Tony Alexander | It’s a Wrap | NZHL

Taken from Tea with Tony December 2022

As we quickly approach the end of the year, Tony wraps up the economic turbulence of 2022 and looks at what’s happening in the regions.

And, what can we expect for 2023 – will the new year bring calmer waters, or has uncertainty settled in to stay?

Read on for Tony’s view.

The 2022 Housing Market

According to Tony, house prices are down 12.5% (approximately) on average nationwide. However, Auckland and Wellington are down 17 and 18% respectively, while Canterbury has only seen a drop of around 5%.

Tony attributes the extra weakness in Auckland, to population shrinkage (approximately 1.1% over the last two years) which, he notes, was driven by the lack of people coming into New Zealand. However, with the borders now open, Tony believes there is an opportunity for positive growth in Auckland helped by the current below-trend house prices in the region.

However, in Wellington, Tony calls the extra weakness a strong pricing correction after a massively overpriced market which is now almost back on trend.

On the flip side, Canterbury is still placing a pricing catchup post the 2011 earthquake and Tony believes there is still a bit more correction to go which could see Canterbury faring better than other regions in the current market.

While the South Island didn’t attract the same level of pandemic price surges as the north island, tourist destinations such as Queenstown have room for overperformance.

House Sales

In the year to June 2021, house sales peaked at 100,000 which have now fallen to approximately 87,000. Tony expects a further fall to a total of 60 – 65,000 sales annually.

Furthermore, Tony claims FOMO (Fear of Missing Out) has gone from the market and has been replaced by FOOP (Fear of Overpaying) which has jumped from 19% to 70% according to real estate respondents of Tony’s surveys.

And lastly, the number of consents issued for new builds has only just started to fall, and Tony believes there is a correction of pricing coming after building costs went well beyond the pale which Tony compares to the housing market in general.

Market Influences

Unsurprisingly Tony says interest rates have played a key role in the housing market decline. While we saw a 3.5% one-year fixed interest rate available early this year, by mid-year we reached 5% and now, the one-year fixed rate is sitting at 6.5% (at the time of writing).

There has been a restrain in purchasing recently as homeowners are impacted by rolling off low-interest rates into higher (double in some cases), and young buyers – who have only known low-interest rates and falling inflation over the last decade – are left surprised by the hike in interest costs.

However, according to Tony, there is a combination of other factors contributing to the decline such as the changes to the LVRs (loan to value ratio) alongside the halving of the percentage of low equity lending allowed and changes to the CCCFA (Credit, Contracts and Consumer Finance Act). The latter resulted in aggressive lending pullback from banks not seen since a brief period during the GFC (Global Financial Crisis).

What Next?

Prices are still falling, however, the rate at which they are falling has already slowed as affordability improves. While interest costs and the cost of living are undoubtedly causing financial strain on many in terms of meeting lending criteria there are factors working in favour of proving affordability.

After a large decline in house price prices and strong wage growth, the house price to income ratio has seen more balance allowing more people to meet -at least some- of the banks’ lending criteria and is further helped along by high job security and the banks improved willingness to lead as they get comfortable with the CCCFA criteria.

However, over the last two months, we’ve had two factors that could threaten a further market decline. The first is the latest inflation coming in higher than expected (7.2% rather than 6.6%) which saw a rise in wholesale interest rates and was quickly followed by the retail fixed interest rates (up by approximately .5%).

Secondly, a month later, the Reserve Bank announced a monetary policy change where the OCR (Official Cash Rate) was hiked up by a record .75% and they increased their interest rate peak prediction from 4.1 to 5.5%. Tony notes this should have been done much earlier (in his opinion) to scare consumers into pulling back on their spending.

But does this mean that 2023 will be a repeat of 2022?

The negatives are dominating at the moment with talk of a recession however, while Tony explains we don’t know what a recession will look like these days he doesn’t expect it to have anywhere near the same impact as the recession of 2008/2009 (3% economic shrinkage) or that of the 1970s/1980s but the talk is enough to cause stress for New Zealanders.

