Market update: After months of turbulence, a sense of stability returns (for now)

Post by John Bolton – Squirrel Founder

Check out JB's latest market update below, or scroll down to read the full article:

It’s been one disruption after another across the housing market in recent times — interest rate hikes, house price falls, the state of limbo that was the lead-up to election day — but it feels like things are getting back onto more of an even keel.

On the interest rates front, it’s benign out there.

We have seen a tiny bit of upward movement in short-term fixed rates over the last fortnight or so, but that’s just the Aussie-owned banks making moves to get into alignment with each other.   

It has meant that one-year fixed rates in the market have settled at or around 7.35%. There’s a bit of wriggle room in that, though — and we’ve been able to negotiate down to 6.99% in lots of cases. So, it’s worth talking to your mortgage adviser if you’re looking at fixing or refixing any time soon.  

It feels pretty clear we’re at the top of the current interest rate cycle.

The Reserve Bank has one more Official Cash Rate announcement in store for us before the end of the year — on 29^th November — but there’s no expectation that will result in any changes to interest rates, up or down.

After that, we’ll get a few months’ reprieve from OCR headlines until late February 2024.

As far as the future outlook on interest rates is concerned, my view hasn’t changed.

And that is that interest rates should start to fall sometime around the middle of next year.

The reason for that is simply that I think the economy is slowing down a lot faster than was expected, and faster than I think many people have quite got their head around yet.

Higher interest rates have had a huge impact on affordability and discretionary spending, and the flow-through of that to the economy is now plain to see in retail data. For months now, sales figures have been down, both in dollar terms and in unit sales numbers — and without doubt that translates to a weaker economy.

Then, remembering that we’ve had a huge influx of people coming into New Zealand via immigration over the last 12 months (which in theory should be helping to boost the economy) that picture feels even bleaker.

A lot of that immigration we've had has been people on working holiday visas or brought in to fill labour shortages in lower-skilled industries - so, there’s no magic fix there for the economy. Although the plus side is that it hasn’t driven inflation, as many had feared.

On the topic of immigration, I’m not expecting it to filter through to housing in any meaningful way, other than causing a squeeze in the rental market.

Out in the wider housing market, property investors are still showing caution despite the election result.

We saw confidence start to return among property investors even prior to election day — fueled by the anticipation of a National win, and the party’s promised reintroduction of tax benefits on rental properties.

So, there’d been some expectation that a new National-led government could draw property investors back into the market in a big way — particularly coupled with increased demand in the rental market thanks to immigration. But that’s yet to eventuate.

And that’s because investors feel the impact of high-interest rates as much as anyone. With test rates up around 9.00%, affordability is especially tough — not to mention major increases in the cost of rates and insurance.

So, yes — these changes certainly make property more attractive for investors than it’s been in a while, but I don’t see them jumping back into buy en masse any time soon.

And in terms of the impact of that on the house prices…

I expect that we’re in for a moderate recovery in house prices over the next 12 months or so — somewhere in the realm of 5% to 10%.

Remember that prices were down by up to 20% in places like Auckland and Wellington, and actually by as much as 35% after factoring in inflation, so I don’t think they’ll be back to where they were for a while yet.

The next housing boom will roll around — they always do — but it’ll take interest rates coming down again, and the economy being back in much stronger shape, with high growth, before that can happen.

So, I’m picking it’ll be four to five years before we see any significant surge in house prices.

Overall, I’d say house prices are pretty stable right now. I can’t see them falling any further from here (even though some people are still talking them down) and I certainly can’t see them taking off again either.

At least not for the foreseeable future.

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