ANALYSIS: The chances are good that fixed mortgage rates for almost all terms bar perhaps one year will peak before the end of this year. For the popular one-year term, the peak may be delayed slightly if the Reserve Bank decides to take a pause in its monetary policy tightening later this year just to see how things are going – before finishing off the job of taking the official cash rate to 3% early next year.
If I am right, then the one-year fixed mortgage rate will probably peak close to 5.5% for the discounted rates (deposits over 20%), with a near 6% peak for other terms.
On Wednesday the Reserve Bank largely met market expectations by raising their cash rate from 1% to 1.5% and that places the rate back where it was in the middle of 2019 when the Reserve Bank was reacting to surprisingly low inflation.
That is worth remembering because for the entire period since the Global Financial Crisis apart from this special time during which inflation has been boosted by Covid-induced supply chain problems and Russia’s war, inflation has been surprisingly low. That is almost certainly the environment we will eventually return to – though perhaps not with inflation sitting quite as low as the average 1.2% recorded from 2012 to 2019.
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When inflation peaks it will probably do so above 7% and that is likely to produce some scary stories regarding the Reserve Bank having to fight entrenched inflationary forces. But there are few such forces. The key drivers of the inflation surge will eventually reverse – its just a matter of when. Having said that, there is a risk that wages growth will surge, and this will force businesses to raise their selling prices anew over 2023.
But I recently wrote in my weekly publications about the dire need for wages growth to accelerate in New Zealand if we are to raise the average standard of living. This would be achieved by low profit businesses unable to pay the higher wages closing down, and people laid off being hired by businesses more able to pay the higher wages because they are more profitable.
Economist Tony Alexander: “We can expect enhanced expectations that average house prices will fall around the country.” Photo / Fiona Goodall
The trouble is that feedback from many employers is that they feel they can get away without having to boost wages all that much. That is why we should not dismiss the estimate from MBIE that in the coming 12 months the loss of Kiwis offshore (mainly to Australia) will be somewhere between 50,000 and 125,000. This brain drain as people seek higher incomes overseas in particular will see many firms in the position where they simply will not be able to function.
There will also be housing implications. As forecasts for population growth get revised down in an environment of the biggest boost in New Zealand housing supply since the 1970s, we can expect enhanced expectations that average house prices will fall around the country. For existing property owners selling and buying this won’t mean much. But for new buyers it will mean an added incentive to hold off for better prices.
Personally, if I were buying currently, it is not price that I would be focussed on. Instead, I would be going back to my original list of desired attributes in a new property and actively seeking to satisfy all of them by picking and choosing amongst a rapidly growing stock of properties now sitting on the market.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
