1. All eyes on Wednesday’s inflation data
It’s a huge release at 10.45am Wednesday, when Stats NZ will publish the Q4 CPI figures. The Q3 reading shocked most commentators by staying stubbornly high (7.2%) and this next result will tell us a lot about the near-term prospects for the official cash rate and mortgages. To be fair, it’d need to be a pretty bad result (say 8%) to cause too much angst at the Reserve Bank, given that they’ve already indicated it expects inflation to stay high for a bit longer yet anyway.
As it happens, the consensus expectation seems to be that inflation could be broadly the same in Q4 (i.e. around 7.2%), but just reading the tea leaves, that kind of surprise 8% result can’t be ruled out altogether, and it would certainly cement another 0.75 percentage increase in the OCR in February, keeping upwards pressure on floating and short-term fixed mortgage rates.
2. Don’t hold your breath for a loan to value ratio rule change
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In a short op-ed piece last week, I pulled together all of our recent random musings about the loan to value ratio (LVR) rules in one place, and reiterated the view that the rules won’t be relaxed this year – although a loosening in 2024 (at the same time as formal caps on debt to income ratios are potentially introduced) could well be signalled by the Reserve Bank in November’s Financial Stability Report. For a start, there are no real signs that this housing downturn is driving widespread financial stability risks, which would be part of any decision to change the LVRs. Meanwhile, when house prices are already falling, you probably don’t want more people entering the market with lower deposits anyway – that would just create scope for extra negative equity, which isn’t ideal when there are risks of rising unemployment.
3. First home buyers still enjoying conditions
Another argument that has sometimes been put forward for looser LVRs is that they would help more first home buyers to buy a house. That may well be true, although they’d still have to satisfy the income/expense testing and be able to afford current mortgage rates. But while it might sound harsh, it’s not really the Reserve Bank’s concern whether or not any particular buyer group is finding conditions tougher than another. Their aim is to bolster overall financial stability, and then it’s down to the Government to decide policy which may impact the relative mix of buyers.
In any case, first home buyers are actually faring relatively well. While the number of property purchases by first home buyers remains low, first home buyers’ share of the market in December reached a new high of 26%. Reduced competition from other buyers, such as debt-backed investors, will no doubt be helping first timers at present.
CoreLogic chief economist Kelvin Davidson: “Net migration has returned to positive territory faster than everybody anticipated, increasing property demand.” Photo / Peter Meecham
4. Rents stay flat
Meanwhile, the latest Stats NZ measure of rents (new tenancies) showed no change from November to December, continuing the run of broadly flat rents which started around April last year. The annual growth rate has slowed from around 7% at its peak to less than 1% now (compared to average of roughly 3%). This is obviously good news for tenants (and may keep some of them renting rather than looking to buy), but an extra headache for landlords.
5. New migrant arrivals are surging upwards
That said, some landlords will be buoyed by the latest migration data. Indeed, last week’s figures showed that the net migration figure in November itself was around 6100, as strong new arrivals to New Zealand (in net terms) easily outweighed continued outflows of NZ citizens. What’s more, the 12-month total is now back in the black too – at around 5,700, the first positive reading since February 2021.
So all in all, net migration has returned to positive territory faster than everybody anticipated, pushing up population growth and increasing property demand, whether that’s for rented or owner-occupier dwellings. I still think the impact of interest rates is the trump factor for at least the next six months or so, as existing mortgage holders adjust to higher repayments and new borrowers also try to make the sums work. But all else equal, rising net migration can only bring about an earlier/shallower floor for property values.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
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