Tony Alexander: 2023 is going to be a year of high uncertainty and high volatility

ANALYSIS: This week we got the definitive reading into what average New Zealand house prices were doing at the end of 2022, produced by REINZ. Their data are the best and the only price measures I pay attention to because they adjust for changes in the mix of properties sold from one month to another and reflect sales made that month. Other measures mainly reflect title changes from sales made sometimes many months earlier. Plus, they don’t make adjustments for changes in what gets sold.

The latest data from REINZ tell us that after falling some 1.3% in November house prices went down another 1.7% in December. This is a big change from the small 0.2% rise in October but not as bad as the average monthly decline of 1.9% from April through to and including July.

This price weakness reflects the substantial backing off of buyers from the residential real estate market after the two important events of late-2022. The first was the annual inflation number released on October 18 which was 0.6% higher than expected. This shock result wiped away the belief (hope actually) most of us had about inflation falling away and caused a spike in bank borrowing costs as investors factored in extra tightening of monetary policy by the Reserve Bank. Fixed mortgage rates got pushed about 0.5% higher.

Then November 23 brought the Reserve Bank’s first chance to respond to the high inflation number and other indicators showing strong growth in wages and business input costs. The RBNZ pushed the cash rate up a record 0.75 percentage points, lifted its prediction for how high that rate would go from 4.1% to 5.5%, and said a recession looked like being needed to get inflation back down from 7.2%.

These moves and comments produced another 0.5% or so increase in fixed mortgage rates and the talk of recession caused fresh sharp declines in business and consumer expectations for the future.

My monthly Spending Plans Survey for December for instance showed a net 43% of people planning to cut their spending compared with a net 15% in early-October. The NZIER’s Quarterly Survey of Business Opinion released this week showed its business sentiment reading falling to its lowest level in almost half a century.

With sentiment now crushed there is one dollop of good news and two lumps of bad news. The good news is that although businesses are still facing pressure to raise prices, their ability to do so and get away without a strong customer response is disappearing by the day. The inflation outlook is improving and that means I remain 90% confident that we are at the peaks for fixed rates for two years and beyond. Floating rates look set to rise another 1.25% at most while the one-year fixed rate is very hard to pick.

Independent economist Tony Alexander: “At some stage the poor economic outlook will alter inflation risks enough so that mortgage rates start falling.” Photo / Fiona Goodall

The first lump of bad news is that the poor outlook for the economy means the inevitable downward correction in house building from the biggest boom in decades will be more severe than earlier hoped. This will be accompanied by extra weakness (eventually) in the labour market and substantial profit problems for businesses across almost all sectors.

The second lump of bad news is that with people so scared now by what the Reserve Bank has said house prices will continue to decline through to probably the middle of the year and people wanting or needing to sell their property will be selling into the worst levels of buyer demand since shortly after the Global Financial Crisis if we ignore the first two months of the pandemic.

At some stage the poor economic outlook will alter inflation risks enough so that mortgage rates start falling. I remain of the view that this will happen before the end of the year. But whether that creates a better environment for property sellers depends a lot on whether the interestingly strong net migration numbers continue to move upward, and how quickly people change their expectations for where interest rates are headed. We’d also best not forget the tendency for an approaching general election to make people go into their shells.

As noted last week, 2023 is going to be another year of high uncertainty and high volatility and the best piece of advice I can give anyone be they borrower, investor, home buyer or businessperson is to try and stay focused on long-term goals and not fall into the common cyclical trap of thinking the bad times will never end – you know, the opposite of those people who thought the good times would never end when everything was booming.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz