Tony Alexander | The Dwindling Housing Market | NZHL

Taken from Tea with Tony | March 2023

In this blog, Tony shares the latest updates on Monetary Policy, fixed interest rates, and what we can expect to see next in the house pricing cycle.

Plus, Tony dives into the dwindling housing market and the response we’re seeing from Lenders.

Read on for Tony’s view.

Monetary Policy and the Impact of Severe Weather Events.

The Reserve Bank responded to October 2022’s shock high inflation number with a record-high – 0.75% – OCR (Official Cash Rate) increase in November.

Three months later the February 2023 OCR announcement saw a collapse in business and consumer sentiment. While Tony’s monthly surveys showed a tremendous fall away in the housing market alongside slower-than-expected wage growth and 0.1% job growth – which in the context of fighting inflation is positive.

Nonetheless, the OCR still rose a further 0.5% and the Reserve Bank moved its OCR peak prediction date from April to the middle of this year.

Pre-announcement speculation questioned whether the Reserve Bank would hold off OCR increase – or limit the rise to 0.25% – in light of the severe weather events. However, Tony explains the required repairs and limited availability of fruit and vegetables will cause inflationary pressures.

The Reserve Bank predicted a 0.4% rise in inflation from the North Island flooding – with Cyclone Gabrielle set to cause further inflationary pressure. Tony explains that weather events decrease short-term economic activity but add to inflation hence the Reserve Bank’s decision. However, Tony notes – the Reserve Bank will monitor the impact of the weather events over the coming months and respond accordingly.

Fixed Interest Rates.

With the world seeing ‘better than expected’ inflation numbers at the start of this year, the cost to New Zealand Banks to borrow money – to then lend out – was decreased which saw a round of reductions in fixed interest rates in late January.

While in November last year, Tony was 90% sure we were at the peak of fixed interest rates (2 years and beyond), Tony cautions things have changed over the last month, and we shouldn’t expect to see interest rates fall away quickly.

The United States economic data has been stronger than expected with the monthly inflation number ‘quite a bit higher’, strong growth in job numbers, and retail spending leading to the cost to New Zealand banks to borrow money increasing again.

Tony notes local interest rates may see a small rise as we see business pessimism easing and the employment outlook improving. While Tony notes none of the changes are major – we shouldn’t expect further generalised cuts to mixed mortgage rates.

Lender’s Response.

With the dwelling and mortgage sales very low, the banks are not meeting their sales targets. The question now is how banks will respond. So far one lender has responded with a 4.99% 1-year fixed rate – writing business at a loss, while other lenders have offered 2-year fixed rates of 5.99%. Tony explains there is a similar trend in Australia.

Tony notes: 170 billion-plus of fixed-rate mortgages come up for renewal in the next 12 months representing  danger for lenders if other lenders offer attractive mortgage rates -particularly in an environment where borrowers face higher interest rates.

To combat this bank have been experimenting with their interest rate offers and the likes of 1% cashback and Tony expects further experimentation as they learn where the ‘sweet spot’ is for home loan borrowers.

For those with fixed rates coming up for renewal to shop around, Tony advises looking carefully at what’s on offer and negotiating with your lender.

The Dwindling Housing Market.

January housing sales were approximately 2,800 – the lowest number of sales on record since 1993 (approximately) – 55% of the average number of January dwelling sales over those 30 years.

Which Tony claims is an indicator of the weakness of the housing market following on from the November Monetary Policy tightening last year.

Tony expects sales will still be fairly weak for the half of this year, but Tony says we are seeing the return of first home buyers as shown in his monthly surveys.

Tony states several factors are encouraging first-home buyers back into the market including a significant drop in house prices alongside an 18% salary increase (from 3 years earlier), rental market pressure with the migration turnaround and the return of tourism, and a slight loosing of banks’ lending criteria.

Alongside this real estate agents are indicating a slight increase in the number of people attending open homes over the last two months. However, Tony emphasises this is not a wave of people as we saw after the first Covid-19 lockdowns in early 2020 – we shouldn’t expect a sudden uplift in house sales.

Especially since investors are showing no indication of coming back into the residential property market. Tony explains investors have to get their accounts in order with the impact of financing costs going up, and high investor debt alongside uncertainty around rent pricing and the Healthy Home Legislation and a decreased proportion of expenses that can be deducted for tax purposes.

And, with the uncertainty of an election year and the policies that the elected party will bring with them, Tony believes most investors will continue to stand back for the rest of the year.

The House Price Decline.

Tony expects prices to continue to decline over the next few months with no signs of easing downward pressure. With high levels of consumer pessimism and homeowners rolling onto higher interest rates, Tony says these risk further pricing decreases until the market bottoms out towards the middle of the year.

However, with the risk of an economic recession the year (Tony remains 50/50 on the likelihood) Tony doesn’t see a huge jump in prices.

Tony says to keep an eye on some of the underlying factors such as; the turn of net migration numbers to +16,000 from -16,000 6 months ago,  strong growth in tourism numbers – seeing rental properties go out of the long-term rental pool and back onto the likes of Airbnb and the return of foreign students are starting to see slight pressure on the rental market which could, in turn, have a house pricing impact.

The Upward Swing.

Tony cautions there is no certainty around the upward swing of the house pricing cycle. However, he notes Wellington and Auckland have come down a fair distance and alongside Christchurch have scope for outperformance in the upcoming upward leg of the pricing cycle – in comparison to the regions which saw phenomenally strong increases from about 2016 onwards.


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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.