1. Reserve Bank ‘looks through’ Gabrielle
Easily the biggest property and economic news last week was the Reserve Bank of New Zealand’s decision to raise the official cash rate by 0.5 percentage points to 4.75%. The RBNZ essentially said that it was too early to be sure of the impact of the flooding and Cyclone Gabrielle on the economy or inflation, so the best approach was to follow through on its previously signalled plan – which is to stamp out inflation. Flood recovery is best left to Government spending.
Key economic projections as part of the Monetary Policy Statement didn’t really change either – the RBNZ still expects a small recession this year, inflation to start to slow shortly, the OCR to peak at 5.5% (so maybe three more 0.25 percentage point increases to come), unemployment to rise but more through a bigger labour force than outright job losses, and for house prices to fall further.
The direct effects of all of this on the housing market may be fairly muted. After all, the last few steps of this monetary policy tightening cycle have already been priced in to mortgage rates, which have probably now more or less peaked. That said, it’s obviously still expensive to be a new borrower and those with existing mortgages that are due to reprice in the next six months or so could still be looking at a typical rate change of 2-3%.
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2. Housing affordability still stretched
The latest six-monthly CoreLogic Housing Affordability Report, released last week, contained a mixture of good and bad news. On one hand, some measures (such as the house price to income ratio) have improved, as property values have fallen and incomes have risen. However, the improvement has been fairly small and from a very stretched starting position. In addition, other measures actually got worse – such as mortgage payments as a percentage of household income (given that mortgage rates themselves have increased). From here, we should see further gains in housing affordability, but it’s unlikely to be a rapid process.
3. The economy is just ticking over
Based on the NZ Activity Index from Stats NZ, designed to be an up-to-date indication of how the (lagged) official GDP figures might turn out, the economy really just appears to be treading water at present. To be fair, January’s 0.8% rise from a year ago was better than December’s 0.4% rise, but was still a subdued result. It probably just reinforces that although we’re not in recession yet, the risks are still significant, especially now given the Cyclone Gabrielle effects.
CoreLogic chief economist Kelvin Davidson: "It’s still expensive to be a new borrower." Photo / Peter Meecham
4. Expect consumer and business sentiment to be low again
This week, ANZ will update us with the February results for both business and consumer confidence. These measures rebounded in January, but the rise was from a low base, and costs/inflation were still a big concern. Given the Auckland floods and now the cyclone, it’s hard to see anything but a fresh fall in sentiment when the latest figures are published. That reinforces the near-term downside risks to the wider economy and also the property market.
5. New dwelling consents to drop again?
We’ll also get the latest dwelling consent figures from Stats NZ this week, and it seems likely that the emerging downwards trend over the previous few months will have continued in January. However, there may not be much easing in capacity pressures (or cost growth) in the construction sector, given the rebuild work that now needs to be done across the central and upper North Island.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
