Tony Alexander: Will the US banking crisis spark a faster housing market revival?

ANALYSIS: What are the housing market implications of the run on some banks in the United States and Europe? First, none of us know how long depositor concern about banks will last and whether any more bailouts will need to be arranged. If there are a few more banks which go under, then the world’s economic outlook will get worrying enough for central banks to actively think about cutting interest rates and shelving their fight against inflation for another day. Given that the European Central Bank just raised their cash rate by half a percentage point we are well away from that scenario and it’s best to assume it does not happen.

The worries about what depositors might do will encourage banks in the United States and perhaps some other countries to pull back on their lending in order to reduce their need for liquidity. Reduced lending will curtail the pace of economic growth, strength in labour markets, business confidence etc. This will tend to depress inflation.

Weakness in share prices (it is very unclear how sustained recent falls will be) and discussion about financial instability hits household sectors around the world is now easily triggered by such things after three years of a pandemic and worrying about one’s health, finances etc. The outlook for consumer spending offshore and here is now weaker – but by how much is impossible to know.

Suffice to say some newly scared consumers will again tend to depress inflation as businesses look to discount prices to reduce inventories and shelve price-rise plans for fear that consumer response to such rises will be big spending reductions.

All we can say as we wait to see exactly what happens in the US banking sector is this: the outlook for world growth and therefore our growth is slightly worse. The outlook for inflation offshore and here is slightly better. Because the US banking shock is having the same effect as an extra tightening of monetary policy the need for interest rates to go as high as previously thought has declined.

That means that whereas two to three weeks ago the common pick was the cash rate here would peak at 5.5%, now a peak of 5.25% or 5.0% from the current 4.75% is highly likely. In response to the downward shift in New Zealand policy tightening expectations, wholesale interest rates have fallen and that has improved bank margins on fixed rate home loans.

Independent economist Tony Alexander: “The outlook for world growth and therefore our growth is slightly worse.” Photo / Fiona Goodall

Does this mean rate cuts to 1-5 year fixed rates are imminent? We cannot rule out some canny discounting of some rates as banks look to hold on to their customers as about half of all fixed rates come up for renewal in the coming 12 months. But fixed rate lending margins have only gone back roughly to where they were after the last general round of cuts early in February.

But what matters when it comes to borrowing is not just where rates are now but where they are going and in that regard more and more people will now realise that rates have almost certainly peaked and declines will come even if we really have no idea at what pace.

This then becomes a positive factor for the housing market on top of the recent news of a strong lift in net migration flows into the country. But then there is the negative factor.

Greater worries about world growth are going to make people more cautious about committing to new debt even if they have reduced fears about interest rates.

These are still early days in the banking sector depositor runs in the United States and we cannot possibly know by how much the outlook for world growth and local interest rates has changed. Because of that the best thing I find myself able to do for now is stick with my existing view on the housing market. We are approaching the cyclical lows in house prices and sales but are not there as yet. Young buyers remain incentivised to more actively peruse properties given the continuing absence of investors, high number of listings, good job security, falls in prices since late-2021, and increasing bank willingness to lend and discount rates behind closed doors.

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