Job security matters in this market, according to Tony Alexander

In both January and February this year the number of residential properties sold around New Zealand was the lowest since records started in 1992. This weakness reflects not just the quick rise in interest rates from excessively low levels during the pandemic, but also the prediction of recession by the Reserve Bank on November 23 last year.

Maybe we have a recession, maybe not

From my point of view it doesn’t actually matter all that much unless we see the sort of jump in the unemployment rate observed during previous periods of economic shrinkage. But that is very unlikely.

Businesses may be reporting high levels of pessimism about the economy, but they continue to note that they cannot find either the skilled or unskilled staff they want. This, even allowing for a surge in net migration annual flows from -16,000 seven months ago to +33,000 in the year to January.

A distinguishing characteristic of this period of economic challenge (a term I prefer to recession) is the tight labour market and ongoing high job security. This helps explains why first home buyers have returned to the market and remain there despite the recent disturbance in the United States banking sector and some worries about a broader banking correction.

First home buyers kicking into gear

My most recent survey of real estate agents around the country, still underway, shows after 460 responses that a net 20% of agents are seeing more first home buyers in the market. This is essentially the same as the net 22% result last month and well removed from -3% at the end of January.

Investors however remain as absent as ever with a net 47% of agents seeing fewer of them this month from a net 41% fewer last month and net 55% at the end of January. Tax changes explain most of the absence of investors but high interest rates also matter a lot when one is actively considering alternative income yielding assets like equities and even bank term deposits.

So, what we can say for now is that US ructions have not altered the state of the NZ housing market

That is actually an interesting result for this reason. Worries about US banking have led US banks to reduce their willingness to lend and this implies a slightly worsened outlook for US and therefore world economic growth.

In effect, the collapse of Silicon Valley Bank early in March has acted as a de facto tightening of US monetary policy. This has caused falls in bank wholesale borrowing costs here in New Zealand and more people will now be falling into line with my long expressed view that we have seen the peaks for fixed mortgage rates here a couple of months ago.

This may not mean that we are facing a rapid fall in borrowing costs from here because inflation remains a deep problem. But just as absence of worries about worst case scenarios for mortgage rates has encouraged some young buyers back into the market, a few owner occupiers looking to shift will also start to ease back from their rate worries.

All of this adds up to some further weakness remaining likely in house prices and turnover as we head through autumn and winter. But either mid-year or just ahead of the election a wider return of buyers to the market is likely, attracted by

1. lower prices,
2. good job security,
3. discussion of accelerating population growth,
4. rent rises,
5. improving bank willingness to lend (to meet sales targets), and
6. hopes of interest rate cuts late this year.

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