rates for six weeks longer. So, a continuing stimulus to the housing market for longer than anyone had been thinking. And we’re all reasonably confident of getting this under control, and then we will run out again and get another spa pool, or gazebo or kayak.”

House prices

Tony advises that pre-lockdown market momentum has continued with FOMO again on the increase.  Moving forward, however, he questions the sustainability of the growth experienced in the past year.

“I certainly don’t think the market is going to be shooting off the other side. But one key point to note is that, although we saw the market being shocked by March 23 tax announcements, and things were at their weakest maybe around April to May, over the past three months, extra momentum has built.”

And in response to Reserve Bank forecasts about the possibility of a modest (2 – 3%) future house price correction:

“I don’t see the house prices falling at a national level, because generally that only happens when we’ve got a recession in the economy, which has been preceded by very high-interest rates.”

“My message to people has been very, very clear, that we can’t continue at the pace of increase in house prices of the past 30 years, 6.7% per annum, or obviously the past a year of about 31% or so. There’s definitely a slow down coming along. But virtually every forecast in the past three and a half decades of falling house prices has been wrong, and I think the (Reserve Bank) Governor is well aware of that.”

Tony’s Tips

  • Get good advice – “My advice to people would be, get proper advice when it comes to managing your mortgage from mortgage advisors”.
  • Listings will eventually increase over time – at some point, investors will sell, particularly as the Reserve Bank will likely take further action in this area.
  • Now is a great time to look at your spending vs your savings and how you can improve on both fronts – NZHL have some resources to help you in this area as this is part of the process we step through with our clients.
  • Take a second job – the labour market is crying out for extra hands, and it could be to your benefit.
  • Rent out that spare room if you can!

Click here to view the full Tea with Tony episode.