1. The inflation peak seems to have passed
The big economic news last week was the Q1 consumers price index (CPI) data, which showed a slowdown in inflation from 7.2% in Q4 2022 to 6.7% now. Clearly, that’s still high, with food and housing being key contributors to the overall price pressures once again (e.g. new-build house costs rose by 11.5% in the year to March 2023).
However, the number was less than expected and would seem to indicate that inflation has now peaked. This is likely to cement the expectation that we only see one more official cash rate rise in this cycle, taking it up by 0.25% on 24th May to 5.5%. In turn, mortgage rates seem unlikely to rise much further either, if at all.
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2. Rental growth ticking over ... for now
The latest Stats NZ rent price data showed a rise of 2.7% in the year to March (based on the flow of new leases as opposed to the stock of existing tenancies), below the long term average of 3.1%, and significantly lower than the typical rates of 6% or so that were seen in late 2021 and early 2022. So for now, the market seems to be in favour of tenants, but with the stock of rental listings already pretty low in several parts of the country and net migration now rising strongly, it may not be too long before rental growth starts to accelerate again.
3. The beginning of the end for this housing market downturn?
In a similar vein – and just to provide an update on the "big picture" – the mood around the housing market seems to be shifting slightly, as mortgage rates top out, total listings edge lower, employment confidence stays high, and net migration surges. No doubt some investors may also be starting to imagine the reinstatement of interest deductibility for existing properties after October’s Election, and could try to get in ahead of probable restrictions on debt to income ratios from March next year too. What this amounts to is a growing body of evidence that the downturn in sales activity and property values may well be on its last legs.
CoreLogic chief economist Kelvin Davidson: "There are still plenty of near-term challenges for the property market." Photo / Peter Meecham
4. But still keep a close eye on the economic dataflow
That said, there are still plenty of near-term challenges for the property market, and clearly a recessionary economic environment is one of those. This week, watch for Stats NZ’s March NZ Activity Index (NZAC) on Wednesday, and ANZ’s dual confidence measures for April – businesses on Thursday and consumers on Friday. The overall tone of these releases may still be pretty downbeat, meaning that the chatter about recession will continue.
5. Filled jobs remain a key indicator
Of course, there’s recently been something of a divergence between measured economic activity and employment – i.e. GDP has been soft, but employment has stayed high. Last month I referred to this as a potential "jobfull recession" (conversely sometimes in the past there have been jobless recoveries). This strength in the labour market to a large extent reflects the skills shortages that still prevail, and firms’ desire to protect and retain their current staff at almost any cost. In turn, that has helped prevent an even larger housing downturn, which might have eventuated had we seen a rise in mortgage repayment problems, loan defaults, and ‘forced sales’.
In any case, the next jobs data (for March) will be released by Stats NZ this Friday, and it seems reasonable to assume that the figures will show another steady rise. Of course, this run of jobs growth could end at any time. But for now, another rise would add to the point above about the housing downturn potentially now entering the "beginning of the end".
- Kelvin Davidson is chief economist at property insights firm CoreLogic
