Post by John Bolton – Squirrel Founder
The Reserve Bank (RBNZ) has had some big surprises up its sleeve for us over the last 18 months.
By contrast, this week’s Official Cash Rate (OCR) announcement was about as predictable as they come.
Sticking to the path it laid out for us in July, the RBNZ has opted to hold the OCR steady at 5.50% — and the “big themes” of its commentary remained broadly the same.
It’s seeing plenty of evidence that higher interest rates are having the desired effect (the economy is slowing, and inflation is coming under control) so there’s nothing to suggest rates will need to go any higher.
And it’s still anticipating that things will need to stay at this level for “the foreseeable future” — although it suggests it could now be as far out as 2025 before rates start to fall, rather than the mid-2024 timeline given previously.
We haven’t seen any major changes to mortgage rates off the back of this week’s announcement, and I’d be very surprised if we did.
The banks (rightly) copped a lot of flak for hiking interest rates after the last OCR announcement on 12th July, even though there was no change then either — so this time round, I think they’ll keep things exactly as they are.
There are a lot of recessionary forces at play out there right now.
There’s the recovery in immigration, which has taken some serious wage pressure out of sectors like hospitality and retail. We’re now seeing the unemployment rate starting to climb, slowly but surely.
And with National and ACT having said they’ll significantly reduce the size of government if they win the election, that would help to address talent shortages within the private sector even further.
Food prices also seem to be normalising somewhat, as we recover from the short-term inflationary impact of the weather events we had at the start of the year.
The RBNZ called out slowing global economic demand as a major factor for consideration, which is starting to have a negative effect on exports and commodity prices.
Fonterra just announced a 12.5% cut to dairy payouts as a result of reduced demand in China. That alone will mean roughly $1.4 billion less flowing through New Zealand’s economy.
I’ve talked before about the fact that China’s economy is in real trouble right now. And ultimately, I think what’s happening there is going to have major implications for New Zealand, and how quickly interest rates start coming down again.
Consumer confidence has completely evaporated in recent months, and demand has fallen out of their economy.
It’s spelling trouble for China’s manufacturing sector. After expanding production in recent years, falls in domestic (and global) demand are creating a large oversupply problem.
As a result, manufacturers are dropping prices to try and get rid of excess stock. Over supply means less demand for resources and falling commodity prices.
Its housing market is also extremely weak. We’re hearing more and more stories emerging of developers either collapsing or defaulting on loans. China has been on a debt-fueled property binge for the past decade — and if you think NZ prices are high relative to incomes, that’s nothing compared to China.
Indications are that even food prices in China are deflationary now, which shows just how ‘relatively’ weak its economy is.
I’ve said before that deflation is probably the one thing Reserve Banks fear more than inflation, and for good reason.
China is our biggest trading partner by a long shot. Ditto for Australia. And so the consequence of that for our economies promises to be significant.
New Zealand’s export sector had still been performing relatively well for us of late, even while other parts of the economy, like construction, retail and (to an extent) hospitality have taken a big hit.
But now, with weakening demand overseas — particularly in China — we’re seeing weakness emerge in our export and commodity prices as well.
There is no good news in that equation.
Bear in mind as well that the screws are still being tightened on Kiwi mortgage borrowers as more and more of us roll off lower fixed rates onto rates around seven percent. That’s more money coming out of our back pockets, at a time when all these major parts of our economy are weakening.
To me, all of this suggests that we’re headed for quite a big, extended recession. It might not cut too deep, but it is going to be around for a while.
And when the RBNZ insists rates will have to stay high for the foreseeable future, I don’t think these risks are factored in yet.
So, even though most economists will be working towards a 2025 date before rates fall, if the risks I’ve discussed materialise, I wouldn’t be surprised if it starts happening around the middle of next year.
This is just my view of the world, so only time will tell who’s right.
It’s not unusual for Kiwi to fence-sit in the lead-up to an election, as we wait to see which way things are going to go. And that’s exactly what’s happening in the housing market right now.
The Wellington housing market is always wobbly in an election year. It doesn’t respond well to the prospect of a National-led government, because that means big job cuts within the civil service.
ACT has already said it plans to halve MBIE’s workforce (the Ministry for Business, Innovation and Employment). In number terms that’d mean roughly 3000 job losses.
It makes sense that with this kind of uncertainty people in the Capital are sitting on their hands and waiting it out, until they feel like they’ve got some job security back again post-election.
But it’s not just Wellington. The rest of New Zealand is watching and waiting too.
For investors in particular, there’s *a lot* riding on the outcome — and whatever happens on that front will have big implications for the rest of the market, too.
On one hand, if we get another three years of a Labour-Greens coalition, their policies are quite “anti-property”. It’ll be the end of interest tax deductibility on many investment properties, and potentially some form of rent control as well.
If that’s the outcome, it’ll likely mean investor demand stays subdued — and would see continuation of a soft housing market.
By contrast, National and ACT have promised to reinstate interest tax deductibility on rental properties, and there’s also talk of potentially pulling back on the foreign buyer ban. I’d be extremely disappointed to see the foreign buyer ban dropped. Rich foreigners buying up our best land will price many Kiwi out of owning their own bit of paradise.
If we do end up with a centre-right government, that could light a fire under the housing market as investors and FOMO kick back in. Westpac is forecasting an eight per cent increase in house prices next year, while the RBNZ is forecasting nine percent over two years.
We are already seeing investor confidence slowly returning, in anticipation of National edging out Labour on election day, and considering that higher immigration numbers are driving rents up.
It feels like there’s been a mindset shift among buyers in recent weeks.
They’re not just waiting and hoping that prices will continue to fall anymore. They’re realising that there are some great deals already to be had and it’s worth trying to sniff those out.
The fact that people are also starting to really struggle with higher interest rates will have interesting implications for listings and buyers as well. There are more motivated sellers out there now who will be prepared to meet the market.
I wouldn’t call it a “hot” market, but activity is ramping up. And although we’re probably going to be in a holding pattern pre-election, there’s definitely more activity happening on both the buyers’ and sellers’ side.
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