Post by John Bolton - Squirrel Founder
Check out JB's latest market update below, or scroll down to read the full article:
And there it is, finally... The break in interest rate hikes we’d all been waiting for.
This week’s Official Cash Rate (OCR) announcement on Wednesday, has seen the Reserve Bank stay true to its word, holding things steady at 5.50%.
It’s no real surprise, after RBNZ Governor Orr clearly signaled back in May that increases were done and dusted – but some parts of the markets had started to speculate in recent weeks that we’d still need further increases to get inflation properly under control.
Thankfully, they’ve been proven wrong.
The RBNZ has said that interest rates will stick at the current level for the “foreseeable future”. But given the reality of how things are tracking in the economy, my sense is that “foreseeable” is probably only a few months out at this stage.
That’s because, from what I’m seeing and hearing among business owners, things are getting harder, and fast.
Confidence is still really subdued, consumer spending has dropped massively, and businesses are being forced to dial right back on plans for growth and capital expenditure. Our economy is slowing down at pace.
Chatting to a client recently who’s just returned from a big stint in the UK and US – they’ve been struck by just how depressed the mood is in New Zealand right now, compared to overseas.
And between the impact of high interest rates, major weather events, the uncertainty of an election year, and (to top it all off) a cold and rainy winter, it makes sense that’s where we’re at.
Then, globally, there are some big forces playing out that are going to have a very real impact. The huge slow-down in China’s economy in particular presents a big risk. It’s the first time in a very long time I’ve heard anyone roll out the word “deflation”– and if there’s one thing that scares Central Banks more than inflation, it’s that.
So, in terms of when we’ll start to interest rates come back again…while some are still predicting it could be as far away as the middle of 2024, increasingly there are those who think we’ll have some relief before the year is out.
I’ve said before that the Reserve Bank has a tendency to be too slow to move at either end of the economic cycle.
And I suspect that when it does finally start to drop rates, it’ll be a reactive move, once it’s already abundantly clear that the economy has slowed down faster, and for longer, than it needed to.
That means that when rates do drop, it’ll happen fairly quickly and without any warning.
So, it’s really anyone’s guess as to when that’ll be.
Over the last 18 months, New Zealand’s housing market has sustained price falls bigger than those we had during the Global Financial Crisis.
In Auckland and Wellington, we’re talking close to 20 per cent off the “sticker” price of homes. When you factor rampant inflation into the mix, the fall is probably closer to 30 per cent.
The general consensus now, though, is that the market has finally bottomed out – and we should start to see a small increase in house prices between now and the end of the year, as stability comes back into the market.
It won’t be massive, but it will be the beginning of a slow recovery.
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