Tony Alexander Update Nov 2022

Cycle bottom delayed

Thank goodness in my last column I wrote that the outlook for interest rates had deteriorated somewhat. This was hammered home a couple of weeks ago when the annual inflation rate in New Zealand came in almost 0.7% higher than expected.

Admittedly, we shouldn't have expected much downward pressure on the rate of inflation just 12 months after the Reserve Bank had started raising monetary policy. It usually takes 18 to 24 months for the effects of higher interest rates to be seen in inflation rates. But we were all hopeful and, in the event, those hopes were dashed.

Now, interest rates have moved up and banks have responded by raising their fixed mortgage rates about 0.5% across the board. With any luck these are now the cyclical peaks for fixed mortgage rates. But the environment we are going through is one of many uncertain factors and new shocks seeming to come along with greater frequency than in the past.

For instance, climate change is leading to greater than normal flooding in some parts of the world and droughts in others with the result that crop yields are falling. This is placing upward pressure on food prices which not only increases international tensions but boosts inflation and therefore interest rates a bit more. The on and off again permission by the Russians to allow grain out of Ukrainian ports is also a source of volatility in international food prices.

Fortunately for New Zealand we are a food exporter. Therefore, in times of an international food crisis our farmers tend to do well. This is our version of what happens in Australia with the Russian invasion of Ukraine causing soaring prices for coal and gas which are key exports for the Australian economy. Australia is also benefiting from high grain prices and record grain volumes recently because of rain in the past year on the eastern seaboard.

The downside for the New Zealand housing market from good international food prices is that the extra income for the farmers and in the regions is clearly a boost to the New Zealand economy. But this comes at a time when the Reserve Bank is trying to slow down the pace of growth in our economy and crunch consumer spending by getting the unemployment rate up.

But the labour market in New Zealand is at capacity. There may be almost 100,000 people receiving the dole, but they by and large do not offer what employers are seeking. A clear implication of the tight labour market is that wages growth will accelerate a bit further. Offsetting this from a housing market point of view is that the high job security for first home buyers in particular will keep them interested in making a home purchase.

I can see from my monthly survey of real estate agents that the most recent increase in interest rates has had its biggest impact on investors. Just one month after they were starting to show some interest in the return of first home buyers to the market, they have stepped back strongly again because of the rising finance costs. This is quite a problem as they contemplate the impact of tax changes announced last year for interest expense deductibility.

There's about a 70% chance that we are now at the peaks for fixed mortgage rates. Banks are eager to lend even though they are applying far tougher lending criteria than has been the case for almost all of the past three decades apart from very late last year and early this year when they were grappling to understand the implications of changes to the Credit Contracts and Consumer Finance Act in particular.

I still think we are in the endgame for this phase of a declining housing market around New Zealand. But because of the interest rate increases we should push out the probable bottom for the cycle from the turn of the year into autumn of 2023. After that, with assistance from an improving outlook and expectations of interest rates falling from the end of the year, I'd expect to see a slight improvement in real estate turnover and a general bottoming out of prices for the country on average.

Some regions however look to be slightly oversupplied with property. With an ending of the period when older homeowners have been cashing up in the big cities and shifting early to the regions
because of the impact of the pandemic, there is a risk that the downward price correction continues in some regional parts of the country through much of 2023.

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By Tony Alexander

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