A rock and a hard place

Showing resilience in the face of rapidly rising interest rates and house values coming off the boil from their November 2021 peaks, New Zealand’s economy is faring pretty well. Yet, it’s just that idea which could keep the Reserve Bank of New Zealand’s foot on the interest rate accelerator, as they work double duty to dampen consumer demand.

Across the national housing market, the slowdown has been palpable with global economic uncertainty a leading cause for buyers and sellers adopting that ‘wait and see approach’. With fewer concluded transactions the Real Estate Institute’s Housing Price Index data for September reflected the fact that prices have fallen just over 10 percent nationally, although – this only takes values back to where they were in April 2021.

The gradual unwinding of the out-of-cycle pandemic stimulus that saw asset prices rise and homeowners net significant equity gains has so far been orderly and relatively painless with very few homeowners currently under significant financial pressure.

However, economists are forecasting dark clouds on the horizon as current market fundamentals continue to create headaches for policymakers.

DOMESTIC INFLATION

Statistics New Zealand’s recently released Consumer Price Index (CPI) inflation data for the third quarter 2022 painted a concerning picture. While headline inflation fell, core inflation continues to accelerate, with domestic sources of inflation proving the most persistent to tame. Non-tradable (domestic) inflation hit a fresh record high this September, despite the central bank having hiked the Official Cash Rate by 325 basis points since the start of the year.

Factors including high construction activity and near record-low unemployment continues to push domestic inflation higher, and markets have now fully priced two 75 basis point hikes to the OCR at the RBNZ’s next two Monetary Policy Statements later this month, and again in February.

Should wage growth remain high, Kiwis stand to benefit by being better prepared to absorb higher costs. However, resilience will require attention, namely in the form of further rate rises from the central bank, as cooling demand rather than stabilising it remains their key focus for the economy.

GLOBAL INFLATION

The global economic landscape continues to change at a rapid rate of knots, despite recent data showing tradables, or factors which are imported/have their prices affected by exchange rates/offshore influences have eased from last quarter’s result.

The Russia-Ukraine war, political upheaval in some of the world’s leading economies, and the ongoing pivot away from globalisation has seen international inflation rise persistently over the course of the year. While this has a lesser baring than domestic inflation pressures, global swap rates are a key influence on mortgage lending rates, with higher swap rates likely to be passed on to borrowers through higher interest rates.

MORTGAGE LENDING RATES

How high mortgage lending rates may rise depends on a variety of factors including the RBNZ’s monetary policy settings, inflation and bank funding costs including swap rates.

While the path forward here is difficult to discern with any degree of accuracy, higher market expectations for a rising OCR likely signals higher mortgage lending rates, and sooner than previously expected. This is likely to impact house hunters’ ability to borrow and perhaps their appetite to take on additional debt at this time.

MIGRATION

With latest data showing domestic tourism has hit over the one million mark for the first time since the pandemic in the year to August 2022, it’s pleasing to see the positive effect on local businesses by demand in the economy getting a sizeable boost from the reopening of international borders and return of international tourists, which is a bright spot in the economy. While our domestic population continues to play catch up after several years of negative population growth, Statistics New Zealand has recently reported that inter-region migration has risen, with residents from main centres like Auckland and Wellington looking for affordability and lifestyle in other regions. So far, sales data has shown the decline in house prices have generally been larger in regions with the weakest population growth, and we see any recovery of net migration as providing upside for local housing activity.

EMPLOYMENT

Billed by research firm CoreLogic as the difference between a ‘housing market correction and a more serious slump’, the unemployment rate at 3.3 percent remains near record lows and job prospects remain strong with a tight labour market fuelling wage growth. Significant employment prospects and rising wages are undoubtedly contributing to Kiwis’ ability to pay higher costs, with a substantial effect on general market sentiment. Despite this, leading economists say positive wage growth is inflationary, and has the potential to add upward or stabilising pressure on house prices. Wage growth and employment in 2022 has done well to place a floor underneath the residential housing sector, hwoever, persistent wage growth could see the RBNZ push the OCR even higher, restricting any positive upside for residential values.

LEGISLATION

Sweeping changes proposed under the National Policy Statement on Urban Development (NPS-UD), particularly those pertaining to Medium Density Residential Standards (MDRS) stand to greatly impact the residential sector if enacted. By allowing up to three townhouses of up to three levels on most land sites in our largest cities without the requirement for resource consent, there could likely be a upward pressure on preferable sites with development potential. Equally, single homes positioned in areas changing to high density could see property values impacted significantly begging the question whether it’s time to get ahead of the changes.

POLITICS

New Zealand’s households have a disproportionately high level of household wealth tied into residential assets when compared with the OECD, making any significant moves to meaningfully reduce house prices a political football. In addition to this, the country’s next general election looms large on the horizon, with an already demonstrable effect on buyer/seller behaviour illustrated by property investors which are biding their time to see if a change in the government guard will reverse the tax legislation implemented by the Labour Government in X which removed the ability of property investors to deduct rental income from mortgage repayments on their investment properties.

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