Post by John Bolton - Squirrel Founder
The really big thing that’s happened since our last market update, is of course, the election.
In the lead-up, it felt like there had been a growing sense that this one was National’s to lose. And so, for many Kiwi voters, the outcome of October 14th probably didn’t come as too much of a surprise.
Obviously, we won’t know exactly what this new government looks like for at least the next week or two, while coalition talks play out and all the special votes are tallied.
But wherever things land you can bet that National’s focus, especially over the next 12 months, will be on driving through policies that are designed to bolster the New Zealand economy.
As a result, I’m expecting to see business confidence continue to track upwards — and in some areas, even improving consumer confidence as well.
Property investors will certainly be feeling a lot happier than they have been of late, now that the reinstatement of tax deductibility on rental properties is firmly on the cards.
And homeowners (particularly those with big mortgages) could also be feeling a bit more at ease, hoping that a change in government could see interest rates on the downward track sooner than previously indicated.
If you take our latest GDP statistics — released in September — at face value, New Zealand has so far narrowly avoided recession.
But the story those numbers don’t tell is the fact that we’ve got roughly 100,000 more people in the country today than we did a year ago, thanks to the recent surge in immigration.
With the economy having remained relatively flat, that means Kiwi households are actually worse off on a per capita basis. In other words, we’re getting poorer.
And the impact of higher interest rates hasn’t fully trickled through to mortgage borrowers yet, either. We’re still very much in the tightening cycle, so I’m expecting to see consumer spending soften even further.
I’m still seeing clients rolling off rates as low as 2.9% to up around 7.00% — and having to go through the process of cutting back, and reducing spending, to try and cover those much higher costs.
Add to that the fact that this new government will be cutting back on its own spending, and potentially restructuring parts of the public sector, meaning redundancies will no doubt be on the cards, and that’s not great news for the economy either.
I’ve said for a while now that I’m expecting the economy to slow down much sooner (and more rapidly) than what’s been indicated by the Reserve Bank. And I think we’re starting to see signs of that happening.
The latest inflation figures for example, which came out last week, were a lot lower than anyone had predicted — and to me, that points to just how soft the economy is right now.
In my opinion, it’s looking more and more likely that we’ve hit peak interest rates — which *should* mean the next move in the OCR will be downward, and it’s just a matter of when. We are still seeing some movement in home loan rates from banks looking to maintain their high levels of profitability but that has limits — or at least, it should!
In terms of the OCR eventually falling, previous experience would suggest we’ll get no advance warning from the Reserve Bank beforehand. It always tends to talk rates up until the moment it starts to drop them — so there’s no way of knowing exactly where its head is at.
At this stage, most economists are still picking the end of 2024, or maybe early 2025, before rates start to fall. But with the weakness I’m seeing in the economy right now, I wouldn’t be surprised if it was as early as the middle of next year.
For anyone coming up to a fixed rate rollover soon, the best course for you really depends on how comfortable you are around your ability to service your mortgage.
In my opinion, fixing for anywhere from 1 to 2 years should see you out the side of this period of higher rates.
If you’re really worried about affording your new repayments, then opting for a two-year term will mean you’ll be able to nab a slightly lower rate. If you’re comfortable with your ability to service your mortgage at current levels, then fixing at 12 months could be the right option.
We are certainly seeing a lot more activity in market than we have for a long time.
Buyers are aware that it’s a good time to be in market, given how far prices have fallen in the last 18 months, especially in Auckland and Wellington.
And now that prices are starting to level out — and even pick up again — those who had been holding off on listing their properties for sale are starting to come back into the market as well.
That balance we’re seeing, where supply is growing somewhat in line with demand, should help to keep house prices steady.
The fact is too that interest rates are still extremely high, which means people’s borrowing ability just isn’t as strong as it has been — they can’t borrow as much — and that’s likely to hold prices back somewhat too.
I think while we’re seeing more activity in the market, there’s nothing to suggest to me that house prices are going to get out of control. It will be more like a return to normality.
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