1. Inflation shoots up, recession fears bubble
Annual inflation hit 7.3% in the three months to the end of June, according to figures from Stats NZ. That follows a 6.9% annual increase in the three months to the end of March, and is the biggest annual rise since 1990. Stats NZ pointed to rises in construction costs (up 4.5% in the three months to the end of June) and rentals for housing (up 1.2% over the same period) as two of the main drivers.
On Wednesday Stats NZ will release the June figures for the NZ Activity Index – the timely monthly indicator for how the overall economy is tracking. The results have been weak lately and another weaker result could simply reinforce the recession fears (and risks that unemployment starts to rise) that are bubbling away under the surface. That would clearly be another challenge for the property market, especially with inflation high and interest rates rising at the same time.
2. Inflation v price petrol
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Speaking of inflation, we all know that it’s high. But I’ll just take a chance here to remind you of a technical point – that inflation is a rate of change, which is different from the level of prices. Petrol can still cost $3 a litre, but if it stays flat at that high level, then inflation (the rate of change) will slow. So if inflation comes down from 7.3% in the coming months, you'll still feel that things cost a lot, even if the general commentary may shift to inflation being less of a problem, at least from a monetary policy perspective (because the rate of change in prices has slowed down).
3. Mortgage rates are still top of mind
Last week, the Reserve Bank raised the Official Cash Rate (OCR) another 0.5 percentage points to 2.5%. Given the competitive pressures in the banking sector, and that a lot of the future rises in the OCR have already been “priced in” to existing mortgage rates now, the latest move may not impact mortgages costs too much in the near term. But I’d also be cautious about concluding that mortgage rates have peaked, given that there’s still so much global uncertainty floating around. And of course, whatever happens to mortgage rates over the next six to 12 months, many existing borrowers will be facing higher costs anyway as their old low-rate terms expire.
CoreLogic chief economist Kelvin Davidson: “Many existing borrowers will be facing higher costs as their old low-rate terms expire.” Photo / Peter Meecham
4. Net migration still in the red
Last week’s Stats NZ figures showed that we’re losing more people overseas each month. Indeed, the net migration flow for the year to May was -10,674. The most striking thing for me is that the NZ citizen balance has now turned negative again, with Australia confirmed as a key target for people leaving the country. Net migration losses will undermine property demand over the longer term (although other factors such as reduced mortgage availability and higher interest rates are the key short-term drivers to watch), as well as reinforcing the skills shortage problems in our labour market.
5. Keep your sum insured right up to date
And finally, a little diversion here away from my normal market commentary, but as we all know, residential construction costs are rising rapidly – with the next data update to be published from the CoreLogic Cordell Construction Cost Index later this week. Rising construction costs obviously have implications for anybody contemplating a new-build project. But at a personal level, it’s also vital that existing homeowners keep their sum insured up to date for rebuild purposes – you don’t want to find yourself 10% or 20% short in the event of disaster striking.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
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