ANALYSIS: The first Budget of the Coalition Government has been delivered and the implications for immediate growth in our economy, inflation, interest rates, and the housing market are essentially zero. That is, while technically there is some extra stimulus to the economy and therefore upside inflation risk applied by government plans for the coming year, the effect will be well lost in the wash of the far bigger factors in play.
The biggest of these factors for inflation and interest rates is the speed with which businesses stop raising prices even when their costs have gone up. In that regard, we recently got some good news with ANZ’s Business Outlook Survey, which showed a net 42% of businesses plan to raise their selling prices in the coming year.
This is still much too far above the long-term average of 25% to allow us to think about an imminent easing of monetary policy. But at long last the trend in this important gauge appears to be downwards as this was the lowest reading since December 2020.
I agree with Treasury that there is scope for the Reserve Bank to make its first cut to the Official Cash Rate (OCR) before the end of this year. But projections that the OCR – currently at 5.5% – will fall 3% over the next 3-4 years look a bit optimistic.
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The structural worsening of New Zealand’s productivity growth rate means higher average inflation for any given rate of economic growth than was the case in the past. At the same time, the labour market looks tighter on average than in earlier years, although in the near-future a temporary rise in the unemployment rate above 5% is highly likely.
Regarding the housing market, I’ve nothing to say of interest based on the Budget’s contents. But I can note that my latest monthly survey of real estate agents shows even further deterioration in almost all measures.
FOMO (fear of missing out) on the part of buyers remains almost completely absent while a net 55% of agents now feel that prices are falling in their area of operation. Last month this was a net 37% and in January a net 26% felt prices were rising. This is an especially sharp turning of market sentiment and probably has come about because of soaring employment concerns.
Independent economist Tony Alexander: "There is scope for the Reserve Bank to make its first cut to the Official Cash Rate before the end of this year." Photo / Fiona Goodall
A record net 55% of agents this month said buyers had expressed concerns about their jobs and incomes. Last month’s reading was 50% and a below-average 14% felt this way in January.
This goes some way to telling us that even when interest rates start falling from probably late this year, we won’t see much of a turnaround in the residential real estate market until job security starts returning. We’ll be able to gauge that monthly, and I’ll report the results regularly here.
One other point worth noting from the survey is that only a net 5% of agents this month said that they are seeing more first-home buyers in the market. This is down from 21% last month and a recent peak of 55% in January and before that 66% in August.
Job worries are making young buyers step back. But there is probably also a strong element of feeling that with so many fresh property listings available to peruse, there is no need to hurry.
Winter and spring look as if they’ll be fairly quiet for the housing market as the country goes through the final stage of the Reserve Bank’s fight-back against the inflation it created over 2020-22.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
