Taken from Tea with Tony | June 2023
In this blog, Tony explores the key factors shaping the economy, housing market, and interest rates alongside the impacts of the recent Government Budget announcement and the latest Reserve Bank monetary policy review which saw a .25% hike to the Official Cash Rate (OCR).
Plus, Tony shares his latest insights into the economic outlook – are we still heading towards a recession?
According to Tony, the Budget (announced a few weeks ago) followed the trend of election years, featuring an easing of financial policy with increased spending. Tony explains It’s common for governments, particularly in election years, to avoid cutting back on spending. In terms of financial impacts, Tony expects a boost of approximately 1.7% to the New Zealand economy in the coming months and notes; while these boosts can impact inflation, initiatives such as changes to public transport, prescriptions, and early childhood fees aim to offset this.
The Official Cash Rate & Economic Forecast
Shortly after the Budget, the Reserve Bank met market expectations by raising the official cash rate by 0.25%. However, what surprised many was their optimism about inflation and the intention to hold on to future OCR hikes.
They highlighted a recent economic tightening, lower-than-expected inflation numbers, wage indicators, and improving global supply chains. Tony cautions you can’t completely rule out further increases with the inflation forecast not set in stone, but he believes this is unlikely as all indicators are pointing to a falling away of inflation expectations.
Additionally, the Reserve Bank revised its previous recession forecast (based on the higher-than-expected inflation number in 2021). While they still predict a small recession in the middle of this year, the scale is expected to be significantly lower than previously expected aligning with the view of many economists who believe it is a 50/50 call whether the country will experience a recession.
Tony notes, that we may have already had a recession after shrinking 0.6% in the December quarter and while the economy has tightened, job numbers have continued to grow, reflecting a tight labor market with the ability to quickly rehire skilled employees proving challenging to business amongst economic challenges.
The Housing Market
Tony explains data from REINZ (Real Estate Institute of New Zealand shows a positive trend in the housing market. After adjusting for seasonal factors, sales have increased by 11% (approximately) in April and average house prices have plateaued, suggesting we may have reached the bottom of the housing cycle.
While Tony notes further (minor) pricing dips are possible, the data indicates a stronger level of consumer certainty compared to last year with the reengagement of first-home buyers and increased attendance at open homes. Tony claims there are various factors influencing buyers, including rising rents, increased listing inventory, and relatively more accessible credit for first-home buyers with a relaxing of the CCCFA lending criteria.
Where to from here?
The housing market will be influenced by the outlook for interest rates. According to the Reserve Bank’s forecast, the cash rate will remain at 5.5% until around September 2024, after which it is expected to gradually decrease. However, economists believe that interest rates might start declining earlier in 2024 and as they decline, they will cause an increase in residential real estate activity around New Zealand.
However, Tony states the crucial point is not the interest rate itself but that the fear of continuously rising interest rates has subsided, providing potential buyers with a more stable and predictable environment – effectively undoing the nervousness caused by previous expectations of interest rate rises.
Lastly Tony cautionary message to buyers – while the number of property listings are high, they have already decreased 13% since the peak in December and with more buyers coming back into the market there will likely be a further drop in listings, more competition and a pricing impact.
*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.