Taken from Tea with Tony | May 2023
Tony discusses the latest developments in the New Zealand economy, including interest rates, monetary policy, and key drivers of the housing market.
He also explores the impact of property listings on the housing market cycle and longer-term fundamental factors.
Plus, Tony has a special message for young buyers.
Read on to find out more.
Interest Rates and Monetary Policy
According to Tony, interest rate levels, and more importantly, where people think they are going to go, are significant drivers of the housing market.
With the peak for 3 – 5-year fixed rates passing a few months ago Tony says we’re pretty much at the interest rate peak for the 1 and 2- year fixed rates, but we’re not yet at the stage where people believe interest rates will be falling away. He expects that once we get there, the high level of concern people currently have about taking on a mortgage will disappear, and the expectations of declines will drive buyer behaviour.
Tony notes the tightening of monetary policy by the Reserve Bank on April 5 was not intended to make interest rates rise, rather it was to prevent interest rates from falling in response to bank wholesale funding costs, which have fallen in response to the banking problems in the United States causing a decline in expectations for US growth & inflation and therefore US interest rates.
With the next Official Cash Rate (OCR) announcement due on May 24, Tony believes the Reserve Bank will not make further increases as the Reserve Bank has indicated monetary policy decisions from here will be based on domestic demand (consumer spending) and inflation indicators.
Net Migration Flows
Tony explains one of the big drivers of domestic demand, especially in Auckland, is the net migration flows. On average, over the last quarter of a century, New Zealand has enjoyed a net migration gain of approximately 25k people each year. While the year prior we saw a loss of 20k people now in the year to February 2023 we’ve seen a net gain of 52k people, which is a 1% boost to the population.
Tony explains that a population rise of 1% of people will cause extra inflationary pressure with unanticipated spending, which needs to be offset against the extra resource added to the labour market.
Employment Numbers and The Labour Market and Wage Growth
When looking at the latest employment numbers, Tony cautions labour market changes tend to happen well after the economy changes with businesses taking a long time to make employee decisions. He uses the 3% shrink in New Zealand’s economy in 2008/9 as an example – while the economy bottomed out in 2009 the unemployment rate didn’t peak until 2012.
However, even as the unemployment rate rises, Tony doesn’t predict we will reach the 6.7% high of 2012 due to the short labour supply. Tony notes it’s not just New Zealand facing a tight labour market and with other countries competing, particularly for skilled employees, New Zealand will struggle to be competitive.
Tony expects a suppression of wage growth towards the lower half of the wage spectrum as a result of the net migration boom – with the tourism and hospitality sectors set for a hugely beneficial boost to employee numbers.
Tony believes that the number of property listings is a significant factor affecting the housing market cycle. He notes that in 2021, when house prices rose by 11% in the second half of the year, despite interest rates rising, net migration flows, and changes to Loan to Value Ratios (LVR), this was due to a big fall in the number of properties listed – down to 13.5k.
While at the end of 2022, with house sales reality weak, the number of properties listed was approximately 29k, which creates a lack of urgency with people being able to pick and choose in a ‘buyer’s market’.
However, over the last couple of months, property listings have fallen by approximately 11%. Tony explains that when sales go up and more buyers come into the market, and everyone’s expectations are a little more realistic, listings tend to go down. Instead, there is a queue of buyers who have been holding off for the last 18 months, waiting for the bottom of the price cycle, thinking they will be able to pick and choose. At some stage, people will recognise property stocks are falling away, and that will become a motivator of buyer behaviour.
The Housing Market Cycle & Message to Buyers
Tony points out that while market fundamentals may not be immediately recognised by buyers, it is crucial for people to recognise them as a turning point in the market. This recognition can ultimately drive their purchasing decisions.
As interest rates turn, net migration numbers increase, and construction falls away, Tony claims people will start to recognise the impact on the housing market. Additionally, the recognition of fewer property listings will motivate buyers to purchase, especially after being conditioned to panic buy during shortages throughout the pandemic.
Although Tony notes, there is still more to go we are near the bottom of the house pricing cycle, his message to buyers, particularly young buyers, is this has been your best opportunity in a generation to make a purchase. Tony acknowledges this is hard to do with deposit requirements and high interest rates, but there is also a lack of competition from investors.
While he doesn’t see a rush of investors back into the market he cautions buyers, the clock is ticking on this downward leg of the housing cycle, and he emphasisies there is ‘absolutely zero way’ of knowing how quickly prices will rise – with not a single person picked the soaring or falling of house prices since the pandemic started.
*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.