Market update: Stabilising forces tempt more (and more) buyers off the fence

Housing Market Written by John Bolton, May 19 2023

Another month has rolled around, which means it’s time for a quick check in on interest rates, house prices, and what’s going on in the market more broadly.

And first up, we’ve got some good news on the inflation front.

For a while, there’ve been some clear signs that we were starting to get on top of the inflationary battle. Until now, though, the numbers just weren’t telling the same story.

But the latest inflation statistics, released in April, show inflation tracking at 6.7% — a figure well below market expectations, including even those of the Reserve Bank, which had inflation pegged to stick at 7.2%.

It’s worth remembering that inflation figures in New Zealand are pretty slow to show the truth of the situation, because they represent a long-term average, looking back over the previous 12 months. So, that’s why the numbers have stayed so stubbornly high.

And in reality, I think there are actually more positives behind the latest result than what you might guess at first glance. There’s an extremely high food inflation number hidden in there, for example, which will have skewed the number upwards — but that will also work its way through in time.

Between a weakened construction sector, increasing migration and more businesses starting to retrench (both of which are helping to ease pressure in the job market), I think there’s lots of stuff happening out there to indicate that inflation’s coming under control.

So, will there be another OCR increase?

My view is yes — but there are plenty out there who would disagree. Including others inside Squirrel.

(Check out episode one of Squirrel’s new podcast, Live at the Nut Bar, for a bit of healthy debate on the topic between myself and Chief Squirrel, David Cunningham).

The Reserve Bank has said it’ll take us up to 5.50%, and we’re only 0.25% short of that now, so it just makes sense to me that it’ll go that final step. I think Governor Orr will want to stay the course he’s laid out for us.

But while I am expecting the OCR to climb that little bit further, I’m confident that it won’t have any upward impact on mortgage rates.

And actually, if you look at the rates out in market now, you’ll see they’re starting to price in potential falls over the next 6 to 12 months — with longer-term mortgage rates (ranging from 3 to 5 years) already sitting lower than shorter-term rates, at around 5.99%.

While it might be tempting, I’d be really hesitant to fix for any longer than a year right now — or two, at a push — especially if you’re only doing it in the hopes of getting a better rate.

As rates start to fall in the coming months, you can be sure there will be better deals to be had. And if you’re locked in long-term, you’ll need to break that to take advantage of rate falls, and chances are you’ll find yourself hit with costly fees for doing so.

If you want to read up further, we’ve done a write-up on break fees which goes into all the detail you need to know.

Still, there’s no doubt rates are causing lots of pain for households — and there’s more to come.

Although the sense out there is very much that we’re at peak rates, unfortunately that doesn’t mean we’re out of the woods in terms of the impact.

There are more and more Kiwi still rolling off low fixed rates of around 3.00%, onto current rates, which means the hurt will continue to grow, even if rates don’t get any higher.

And as more people have to grapple with higher mortgage costs, we’re going to see more households tightening their belts on discretionary spending, and the downstream impact of that on the economy can’t be understated.

And in terms of the wider housing market, and house prices...

In my last update, I mentioned that sales activity in the housing market had been absolutely anaemic over summer — but we’ve definitely entered a pretty healthy comeback phase in the last month or two.

In part, that’s down to the fact that house prices are starting to stabilise.

Prices have now fallen about 20% in nominal terms, or 30% once you factor inflation into the equation, essentially taking us back to where they were pre-COVID. Commentary out of the Reserve Bank is that those falls have done what was needed to get us back to a more sustainable space with house prices.

(We dive into the discussion around house prices in more detail during episode two of Live at the Nut Bar, for anyone interested).  

And given interest rates are likely to start falling in the coming months, I think we’re going to see housing turnover gradually pick up more and more from here.

Because while people might sit on the fence when there’s cause for uncertainty, their fundamental need for housing never goes away.

But now those causes for uncertainty are starting to disappear, people will be back on the hunt to buy.

And now that we’ve turned the tap on again with respect to immigration, you can bet that’s going to add even more fuel to the housing market fire. It won’t necessarily mean prices shoot back up, but we’re certainly going to see choice start to disappear for buyers — something I’ve been warning about for a few months now.

In fact, we’re already seeing demand heat up in a massive way in the rental space. Looking at Auckland in particular, rentals are being snapped up so quickly there’s barely anything going at the moment — meaning we could be on track to follow in the wake of Sydney, Melbourne and Brisbane, which are deep in the midst of a rental crisis.

And the sad irony of it is that, as demand picks up again, we’re systematically destroying our construction sector at the same time.

What we should really be doing right now is supporting the sector to maintain the levels of consents and building we hit last year — to help us stay ahead of immigration levels, and maintain sustainable house prices.

Unfortunately it’s the same mistake New Zealand makes every time we go through this sort of housing market cycle. Hopefully one day we’ll learn.

The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Squirrel shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Squirrel. We recommend seeking professional investment and/or mortgage advice before taking any action.

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