ANALYSIS: Just over a month ago when the higher than expected inflation rate for New Zealand of 7.2% was revealed there was a substantial sell-off in the New Zealand wholesale interest rate markets. Expectations soared that the Reserve Bank would need to raise interest rates a lot further than the 4% peak they had indicated in their economic forecasts released in August.
The market started to price in that the Official Cash Rate (OCR) would instead peak at 5.5%. This led the banks to undertake a round of increases in fixed mortgage rates of about 0.5% across the various terms. As a result of that we have seen investors disappear once again from the housing market and first home buyers step back slightly to see how things would pan out.
One month after our higher than expected inflation number we saw the opposite thing happen in the United States with inflation coming in better then predicted. This led to declines in wholesale interest rates over there which fed through to declines in New Zealand as well. The common pick for where the OCR in New Zealand would peak dropped from 5.5% down to 5.1%, which was where it was sitting just before the Reserve Bank announced the latest monetary policy change.
They largely met market expectations by raising the cash rate 0.75 percentage points to 4.25%. But their comments regarding the difficulties they are experiencing in crunching consumer spending as a means of crunching inflation were stronger than expected. They noted that people seem intent on maintaining relatively high spending levels despite increasing debt servicing costs, falling house prices, and very low levels of consumer confidence.
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They also noted that wages growth is relatively firm, that the labour market is much tighter than they want it to be, and that the rebound in inbound tourist numbers is stronger than had been expected.
Taking these factors into consideration and noting that the longer inflation stays high the harder the task is getting it back down, they have decided to accelerate the pace of monetary policy tightening and lift their predicted peak for the official cash rate from 4% to 5.5%.
As a result, wholesale interest rates which banks must pay to borrow fixed rate money for lending to you and I at fixed interest rates have increased back to where they were before the good United States inflation number and just after the higher than expected New Zealand inflation result.
Because of this rebound in bank borrowing costs and because of the expressions of concern by the Reserve Bank, there is a very good chance that we will see another round of fixed mortgage rate increases very soon - perhaps even between the time I write this article and the time it gets published.
Independent economics speaker Tony Alexander: “House prices are going to fall further but the pace of decline has already slowed down in recent months.” Photo / Fiona Goodall
My best guess for the moment, keeping in mind that everybody has got their interest rate forecasts wrong around the planet over the past year, is that the usually very popular one year fixed mortgage rate will rise from close to 6% at the moment towards 6.5% and maybe higher.
This level along with concerns that interest rates may not come down for quite a long period of time will cause house buyers to take another step back. But I'm still sticking with my opinion that we are in the endgame for the period of declining house prices.
House prices are going to fall further but the pace of decline has already slowed down in recent months and will likely remain relatively slow for a number of reasons despite the extra pessimism set to come along. Construction costs continue to go up, net migration flows are proving stronger than anticipated, job security remains strong, and the extra hike in interest rates is going to make it even more difficult for the current government to get re-elected late next year.
In fact, with the Reserve Bank forecasting recession from the middle of 2023 the chances of a change in government have increased and this means that as we move through 2023 more investors are likely to start sniffing at the property market in expectation of interest expense deductibility returning.
Clearly there are a great number of extremely uncertain factors in play here even without having to make reference to the also very uncertain international economic and political outlook. But for those people who have the spare cash flow to handle slightly higher interest rates the housing sector is turning more and more in their favour.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
