Tony Alexander Update May 2023



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The past month has been quite interesting from an interest rates point of view. Initially, and as I wrote in my last column, there was downward pressure on wholesale interest rates in New Zealand because of the banking sector problems in the United States. But then those worries settled down and we have seen US rates move up somewhat, though not back to where they were before Silicon Valley Bank collapsed.

We also on April 5 saw the Reserve Bank shift its official cash rate up by 0.5% and not the 0.25% which most of us had expected. In raising the rate, they said they weren’t actually doing it to push mortgage rates higher but instead wanted to stop those rates from falling because of the US banking sector worries.

As it turns out banks have in fact slightly increased their 1-2 year fixed rates, taking the opportunity presented by the Reserve Bank’s move to claw back from margin. By the looks of it the Reserve Bank called around the banks for a word in their ears regarding not undermining monetary policy by discounting rates as we saw happening 2-3 months ago. So, banks probably felt it was safe to boost margins for a while.

But then come April 20 we saw the annual inflation number come in at 6.7% and not the 7.1% expected by analysts. More importantly, the 6.7% outcome was 0.6% lower than what the Reserve Bank was anticipating. This adds to a growing number of data releases which have been weaker than expected by our central bank.

These developments in conjunction with still high levels of business and consumer pessimism,
downwardly tracking measures of inflation expectations, easing inflation gauges offshore, and the coming lagged effect on homeowners of resetting fixed rates imply the greatest part of the inflation threat is now well behind us.

Market attention is starting to turn to when interest rates fall, and the chances of another cash rate increase come May 24 are not that high. But it would be very premature to start thinking that the Reserve Bank will soon feel comfortable enough with the inflation outlook to say they are seeing scope for rates to fall.

Inflation of 6.7% is still much too high, especially with the unemployment rate still exceedingly low and the housing market being well into the endgame of its period of falling prices. The next move in mortgage rates is likely to be downward and 3-5 year fixed rates have already appreciably declined. But relief for the 1-2 year rates may not come until Spring.

With regard to the housing market, REINZ data show that in seasonally adjusted terms nationwide prices on average only fell by 0.2% in March. This followed a 1.1% fall in February and average 1.1% decline each month since December 2021. House prices may almost have bottomed out.

When will they start rising, and when they do, how quickly will they go back up? These questions cannot reasonably be answered, not least because some of the biggest factors which influence house prices are undergoing substantial changes.

First, the pace of population growth has firmly accelerated in response to net migration flows producing a gain of 52,000 in the year to February from a loss of 20,000 12 months earlier. More people will eventually mean more pressure on the rental market, rising rents, and rising house prices. But we don’t know when the many tens of thousands of people who have held off buying since 2021 will realise what is happening with migration, acknowledge the pricing implications, then act on the
removal of fears that prices will fall further.

Second, we also don’t know when people will realise that the pace of growth in new house supply is going to fall for a 2-3 year period starting a few months ago. Dwelling consent numbers have fallen slightly but look set to decline a lot more with architect firms laying off staff in recent months as early design work has dried up.

Third, we cannot know when potential house buyers will have reduced fears about further interest rate rises and decide to step into the market to make a purchase.
There are many people waiting for house prices no longer to fall and interest rate prospects to look better before coming out of the woodwork to buy. But the clock is ticking and first home buyers in particular should (if they can meet 8.5% bank test mortgage rates) consider how buying at the moment means little competition from investors in particular. The stock of properties listed for sale is also unusually high so one has an ability to pick and choose that has not been present for many years.

But this period of high stock availability risks changing quickly over the second half of the year.

The residential real estate market has been falling and remains weak. But there are signs of things getting close to turning. The factors which drive prices up during the cyclical recovery are looking interesting from a price appreciation point of view – eventually.

For now, weakness still prevails. But the clock is ticking down the time for the weakest real estate market conditions since the GFC – and longer from a price decline perspective.

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By Tony Alexander

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