Be afraid! But Reserve Bank’s cash rate warning may not come to pass

1. Adrian, Adrian, Adrian

It was all about the Reserve Bank (RBNZ) last week and the decision by Governor Adrian Orr and the Committee to hike the official cash rate (OCR) by 0.75 percentage points to 4.25%. Of course, that decision was widely anticipated. What came as a much bigger surprise was their prediction for the next 12-18 months – an OCR peak of 5.5% by mid-2023, a recession next year, a rising unemployment rate, inflation not starting to ease until the second half of 2023, and peak to trough house price falls of 20%.

Now, all of that might seem quite alarming – and the reality is that it’s not great. Indeed, it could easily result in typical mortgage rates of 7% or more (albeit the flipside is that it will increase the returns for savers too), driving further strain on household budgets. For a start, higher mortgage rates restrict how much money a new borrower can obtain. And with 20% of existing borrowers due to reset their fixed mortgage rate in the next six months, there are further challenges here too.

However, some balance is also warranted. The expected recession is mild, and a higher unemployment rate is more about a larger labour force rather than outright job losses – that’s a “less bad” property outcome. Meanwhile, there may be some gamesmanship here too – “scare” inflation down with a pessimistic outlook, and then the OCR may not actually need to go all the way to 5.5%. In addition, monetary policy works with a lag – the previous OCR increases could still bite really suddenly in the early months of 2023, also reducing the need to push it up further still.

For the key property indicators themselves, after a quiet year for sales activity in 2022 (perhaps around 67,000 deals), things don’t look much better in 2023, as higher wages and rising net migration are offset by a soft economy and higher mortgage rates. We’d also go along with the view that property values will fall by 20% in total by the end of next year, although that would still leave them 15-20% above pre-Covid levels.

So what’s next? We’ll be watching the Q4 inflation data very closely (to be released 25th January) and also the next official labour market stats (early February), in advance of the next OCR decision on 22nd February. The next few months of summer may not be as pleasant as normal.

2. First home buyers still keen to borrow

There were no surprises that the latest RBNZ mortgage lending figures showed another quiet month overall in October – indeed, the total of 15,118 mortgages was the lowest October figure in the history of this series (going back to 2014). However, consistent with our CoreLogic Buyer Classification figures, first home buyers (FHBs) are holding on fairly well. Indeed, their % share of mortgage lending in October was the highest on record (22%), and they’re still using low deposit lending where possible – around 75% of banks’ low deposit lending allowance is being used by FHBs.

3. Consumer confidence still in the doldrums

Last week’s consumer confidence measure from ANZ was weak again, falling back close to a record low. To be fair, consumers have recently been saying one thing and doing another, by still spending steadily. But with the OCR set to head up again, that ‘disconnect’ may be about to come to an end, and when we get the next confidence measure in late December I wouldn’t be at all surprised if it hits a new low. After all, the RBNZ delivered a big hit last week.

CoreLogic chief economist Kelvin Davidson: "The next few months of summer may not be as pleasant as normal." Photo / Peter Meecham

4. Employment still rising … for now

This week Stats NZ will publish the filled jobs measure for October, which may well show another reasonable increase. But if the RBNZ’s forecasts are correct, firms may be about to shut up shop in terms of hiring new staff. Still, that’s arguably better for property than actual job cuts.

5. Dwelling consents – Up? Down? Flat? Who knows?

This week Stats NZ will also release the latest building consents data (October), which have continued to defy gravity in recent months. These figures are bound to soften at some stage (from a very high level), due to factors such as higher mortgage rates and increasing construction costs. Will it be this month?

- Kelvin Davidson is chief economist at property insights firm CoreLogic