Tony Alexander: The scene is slowly being set for some quick interest rate cuts

ANALYSIS: Last week I wrote about the deteriorating labour market and how people’s rising worries about employment are affecting housing. Because the employment cycle lags the economic cycle, even when we are initially out of recession and activity is picking up, the labour market will continue to worsen – probably well into 2025.

Does this mean the housing market will be weak well into 2025? Probably not. But until the Reserve Bank recognises it has over-restricted the economy and it cuts interest rates quickly, the current situation of a flat market is likely to persist.

Flat in the context of residential real estate doesn’t mean no change in prices but rather when looking past the month to month fluctuations there is little evidence of much price gain. For instance, if we look at the average over three-month periods, we see that in the September quarter of last year Auckland house prices on average rose by 2.6%.

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They then rose 2.5% in the December quarter but have now declined by 0.8% in the first three months of this year. In Auckland the number of properties listed for sale at the end of March was 23% higher than in July last year so buyers have extra stock to peruse at their leisure.

In fact things are so leisurely now for buyers only 6% of agents in Auckland responding in my monthly survey with NZHL now say that buyers are displaying FOMO. Back in September that was 45%. The pandemic frenzy peak was 90% in October 2020.

The net proportion of real estate agents in Auckland saying that more investors are actively looking for property has turned negative by 5% from a positive 16% in September. The net proportion saying they are seeing more first home buyers has dipped from 56% to only 12%.

A key characteristic of this recent fresh period of market weakness is a backing away of young buyers to a greater degree than the backing off of investors. The only small investor change looks like it is due to not that many deciding to advance their buying anyway over the second half of last year. They are affected by large increases in some key costs such as for rates and insurance, debt servicing charges are cyclically high, and many may simply be ageing and looking to fund their retirement through selling their investment asset.

Independent economist Tony Alexander: "But now job worries are acting to rein in household spending and that is something the Reserve Bank will have to increasingly take into account." Photo / Fiona Goodall

The young buyers have probably pulled back firmly from their earlier very strong interest because of the new development running through the economy and discussed last week – employment worries. This is actually something quite important.

The negative impact on the economy and therefore eventually inflation has to date not been assisted much by the labour market. The unemployment rate has only gone from an unsustainably low 3.2% to 4% and wages growth has only minimally slowed down.

But now job worries are acting to rein in household spending and that is something the Reserve Bank will have to increasingly take into account as we advance through this year. It will be discussing whether the overall degree of restraint on the economy is turning out to be more than it think it needs, especially with a fresh deterioration underway in the outlook for world growth due to heightened tensions and actions in the Middle East.

The scene is slowly being set for some quick interest rate declines – but definitely not in the next few months.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz