Pulling New Zealand’s purse strings

Significant moves by the world’s leaders, including the United States Federal Reserve and the newly minted Government in the United Kingdom, have reverberated across the global financial system, impacting property prices in New Zealand.

Currencies worldwide have been hammered this year by aggressive tightening of monetary policy by the world’s most important banks as they attempt to stamp out inflation following a decade of ultra-low interest rates and money printing during the pandemic.

TALKING TOUGH ON INFLATION

Greater interest rate hikes continue to loom large on the horizon in many countries prompting the World Bank to note it could be too much, too soon. While observers fear that the United States Federal Reserve (the world’s most influential central bank) will face a recession due to the fastest rate-hiking cycle since the 1980s.

In response to this, and announcements in Britain which saw the incoming government promise to cut taxes and increase borrowing, the New Zealand Dollar (NZD) has fallen 19 percent over the past six months, and it continues to trade at a 13-month low*.

This is important because the Reserve Bank of New Zealand (RBNZ) ultimately wants to see the inflation we’ve inherited from the rest of the world – vis-à-vis the United States Dollar (USD) appreciating and effectively exporting inflation globally - come lower, and domestic economic activity slow too.

The Reserve Bank of New Zealand ultimately wants to see the inflation we’ve inherited from the rest of the world – via a vie the United States Dollar (USD) appreciating and effectively exporting inflation globally - come lower, and domestic economic activity slow too. Unfortunately, a weaker currency works against both of those things.

Unfortunately, a weaker currency works against both of those things.

So, we could likely see the cycle of Antipodean interest rate rises last longer and move higher than previously thought as the RBNZ battles to control homegrown and international inflation pressures.

WINNERS AND LOSERS

Importers and those bringing critical building materials into New Zealand, including cement fibre, bricks and roof tiles, are facing higher costs for goods overseas. This stands to impact the building and construction sectors most significantly through higher prices which may filter through the pipeline, resulting in the end consumer footing a more expensive bill for home renovations and new-build housing.

Despite this, supply chain pressures are beginning to ease, so while the cost of imported items stands to rise, the burden of getting them here is reducing.

On the flip side, the firmness of New Zealand’s export industries will continue to be an essential buffer for economic conditions over the coming months. Primary exporters for dairy, beef, forestry and horticulture are positioned to enjoy higher returns that could find their way back to the economy through higher discretionary spending on goods and assets.

The lower value of the NZD on the world stage also creates uncertainty. For example, stock markets have fallen because investors believe the United States Federal Reserve is determined to bring inflation down by raising interest rates until it succeeds.

For Kiwis, the expectation of economic uncertainty has a trickle-down effect on the housing market. As a central component of the economy, this can considerably impact consumer confidence.

Uncertainty can see Kiwis less prepared to make the big decisions – a phenomenon we have seen evidenced by weaker transaction numbers for residential property throughout the year.

We have seen uncertainty ripple through financial markets, with an effect on our KiwiSaver balances as well as the New Zealand Super Fund. It’s also thought we are particularly sensitive to the expectation of interest rate changes due to such high household mortgage debt.

With New Zealand being the first economy in the world to pursue a rate-tightening cycle following the pandemic, it is interesting to see early signs that the fog of uncertainty may be lifting – in spite of global currency turmoil.

Housing data from August shows a more than nine percent bounce in sale volumes, with this metric a leading indication of strengthening demand as we head toward the busier spring and summer months.

TO YEAR-END

Central banks worldwide will continue to tighten monetary policy settings rapidly as we lean against the bubbling inflation pressures threatening our economies. At the same time, geopolitical tensions and the war in Ukraine have impacted commodity and financial markets.

While the current global picture presents rather bleak, New Zealand’s Finance Minister Grant Robertson recently noted Kiwis are well-positioned to manage a volatile environment. He cites low unemployment, low public debt and reasonable economic growth during the pandemic as reasons for optimism in our corner of the world.

While the current global picture presents rather bleak, New Zealand’s Finance Minister Grant Robertson recently noted Kiwis are well-positioned to manage a volatile environment. He cites low unemployment, low public debt and reasonable economic growth during the pandemic as reasons for optimism in our corner of the world.

Global inflation and interest rates have set the base for ours here in New Zealand, and house prices have been driven to dizzying heights by lower global interest rates in combination with land supply restrictions.

Furthermore, tax rules in New Zealand have historically favoured housing against other investments, meaning house prices have been highly influenced by employment and incomes, bank lending rules, and the availability of mortgages.

At the same time, New Zealand’s Reserve Bank has moved to keep short-term interest rates and inflation low while creating stability through employment at its maximum sustainable level.

The factors driving housing demand have shifted with an effect on value growth over the last 12 months; mortgage lending rates are rising, building activity has increased, and population growth has been muted.

Current movements, however, are all part of the economic cycle. So, while KiwiSaver balances have taken a hit, they will recover – and observers expect this period of calibration for the global financial community will turn around again, just like residential property values in the medium-to-long term.

*At the time of writing, September 2022.

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