Tomorrow the 2021 Budget will be delivered. The current Government has revealed a penchant for surprise announcements of large nature which can cause confusion. So, perhaps it would be unwise to write what I think will be in it with relevance to housing when things could be vastly different.
Logic would suggest that the Government is incentivised to wait and assess the impact of their announcements so far before making further moves. But if that were the case then citing pressures on housing from the surge in issuance of temporary migrant visas over the past couple of decades would not have been used on Monday to justify warning of an unquantified immigration crackdown.
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The underlying trend in the housing market is one of some easing off of activity and intensity in searching and pricing. This trend got interrupted over February into April as investors acted quickly to lock up a purchase before they needed a 40% deposit from May 1. Now, when we get data out for the next few months, we are likely to see that trend get re-established with some accentuation from the recent announcements.
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So, lets just leap right ahead and address this question. What are the chances that the trends underway will result in average prices falling on an annual basis? Not strong.
While the Reserve Bank is highly likely to start raising interest rates in the second half of next year, a return to high rates of the past is not very likely. For those new to this business, during the 1970s and 1980s inflation averaged over 11% in each decade while floating mortgage rates averaged over 9% then over 16%.
We are not heading back to those bad years, though it would not be surprising if, once rates do start rising, a few old heads scare some of the younger home buyers with old ghost stories. For one thing, back then inflation got turbocharged by oil prices quadrupling early in the 1970s then doubling again towards the end.
Unions were much stronger than today, and many businesses were protected from competition. This resulted in both parties engaging in a wage-price spiral which produced high inflation.
Tony Alexander: "Before the 1990s, household debt was less than 60% of household income. Today that ratio is near 165%." Photo / Supplied
Our central bank was also under hefty direction from the Government and was prevented from quickly containing price rises with higher interest rates and credit restrictions.
These days the economy is far more flexible and competitive, businesses have lost a lot of their repricing ability, many factors pushing prices higher will be temporary, our central bank will act earlier than back then, and the impact of a 1% interest rate change will be much more.
Before the 1990s, household debt was less than 60% of household income. Today that ratio is near 165%, so any given percentage change in mortgage rates will have a far greater dollar impact on people’s disposable incomes than before.
In addition, a whole generation of borrowers know nothing other than low and falling interest rates, having never seen a monetary policy tightening cycle since 2004-08. Once rates start rising, these borrowers are likely to react far more quickly from the shock of it than at any time in recent decades where we were somewhat more inured to interest rate changes of sometimes substantial magnitude.
In all probability, by the time mortgage rates start rising, the housing market will have substantially calmed down under pressure from government actions, people diverting spending back to foreign travel, increased supply (particularly in Auckland), and a net loss of Kiwis to Australia to reap the benefits of their boom in labour demand.
The degree of fighting which the Reserve Bank will have to do is unlikely to be great. That is why pencilling in a rise in mortgage rates amounting to 2% between late-2022 and the end of 2024 could be a reasonable thing to do.
Then again, having been an economist through a number of interest rate cycles there is something I can offer from those experiences. Ahead of the 2008-09 Global Financial Crisis, we tended to under-estimate how high interest rates would eventually go. After the GFC we continually over-estimated the degree of interest rate rises. It is not clear which of those environments we will be back in post-Covid.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
