ANALYSIS: I’d advise borrowers and potential home buyers not to get overly excited about the annual inflation number coming in about 0.4% lower than expected at 5.6%. The direction of change in the annual rate from 7.2% a year ago is good and we can look forward to interest rates eventually falling.
But we economists don’t just look at this annual number. We also look at various measures of underlying inflation to see what is truly happening if distortions and special cases of price changes are stripped out. We also look at what happens over the three-month periods used to make the four quarter annual change.
In all cases the rise in prices this latest quarter was worse than in the June quarter. The official quarterly change was 1.8%, which is appreciably more than 1.1% in the June quarter and 1.2% in the March quarter.
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If we strip out food and energy prices the annual rate is 5.2% but the quarterly rise is still 1.3% from 0.9% in the March and June quarters. The other underlying measures show the same pattern.
But there is more to the cautionary view we must still take on inflation than just these numbers. There is also the problem that as yet, and despite the record net inflows of foreign workers, there is no evidence of a sustained slowing in the rate of increase in wages. Eventually wages growth will slow down because our labour market is highly deregulated and responsive to changes in the availability of labour.
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But until solid evidence of a slowing in wage inflation emerges the Reserve Bank is not going to take the risk of saying things look sweet, watching the financial markets rally and mortgage rates decline, only to have to tighten again if it turns out to be wrong. This has happened in the past and there are enough people with grey hair in our central bank to remember this particular mistake.
Another thing to keep in mind is that the headline inflation rate of 5.6% is still miles away from the target range of 1%-3%. So, much as some forecasters are now pulling back their predictions of additional interest rate increases, the arrival of a fresh interest rates stimulus to the housing market is probably still a story for the second half of 2024.
Independent economist Tony Alexander: "Until solid evidence of a slowing in wage inflation emerges the Reserve Bank is not going to take the risk of saying things look sweet." Photo / Fiona Goodall
What about the election outcome? The coming removal of a requirement on the Reserve Bank to try and maintain full employment when setting monetary policy probably won’t make any difference as most of us don’t think it factored that in anyway in recent years while cutting raising interest rates. But if you think it did pussyfoot around on raising rates because of a desire to keep job numbers high, then you’d best assume higher rates will ensue when that particular requirement is removed.
Of greater significance out of the election is the coming restoration of interest expense deductibility against rental income for investors, and shortening of the bright-line test period from 10 back to two years. The latter change may bring a few sellers through. The interest expense change will encourage extra investor buying.
But with interest rates so high, minimum deposits of 35% of purchase price required, and no evidence that banks are targeting higher lending to investors yet, the impact of any extra buying is likely to only accrue slowly over the next two years.
Of greater significance I feel in the next six months will be first-home buyers scrambling to make a purchase before the investors return. They already perceive that the window of opportunity to make a good purchase is closing as we are now into month five of the upward leg of the house price cycle, listings are falling, construction is falling, and construction costs continue to go up.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
