Things certainly are interesting now. On August 7 the Reserve Bank shocked us all by cutting the official cash rate 0.5 per cent to a record low of only 1 per cent, rather than the 1.25 per cent level most had been expecting.
Does this mean the housing market is about to get a kick upward because mortgage rates will go lower and investors will move away from low yielding assets toward property?
Or does it mean the Reserve Bank expects the market to fall away faster than they were thinking, perhaps because of concerns about the global economy? If they are more worried, should we be more worried also? It is hard to tell.
International concerns are certainly of growing importance. There is new tension in the sub-continent following India’s decision to remove the special status accorded to Kashmir. The North Koreans are test-launching missiles. The Chinese and Russians are threatening to pull out of an arms treaty and respond to US missile deployments with deployments and developments of their own.
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A potentially nasty Brexit is approaching in the United Kingdom. And perhaps most serious of all, trade relations between the United States and China have deteriorated and this will negatively affect business and consumer sentiment around the world.
Yet in spite of these tensions and the slowing in world growth, the prices being received for New Zealand’s exports on average are where they were a year ago and 5 per cent above their average for the past 10 years.
And although there is weakness in the dairy sector as farmers attack debt and react to increasing environmental requirements, the rest of the primary sector is doing well.
The construction sector is still strong, the government is spending more money, and there is underlying growth in sectors like aged care, healthcare, and the digital economy.
But at the same time, growth in the number of tourists visiting New Zealand has almost stopped and global uncertainly could soon see numbers decline.
Jobs growth in NZ has also slowed down to an underlying pace nearer 1 per cent per annum than 3.5 per cent a year from 2014-2018. Consumer confidence has just fallen to below average levels, and business sentiment has deteriorated anew.
As an economist my job is to keep stepping back from the day-to-day, week-to-week, and month-to-month news items and data developments until a clearer picture can be gained of the longer-term trends which will (usually) prevail. Doing that now I find very little to justify a negative view on housing markets around New Zealand.
Net migration inflows remain near 50,000 a year and history tells us that when wobbles develop offshore net inflows to NZ usually rise. The labour market remains tight in terms of deep and persistent labour shortages, and job security is likely to remain strong even if actual jobs growth is slower.
In fact, our country’s overall rate of growth has slowed down to 2 per cent from 3.5 per cent, as has jobs growth to a greater degree, and the picture that it paints, in conjunction with still good outlooks for many NZ sectors is this.
We have finished a period of exceptional and unsustainable growth in New Zealand and now there is likely to be broad weeding out of stressed business across most sectors.
But for housing things are different. Although we now face a future of slower jobs growth there is an absence of the traditional things which have crunched the sector in the past — soaring interest rates, hiking unemployment, and collapsing net immigration.
And although slower jobs growth means reduced growth in potential buyer numbers, there remains a shortage of housing, and some loosening of lending conditions is likely, rather than a tightening.
Specifically, come November the Reserve Bank are highly likely to announce a further easing of LVR rules. And also before the end of the year banks might cut the test rates used to assess mortgage serviceability for borrowers from near 7.8 per cent to closer to 5.5 per cent as in Australia now.
So, although global and NZ growth risks have shifted downward, the longer term trends, coupled with likely improving mortgage accessibility for borrowers, suggest that it remains valid to stick with the following view.
Namely that Auckland peaked two-and-a-half years ago and will remain flattish for another couple of years before edging up again.
In the regions price growth will slow and probably stall in most regions by early next year, then move up again shortly after Auckland next rises.
And in Christchurch, potential exists for some extra volume and price catchup over the next three years as young people affected by high and rising rents in particular in Auckland and Wellington seek out more affordable accommodation.
- Tony Alexander is chief economist for BNZ
