I wrote an article recently noting that the structural decline in average inflation and interest rates around the world since 2007 has produced a structural repricing of assets. This has arisen because the big declines in returns to investors from low risk assets like government bonds and bank term deposits has seen money flowing into what were higher yielding assets like shares, commercial property, and houses.
One person reading the article interpreted it to mean that banks had been flooding extra liquidity into the housing market and that this cheap credit was the cause of sharp price rises. He missed the main point however – keen as he seemed to be to reach a conclusion that banks were the primary cause of higher house prices.
Over the past five years housing debt has risen 37 per cent in New Zealand from 16 per cent growth in the five years ending March 2014. In the previous five years to March 2009 growth was 70 per cent and in the five years to March 2004 it was 63 per cent. There has been no post-GFC surge of lending in New Zealand and the 37 per cent lending growth for these past five years only barely exceeds growth in the nominal size of our economy of 29 per cent.
Because we don’t expect another structural shift lower in average inflation and average interest rates, we don’t expect a repeat of the recent period of asset repricing –— a process which still has a bit further to run in New Zealand outside of Auckland.
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But interest rates are still falling. Partly this is because the Reserve Bank cut the official cash rate to 1.5 per cent on May 8, though mainly it is attributable to slowing world growth and falling international inflation.
The official cash rate set by the Reserve Bank heavily influences bank funding costs — though it is not the rate at which we actually borrow — and we don’t get any of our funding on an ongoing basis from the Reserve Bank. At 1.5 per cent the cash rate is now 1 per cent below the level it was taken to in 2009 when worries persisted about a global great depression and our economy had just shrunk by over 3 per cent.
We are currently growing at about 2 per cent with a 4.2 per cent unemployment rate. So why the monetary policy easing without great depression worries? Because around the world these days we get low and even declining inflation with economies growing at 2-3 per cent rather than shrinking. The world has changed. As a result, who would have thought that those of us who financed our first house in 1987 at interest rates of 18.5 to 21 per cent would have been better off in terms of getting on the housing ladder than young people today financing at less than 4 per cent? For new young buyers a new paradigm is now in play. Low borrowing costs but high asset prices. For older people looking for low risk returns there is equally a new world to be handled — low-term deposit rates near 3 per cent yet high house values which are only useful if one downsizes or sells a spare property bought some years back.
Just briefly, let’s take a look at the most recent developments in the Auckland and NZ housing markets. Sales are falling virtually everywhere, and nationwide sales are likely to decline toward 65,000 within a year from 73,500 now and a peak late last year above 76,000. Prices continue to trend upward everywhere except Auckland where average prices in the last three months were down by 0.4 per cent from a year ago. But the pace of price rises is slowing now in most regions and within 12 months price movements are likely to be relatively flat almost everywhere.
- Tony Alexander is chief economist for BNZ
