The economy is not permanently “munted”, says Tony Alexander, and anyone who thinks that is going to miss out on opportunities.
The independent economist’s remarks come as speculation mounts that New Zealand’s economy is heading into ugly and uncertain territory.
However, the grim forecasts that have last week’s 0.5 percentage point hike in the Official Cash Rate to 5.25% - the 11th consecutive raise in the space of 18 months - were all part of the Reserve Bank’s plan to bring down inflation, which is currently running at 7.2%.
“We're in an environment where it's actually helpful if people think the future is munted,” says Alexander. “The Reserve Bank is encouraging people to think in terms of recession, because that helps restrain the inflationary pressures on the economy, and therefore people don't ask for big wage rises and [it] will make businesses hesitant about raising prices.”
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He expects consumer spending to be depressed for the rest of the year and maybe into the middle of next year as a greater portion of homeowners’ income is devoted to mortgage interest payments.
Around 50% of existing home loans, by value, are set to roll onto higher interest rates within the next 12 months, with some borrowers looking at jumps that will take their rates from around 3.5% to around 6.5%.
Raising the OCR is a way to put a stop to further reductions in mortgage rates. “The drift for interest rates now is actually downward, and so we're having to make a special effort to stop that,” he says.
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“The risk is people think that this tight period in the monetary policy cycle is something that's going to be here permanently, and extrapolate the remainder of this year into what the conditions are likely to be for 2024, 2025 and 2026. That would be a mistake. We will see improvement in the economy.”
At some stage, the Reserve Bank will step back and start to lower the OCR, says Alexander.
He believes that the fact that mortgage rates have already peaked will be relevant for the housing market. “It's probably going to encourage a few more first-home buyers to come forward, maybe not the investors as yet. I think that's still a bit further down the road, down the track.”
That doesn’t, on its own, mean that a revival in house prices is imminent. Prices still have a way further to fall, he says, adding: “I think they're getting near the bottom.”
Kiwibank senior economist Mary Jo Vergara agrees that the bottom of the market is near. “House prices are down around 15 to 16% from the November 2021 peak. We think they'll fall a little bit further in the coming months, down to a trough decline of around 20 to 21%. But they'll start to rise later this year.”
Kiwibank’s economists don’t think the OCR has reached its peak yet, and expect the Reserve Bank will announce a 0.25 percentage point rise on May 24. That would bring the OCR to 5.5% - which the Reserve Bank had signalled at the end of last year.
“The risks are tilted to the upside, just given how focused the Reserve Bank seemed to be last week with a 50 basis point hike. It was in line with the OCR track, but we were all expecting a down shift to 25 basis points. There are already signs that [consumer] demand is falling,” Vergara says.
“Even if mortgage rates don’t rise, the Reserve Bank is indicating an intention that they remain elevated to keep demand and inflation in check.”
Kiwibank senior economist Mary Jo Vergara says house prices are near the bottom. Photo / Fiona Goodall
She expects that the Reserve Bank will start to make cuts to the OCR later this year. “We think they'll wake up in a few months’ time and see that economic activity is much weaker than their forecast and they’ll be in a position to start cutting the OCR. That may flow through into retail rates.”
Chris Farhi, head of insights at Bayleys, says the overall housing market is likely to see some positive movement once Auckland prices start to stabilise.
“The markets to watch are Auckland and Wellington, where prices have corrected faster and more substantially than in other regions. Those two will be the first to bottom out.
“Because Auckland's housing market has the bulk of the turnover, maybe around 40% of sales, once it starts to get into a stable position, you'll start to see a lot more positive sentiment coming back.”
Farhi says Bayleys agents are starting to see more buyer enquiry and more people at open homes. “Those two vectors are good. It's the first signs of life, signs [of a] come-back.”
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