1. The labour market could dampen housing for a while yet
Last week’s Stats NZ data showed that the unemployment rate rose from 4.6% in Q2 to 4.8% in Q3 – if you exclude the temporary Covid spike, the latest figure was the highest since mid-2017. In that environment, it’s no surprise to see that wage growth also continues to slow.
To be fair, the latest unemployment figure was lower than expected by most analysts. But I wouldn’t get carried away by that. After all, employment still fell by 0.5% (16,000), and so the rise in the unemployment rate was only dampened by some people effectively giving up on finding work and leaving the labour force – hence, not technically counted as unemployed. That’s clearly not a good sign, and so on the whole, it’s obvious the labour market remains weak.
The wider implications are also negative for the economy and housing market, although the soft jobs figures are likely to “lock in” a 50 basis point cut to the Official Cash Rate later this month.
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2. Financial system still looks pretty solid
Certainly, the upside risks to mortgage repayment problems and loan defaults from rising unemployment were discussed in the latest Financial Stability Report from the Reserve Bank last week, although the offsetting impact of lower mortgage rates was rightly also noted. On the whole, though, the latest FSR didn’t reveal too much new; there are always risks, but our financial system in general and the banks in particular are still considered to be on firm ground.
3. Borrowers seem to be taking diverging approaches
Meanwhile, last week’s mortgage lending stats from the Reserve Bank were really interesting and showed a split in tactics – a smaller (but still high) percentage of new loans in September were fixed for six months, with some borrowers focusing even more on the here and now by swaying towards floating, but others shifting to fix for longer than 12 months. Those who chose to float are presumably wanting to just wait a few more weeks until the next cash rate decision (November 27) and will see if they can fix more cheaply at that time. And then those that fixed a bit longer presumably just decided that the lower rates on offer (e.g. at the 18-month term) were too good to ignore.
CoreLogic chief economist Kelvin Davidson: "It’s obvious the labour market remains weak." Photo / Peter Meecham
Just to touch on the US Election here, it’s conceivable that the result might prompt a lower NZ dollar and a touch more imported inflationary pressure, hence slightly less room for the cash rate to be cut aggressively. But our export-led economy could also be softer over the medium term, which would tend to drive lower interest rates. Ultimately, it’s still early days, and we’ll just have to wait and see.
4. Net migration and rents probably still softening
This week, we’ll get September’s migration data and October’s rent price figures. Clearly, these are important metrics for investors to keep an eye on, and although some factors are shifting in their favour (e.g. mortgage interest deductibility), the likelihood of more sluggishness for rents is an opposing consideration.
5. High debt-to-income ratio lending sneaking higher again?
On Wednesday, the Reserve Bank will release the latest mortgage lending data broken down by debt-to-income ratio. Given that the official DTI rules are now in place, these numbers are always going to be of huge interest. This time around, though, while it wouldn’t be a surprise to see the share of lending done at a high DTI go up a bit again (from a low base), the new rules are not likely to be truly binding just yet, given there’s a 20% allowance for high DTI loans.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
