ANALYSIS: Last week Statistics New Zealand released data on the state of the jobs market in New Zealand and the implications for the housing market are mixed. The good news is that businesses are still so short of staff they grew job numbers 0.8% in the March quarter after a 0.5% lift in the previous quarter. The unemployment rate remained at the near record low of 3.4%.
The good news for housing is that more people in work means more demand for houses to rent and buy. The bottom of the cycle is brought a bit closer. The bad news however is that the Reserve Bank has raised interest rates aggressively since the latter part of 2021 to try and crush jobs growth and thereby weaken household spending and the ability of businesses to raise their prices. The job destruction is not occurring.
Perhaps this employment strength helps explain why monthly data on spending with debit and credit cards is holding up at still quite strong levels. The Reserve Bank will continue to doubt that it is gaining sufficient restraint on the economy to give any hint that the inflation battle is well on the way to being won.
This means two things. First, there remains a decent chance of another 0.25 percentage-point cash rate rise come May 24 – though how loose the Government is with spending plans in the May 18 Budget will be a big factor driving their decision.
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Second, the pace with which interest rates decline when they do start properly falling (by which I mean the one year fixed rates and floating rates) is likely to be quite slow. The chances of mortgage rates falling as they did during the GFC are near zero and in fact the picture regarding inflation is a little bit more worrying than my discussion so far – again for two reasons.
Reason number one is that normally by this point in the interest rates cycle and with pessimism so extreme, businesses would be laying off staff left right and centre, knowing that when the upturn comes along they could rebuild quickly. Doing this would produce immediate cost savings and reduce the need to raise prices.
But this cycle businesses have little confidence that people they let go will be able to be comfortably replaced. They are going to carry as many people as possible through the downturn and that means continuing cost pressures, which in turn will slow the pace with which inflation falls.
Independent economist Tony Alexander: “The chances of mortgage rates falling as they did during the GFC are near zero.” Photo / Fiona Goodall
Reason number two is that the continuing good jobs growth and high job security alongside the surging pace of population growth and return of tourists means recession is perhaps only a 50:50 bet and not the certainty which many forecasters including the Reserve Bank think.
Absence of an economic crunch will further slow the easing of inflationary pressures.
But before we get very pessimistic for borrowers and the extent of relief to come through 2024-25 there is another important thing to consider, which is good for inflation but unreservedly bad for those in the sector. House-building is set to fall away potentially sharply for the next 2-3 years. Finance for new developments has substantially dried up and potential buyers have stepped well back from the market.
We can’t yet see this decline in the monthly consent numbers, which are still only running 20% down from a year ago, but that might be because of something special. Many developers have rushed to get consents in ahead of new expensive insulation requirements from May 1 and then a further deadline for other price-boosting changes from November 1.
Falling house construction, once it becomes obvious to see, will have quite a firm weakening impact on the economy – yet also lead eventually to worries about where the properties will come from to house a newly rapidly growing population. Figuring out what this means for house prices and when is not science or even art this time around – it’s pure guesswork.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
