Market update: Even with recession on the horizon, it's not all bad news

Housing Market Written by John Bolton, Dec 19 2022

Since we last checked in for a market update, the big news has been the Reserve Bank’s final Official Cash Rate (OCR) announcement of the year, which rolled through late last month.

The RBNZ came out swinging – yet again – pushing through an unprecedented triple hike (0.75%) to take the OCR to 4.25%, the highest it’s been in over a decade.

Alongside that, the RBNZ issued a revised forecast that the OCR will now peak at 5.5% next year (higher than previously expected) – and admitted that it’s now actively tipping New Zealand into recession as it attempts to bring inflation under control.

For homeowners already feeling battered by increase after increase this year, and the impact of rising mortgage costs, it’s not the end to the year they would’ve been hoping for.

So, will the OCR really get to 5.5%?

Personally, I doubt it, and I’m seeing evidence to suggest that the market’s having its doubts as well.

My reasoning here is that since the announcement was made, we haven’t seen the sort of major spike in wholesale interest rates that we’d usually get after such an aggressive OCR move. In fact, we’ve seen quite the opposite.

Shorter-term wholesale rates have gone up, and may even have a little further to go – but longer-term fixed rates (in that 4- to 5-year range) have been falling. They’re actually now down on where they were when the RBNZ made its announcement.

This tells us the Reserve Bank’s thinking is at odds with the wider market

Even as the RBNZ forges ahead with more aggressive hikes and rhetoric, what’s happening with wholesale rates suggests the market believes previous rate increases are already doing the trick.

That is, that they’re slowing the economy down, and quickly.

In other words, we’re seeing a real friction between the RBNZ, convinced that further drastic measures are needed to try and stamp out inflation, and a market that increasingly thinks the job’s done – and we just need to give it some time to trickle through. 

If the market’s got it right (and I think it has), the OCR won’t need to climb as far or as fast as the RBNZ is currently planning for, and interest rates should start to come back faster than indicated, too.

The most important thing in this environment is to plan ahead.

While it’s a scary time with interest rates as high as they are, the longer-term fixed rates we’re seeing out there now – up around 6 and 7 per cent – are about as high as we’ll see rates go, before they start to come back again towards the end of next year.

The next 12 months or so will be tough, there’s no doubt, but there is some relief on the horizon.

For anyone heading for a fixed rate rollover next year, I’d strongly encourage you to take the opportunity now to plan ahead – get clear on the impact that’s going to have in terms of your cashflow, and the changes you’re going to need to make to cover the extra cost.

If you’re wondering where to start in terms of getting prepared, we’ve got some good tips and tricks to consider over on our blog.  

Things are feeling pretty bleak out in the housing market at the moment, but the foundations are being laid for a recovery.

There’s no denying there’s a lot of negatives playing out in the market right now.

House prices are down about 15%, and they could easily have further to go. And with interest rates climbing and recession on the horizon, it’s ironically getting harder to buy. And the removal of tax deductibility on rental properties is creating fresh challenges for investors too.

Throw in the constant barrage of scary headlines – like the one doing the rounds lately predicting a 40% fall in house prices, once adjusted for inflation – and it’s really easy to get stuck in a negative mindset about property right now.

But, while it feels a bit like the end of the world at the moment, we’ve been here before.

We’re in the downturn of that classic boom-bust cycle that New Zealand has unfortunately repeated so many times over the years – we’re useless at maintaining any sort of stability – but things will bounce back.

And, while I’m not saying it’s going to happen tomorrow, even as we head towards recession there are some green shoots already starting to show through. 

Part of it comes down to the state of our construction sector.

With the housing market having slowed down like it has, the bottom’s pretty much dropped out of our residential construction sector in recent months.

Between falling house prices, higher construction costs, and the premium that was being paid for development land last year, the money side of the equation just doesn’t stack up for most developers anymore.

So as much as there’s been all this talk about record-high consenting levels over the last year, the fact is that most of that consented property will never be built.

And with build activity having fallen off a cliff, we’ll start to see builders and others in the construction sector increasingly moving off-shore in search of work, to Australia and probably further afield.

Then, when the market starts to pick back up again, it won’t just be a matter of flicking a switch. It’ll take years to rebuild capacity.

In the meantime, unless the government steps in to fill the void (which it probably won’t) we’ll be right back where we started – with a shortage of housing stock. And when it happens, that’ll help support a recovery in house prices.

Add immigration into the mix – and that’ll have a big impact, too.

I’ve seen a couple of things happen in recent weeks that’ve highlighted the huge demand that’s already out there for rental properties.

The first is my own experience of trying to sell.

Up until the start of December, we’d been trying to sell one of our properties for about six months. We’d dropped the asking price a couple of times, to the point where it was about 20% below what we could’ve sold it for last year. Still no bites.

We’d been prepared to consider lower offers, but it was starting to feel a bit ridiculous, so we made the call to take it off the market. It was a move I’d been pretty hesitant about to be honest – my thinking being that if it wasn’t selling, we’d probably struggle to rent it out with all the “excess stock” out there.

But within 12 hours of listing it for rent (literally overnight) we’d had a dozen applicants.

It’s a good property, because we’d renovated to sell, but I was still pretty staggered by the demand, and people desperate to find a property to rent.

So that’s the first thing. The other thing is some of the feedback I’ve been getting from people I know within the immigration sector.

A friend of mine is in the process of trying to bring a couple of thousand people over to help address critical skill and labour shortages in sectors like healthcare and transport (truck and bus drivers), among others.

And the single biggest challenge they’re facing is accommodation. They just can’t find enough accommodation to house the people they’re bringing to NZ.

Apparently, since COVID hit, we’ve lost about 30% to 40% of our accommodation pool for working tourists – it’s been converted into emergency housing, or apartments, or otherwise developed – so of course it’s harder to find.

With a decimated construction sector, what’s going to happen when we’re back to welcoming 50,000+ people to NZ shores every year?

And how will demand for rental properties support house prices?

One of the main things that keeps prices dropping is fear.

If vendors are genuinely fearful of where the market’s heading, to the point where they’re willing to exit a property at any price, then prices will keep on falling. But if people feel like they’ve got alternatives, that fear starts to evaporate.

Something I’ve seen a lot of in previous housing cycles is that it gets to the point where more and more vendors start doing exactly what I’ve just done. They’ll be prepared to sell at a reasonable price, but if there’s no interest, eventually they’ll pull the property off the market and put it up for rent. Sure, it might mean negative servicing, but it’s a better outcome than selling for a ridiculously low price.

And once vendors start pulling back from the market in greater numbers, the market will freeze, and prices will stop falling.

I think it’s going to be really interesting to watch what happens over the next few months, as the impact of that starts to trickle through.  

Basically, we’re in the middle of a very predictable cycle.

Right here, right now – between higher interest rates, falling house prices, and the fact we’re heading into recession – the housing market’s pretty scary.

But with construction levels grinding to a halt, and immigration starting to pick up, the foundations are already starting to be laid for the next boom.

The NZ Treasury is forecasting house prices to have fully recovered by 2026, off the back of higher household incomes and lower interest rates. So looking out 2-3 years, things don’t seem quite so bleak.

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