Interest rate outlook sours

Guest post from Tony Alexander

It is somewhat ironic that at the same time as we are seeing first home buyers return to the market and investors pricking up their ears, prospects for interest rates have worsened. Offshore we have seen higher than expected inflation data in the United States and stronger than anticipated numbers on the likes of new house sales, consumer confidence, and business investment.

The latest from around the globe

The altered outlook for US growth and inflation has driven a surge in expectations that the Federal Reserve Bank will need to raise its cash rate higher than previously thought and keep it up for longer. That latter aspect is certainly something officials have been strongly stressing as they push back against optimistic thoughts regarding the ease with which inflation can be brought down.

Of great significance this past week has been a radical loosening of fiscal policy (tax cuts) in the United Kingdom at the same time as the Bank of England is pushing interest rates up to try and slow the pace of growth in the economy and get inflation back down. The obvious conflict between fiscal and monetary policy has caused the British pound to fall to a record low against the US dollar and interest rates to radically spike higher.

The markets now expect the Bank of England cash rate will have to be pushed towards 6.5% as compared with peaks of 4.5%+ generally anticipated in other countries.

The IMF has even issued a warning about the unsustainable path which UK government finances and inflationary pressures now seem to be on and the flood of concern about the situation has caused a flow of money to go into the US dollar.

The jump in global risk aversion has seen the NZ dollar fall away to its lowest level against the US dollar since 2009 and against the Aussie dollar (lifted by strong minerals prices) since 2014. A lower NZ dollar means higher import prices and that is how the extra tightening of monetary policies offshore feeds through into potentially tighter policy here.

What does this mean for buyers wanting to get into the property market?

All of this means we are going to see another round of fixed mortgage rate increases any day and the question becomes does this mean the lift in first home buyer demand will be nipped in the bud? Probably not.

Average house prices in New Zealand are now more than 12% below their peaks of late-2021 and the declines are making many buyers think the cyclical bottom in prices is not too far away. They want to take advantage of the doubling of property listings from a year ago to secure a home.

The availability of credit is improving as banks get used to the new CCCFA rules and some of those rules having been eased from July 7. The price limits for accessing special financing deals with Homes and Communities – Kainga Ora – have also been lifted and that has made purchasing more viable for young buyers.

Over 200,000 people are becoming permanent residents in a special shift from working visas and that means they are able to legally buy a property. Reports from real estate agents show that this is already happening, especially in Auckland.

Investors are becoming more interested in the residential real estate market again as they see share prices falling away and contemplate the direction in which political polls are going. National have promised to reinstate interest expense deductibility when they get re-elected and if that happens late in 2023 then many investors who have been out of the market since the end of March 2021 will step back in. One suspects first home buyers know this and that is providing extra encouragement to buy.

Therefore, while the outlook for a small new lift in mortgage rates will cap the extent of Spring strength in the housing market, other underlying fundamentals tell us the turning in the house price cycle is still probably not all that far away.

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