Furthermore, the Reserve Bank’s prediction of a rise in unemployment from 3.3% to 5.7% has caused unease – alongside an additional .5% fixed interest rate rise and concern for building companies collapsing which is impacting the overall sentiment of those in the building sector. But Tony questions, whether the negatives will continue throughout 2023.

Remaining firm in his view that we are in the end game of the housing market price decline however this could continue for a few months yet, Tony lists some key market influences and what he expects to see next:

Population Growth – In the year ending June 2022, New Zealand’s population grew only .4% after growing 0.6% in the year prior – compared to the average yearly growth of 1.2% in New Zealand over the last decade. While the population growth has been below average Tony claims the net migration numbers are turning around quicker than expected. And while this may not be enough to ease the labour market shortage Tony notes this will continue to support the economy.

Household Income Increases – In response to the tight labour market, we’ve seen wage growth of 8.6% over the past year. And while Tony believes wage growth will slow down over 2023, combined with the decreases in house pricing it does play an interesting role in housing affordability.

While there was an average house price increase of 26% throughout the pandemic there was also an income increase of 14%. Each month incomes are going up while house prices are declining.

A year ago, the ratio between house prices and income was 30% above the level pre-pandemic. Now we are 8% above the pre-pandemic level and Tony expects us to reach pre-pandemic affordability levels over the coming months although Tony notes – interest rate costs remain higher.

Economic Shrinkage – The Reserve bank is predicting the economy will shrink by approximately 1% in 2023, however, Tony disagrees and thinks there are some positive factors supporting the economy.

Assuming 1% shrinkage is correct, there is a predicted rise of 2.4% in unemployment driven by economic shrinkage. But, Tony notes the economy shrunk by 3% during the GFC and an unemployment rise of 3.1% so, Tony questions how the 2023 predicted numbers add up – how can we have an unemployment rise of almost double the economic shrinkage in the tightest labour market we’ve ever seen.

In Tony’s mind, the impact on unemployment rates will be lower than predicted and job security should remain reasonably high.

Property Investors – While talk of a recession and further interest rate increases have seen investors step further away from the market but coming into an election year where the political opinion polls are showing an increasing chance of a change in Government which could mean the reinstatement of interest expense deductibility encouraging some investors to step forward again.

Construction Costs – With construction costs still on the rise, Tony explains the increased costs will support a rise in house prices, and history shows, once construction costs stop rising, they don’t tend to drop back down to where they were previously.

Property Stock – In August 2021, housing stock was pretty much at a record low of approximately 15,000. After jumping back up to 28,000 a couple of months ago we’ve dropped to about 26,000. Tony explains there is an established relationship between changes in the stock available and eventual changes in the housing market prices.

The Bottom of the Market

Putting all these elements together, acknowledging the worrying outlook for the world economy and the struggle of the building companies Tony predicts the market will bottom out around winter, and in hindsight, we will review 2023 as the year the decline in the housing market stops but when it comes to ‘going up the other side’ Tony says that’s anyone’s guess.

Interest Rate Peak

Tony believes we’re at (or around) the peak of fixed interest rate rises with banks restoring their average margin levels for fixed-rate lending over the past two years reducing pressure for further rate increases.

Additionally, Tony notes, lenders have already factored in the potential for the OCR to go close to 5.5%. And there is debate about whether the Reserve Bank is putting too much of a restraint on spending – with evidence (before the November announcement) showing a collapse of business spending, hiring intentions, and confidence.

With Tony’s surveys showing a pullback in consumer spending Tony explains the cash rate might not need to go 5.5% and he expects declines from mid-next year.

In Conclusion, Tony’s Advice and Predictions

Tony stresses there is no reliable way to predict the exact month the housing market will bottom out and cautions against trying to do so. Instead, he advises when buying a house (regardless of whether an investment or a family home) to consider longer-term trends rather than the still relatively volatile short-term market updates.


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*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.