NZ in recession - expect a 0.5% cut in interest rates in February

1. Bad, but not all bad

Last week’s economic figures looked terrible. GDP down by 1% in Q3, after a fall of 1.1% in Q2. However, there is one thing worth bearing in mind. At this time of year, Stats NZ tends to update its underlying methods, which can change the historical path. The latest revisions seem to have pushed most of the economic pain into the last two quarters; Indeed, the size of the economy prior to that is now calculated to have been bigger than previously thought. Put another way, there was good in the figures, and there was bad.

My overall take, then, is that not too much really changes. Regardless of exactly when the recession actually occurred, the economy has clearly been weak, and further interest rate cuts lie ahead – starting with the next call on February 19 (looking like a 0.5% cut).

2. The current quarter looks better

And before you get too downbeat about the Q3 GDP figures, note that the NZ Activity Index for November showed a rise of 0.8% from the same month last year – not a boom, but not terrible either. Based on the past relationship, this suggests that GDP has started to rise again this quarter, perhaps even by as much as 1%. That more encouraging news was supported by the ANZ business confidence survey too, which although it eased a touch in December, has been trending higher for a while now.

3. Which buyers should we be keeping an eye on?

The latest CoreLogic Buyer Classification figures show that first-home buyers' share of property purchases dropped from 27.7% in October to 25.5% in November - the lowest level in six months. Does that mean first-home buyers are waning? No. November's share is well above the long-term average (21-22%) while the actual number of first-time purchases in November is about 10% higher than the tally in November 2023. There are still several factors helping first-home buyers, including access to KiwiSaver for at least part of the deposit, and their "monopoly" on the low deposit lending allowances.

The drop in first-home buyers' market share simply reflects other buyer groups upping their activity. In particular, cash multiple property owners (i.e. investors not using a mortgage for that latest deal) enjoyed a solid month in November, while their mortgaged cousins also continue to make a return.

CoreLogic chief economist Kelvin Davidson: "Regardless of exactly when the recession actually occurred, the economy has clearly been weak, and further interest rate cuts lie ahead." Photo / Peter Meecham

Indeed, from a lull of less than 21% of purchases in April, mortgaged multiple property owners have now risen to more than 23%, their highest share since late 2021 (with the number of deals in November about 16% higher than last year). That’s still lower than normal – circa 25% or above – but there are reasons to think that mortgaged investors will be a key group to watch in 2025, potentially raising their presence further. After all, the tax and deposit rules have eased in recent months, and with mortgage rates down, the negative gap between rental yields and financing costs has closed. In other words, the required cash top-ups from other sources of income that are typically required to keep a rental property going from week to week may now be getting closer to a comfortable level for greater numbers of would-be investors.

4. It’s a tenant’s market

That said, not everything has shifted in favour of landlords in recent months. In particular, with net migration flows slowing and the stock of available property on the market rising – perhaps as some tenants move into home ownership and other properties shift from short-term holiday lets into the long-term market – rents themselves have gone flat. The Stats NZ new tenancy/flow measure was only up by 1% in the year to November, the fourth month in a row at around 1% or less; versus a long-term average of more than 3%. Rents are also already high in relation to incomes, so although lower mortgage rates are helping cashflow for investors look a bit better, there doesn’t seem much scope for hiking rents in the coming year.

5. All the best for 2025

To finish, have a great Christmas and (hopefully) some time off. No doubt 2025 will have plenty of property twists and turns in store.

- Kelvin Davidson is chief economist at property insights firm CoreLogic