Taken from Tea with Tony | September 2023
In this blog, independent economist Tony Alexander gives an update on how the Kiwi Dollar is faring and shares a word of caution about the potential impact of the Chinese economy.
Plus, Tony dives into momentum in the housing market and breaks down non-performing loans – discussing reports of increasing numbers.
The Kiwi Dollar
According to Tony asset prices, currencies and interest rates were all over the place during the pandemic – so where are we now?
At the time of writing the Kiwi dollar is below average at 59 US cents compared to 61.5 year prior and the 10-year average of 70 US cents.
While previous cycles of monetary policy tightening have seen our currency (dollar) go up alongside interest rates – this time interest rates have risen just as rapidly in other economies – such as Australia, the United States, the United Kingdom, and Europe as they have locally.
This means we haven’t had any interest rate differential favouring the Kiwi dollar and causing investors to pour their money into our country.
The economic outlook for China has deteriorated which Tony expects to negatively impact the Kiwi and Aussie dollars, given approximately a third of our exports and 45% of Australia’s go to China.
However, Tony notes – due to the Chinese authority’s ability to re-inject liquidity into the economy, their currency could easily (and quickly) change.
Where is the Kiwi dollar sitting compared to the Australian dollar? Approximately 92.3% (at the time of filming) which according to Tony is bang on the 10-year average.
While there has recently been increased media attention around borrowers having difficulty continuing to service their mortgage, Tony explains we’ve seen a high magnitude of this in the past. Reserve Bank data shows non-performing loans are at 0.4% compared to an average of 0.3%.
Non-performing loans are defined as outstanding housing debt to registered banks that are 90 days or more in arrears – where people are behind on their interest payments.
While the current difficulties can, in part, be put down to interest rates increasing relatively quickly, Tony notes after the Global Financial Crisis of 2008/2009 we were sitting at 1.2%, so while there has been an uplift (from 0.2% year prior) there is no comparison between some of the stress felt currently to what we have seen previously.
Monetary Policy, Interest Rates and Housing Market Momentum
While Tony doesn’t expect the Reserve Bank to further tighten monetary policy in this cycle, he also doesn’t expect a rapid fall away of interest rates but rather a relatively slow decline across 2024.
When looking at the housing market, Tony describes the current environment as highly uncertain with multiple factors – a rise in unemployment and interest rates, weakness in exports and consumer confidence, and the upcoming election – causing a lot of buyers to sit back and wait and see what happens.
While house prices have been ‘whipping around’ after the soaring 46% rise (between June 2020 and late 2021) Tony claims there is a recovery underway with a 1.6% rise in sales over the past three months.
Additionally, prices have risen on average 0.5% above their lows nationally excluding Auckland which is up 1.8%.
Tony predicts Wellington and Christchurch will follow the Auckland upturn while the regions will lag behind. He notes that a strong tourism recovery is underway for parts of the country – the South Island especially – providing a substantial offset to economic weakness in the farming sector.
The Return of Buyers
With the housing market picking up Tony says there have been many factors influencing the return of buyers including the decline in house prices (from peak) improving affordability.
And with a lot of buyers holding off for the last 2.5 years, many have increased the size of their deposits and are generally earning more with average wage growth exceeding inflation – with an average increase of 22% since the start of 2020 compared to an average increase of 18% in consumer costs (excluding interest rates).
Tony explains despite a recent rise in unemployment, job security has been good with job numbers up 4% on last year.
Additionally, the migration boom is offsetting the loss of Kiwis to Australia which alongside rising rents and influencing the housing market upturn. While there is an aversion to new builds – due to increasing built costs of stories of lost deposits – Tony believes this is temporary and is also driven by the higher levels of property listings – which peaked end of last year and have since dropped 15%.
Real Estate Survey Results
Tony’s latest real estate survey results show increasing market strength with 65% of agents saying there is increased attendance at open homes driven by first-home buyers with 67% reporting more first-home buyers in attendance.
FOMO (Fear of Missing Out) is now just above average levels at 40% and while heightened FOOP (Fear of Overpaying) in 2022 kept people away from the housing market – has now dropped to 20% and over double (54%) of agents are reporting buyers are concerned about the number of properties listed for sale compared 3 months prior.
*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.