Down but not out: Making sense of NZ's housing market and economy

Housing Market Written by John Bolton, Oct 17 2022

With so much going on out there in the news mix, it’s hard to make sense of it all. 

A lot of our domestic headlines right now are dominated by falling house prices, climbing interest rates and then inflation.

Outside of NZ there’s a major energy crisis in Europe, a war in Ukraine and just last week, Xi Jinping, China’s autocratic leader, was re-appointed for a third term. Then there’s talk of falling share markets, crashing Crypto and the prospect of a global recession.

The underlying themes that pervade our news sound bites are of the end of “free” money, and the rise of geopolitical risk. We can’t do anything about geopolitics, so let’s focus on the economic side of the equation.

In New Zealand, we’ve been through a period of insanely low interest rates, with the OCR dropping to 0.25% in the midst of COVID – ushering in an unheralded period of monetary stimulus. At the same time the Government has compounded things by loosely throwing money around.

Initially, that washed through asset prices, and we saw everything hit record levels.  However, with COVID supply-side disruption and a pullback from globalisation, these forces eventually translated into the dreaded inflation. 

And that’s where we find ourselves now.

Inflation is scary, but there are lots of forces at play that are starting to bring it under control.

To start with, the Reserve Bank of New Zealand has gone incredibly hard on interest rates to tame inflation. We’ve had an unprecedented hike in the OCR from 0.25% to 3.50% in the space of just one year, and home loan rates have more than doubled from 2.00% to 5.50%.


At the same time, an incompetent Government has set about breaking the NZ productive economy. We’ve lost sight of the most basic economic principle – that we can only spend what we earn, and we only earn by going about business. No amount of wishful thinking or fairy dust puts money in the tin.

The thing with a slowing economy (not just in New Zealand, but around the world) is that it will eventually take the pressure off inflation and interest rates, but maybe not just yet.

Commodity prices are also falling. The Materials Price Index of commodity prices is down 11% year-on-year, even after factoring in higher energy costs.

And shipping costs have plunged, as the world economy slows. The Drewry World Container Index, which measures the cost of transporting a shipping container across major shipping routes, is down more than 60% year-on-year.

Apart from the challenge of severe labour shortages (which continue to plague economies all over, not just NZ’s) all of the supply-side issues that kick started the current bout of inflation have evaporated.

High interest rates will bite and take billions out of the economy in terms of discretionary spending. That will put our retail sector under pressure. And without a full resumption of tourism, hospitality is likely to struggle.

Whilst construction activity has remained strong as builders push to catch up on incomplete projects, by 2023 the forward order book will have started to dry up – and we’re likely to see a weakening of the private construction sector.

And a weaker economy and increasing immigration will help to take the pressure off labour shortages as well.

All-in-all our economy will slow, and much of the services economy will come off the boil. 

A slower economy will also take the pressure off interest rates. For a long while now we’ve been saying peak mortgage rates will be between 5.50% and 6.00%, and I’ve yet to see anything to change my mind on that.

House prices are down 15.00% in nominal terms, which unwinds the meteoric rise in house prices we saw last year – and that’s largely the result of higher interest rates. In inflation-adjusted terms, house prices are down 23%, taking them back to where they were in December 2015, so we’ve seen the impact of unusually low interest rates fully unwind.

With interest rates stabilising and the economy opening, my expectation is that the nominal drop in house prices is largely done in the absence of other macro issues. We are at full employment and homeowners are experiencing higher household incomes.

From a global perspective, debt-fuelled consumption is coming to an end thanks to a combination of higher interest rates, and high absolute levels of debt. Borrowed money always has to be repaid eventually, and that helps to limit people’s future consumption.

It also feels like we’re becoming more conscious of the environmental impact of our consumption habits – trending away from buying things that don’t last, that we don’t need and buying “junky” gifts for unsuspecting loved ones. And that’s a great thing.

But slowing consumption has implications, most significantly in the form of lower long-term global economic growth.

A weaker global economy (and higher interest rates) will continue to hit global share markets that are already down over 25% this year. Higher interest rates turn into weaker growth which eventually translates into weaker business profits.

Even though we're due another cyclical recession, New Zealand is still pretty well positioned in the medium term.

That’s because we produce stuff that people need, we’re about as far away from trouble as you can get, and we have a moderate ‘liveable’ climate. We’re one of the only countries in the world that is self-sustainable, which sounds a bit nihilistic.

The world is far from coming to an end, and there are plenty of reasons to be optimistic about New Zealand’s place within it.

As inflation gets under control, expect to see interest rates fall, with mortgage rates coming back to around 4.50%.

House prices will stabilise, we’ll start to see new areas of innovation that deliver more value to consumers and make our lives better, and the world will keep turning, just like it always has.

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