ANALYSIS: Auckland house prices have not fallen 19%. But the fact that some news articles have appeared highlighting this fall in a measure heavily affected by changes in the mix of houses sold month to month shows how quickly the housing market focus has shifted.
Only four or five weeks ago discussion was still centred around prices being 25% or so ahead of a year earlier. Now, with reliable gauges such as that from REINZ showing about a 5% price decline in Auckland, attention has shifted to falls and how much prices will ultimately go down.
None of us know by how much prices will reduce as we all failed to pick soaring prices during a global pandemic. But price declines are one of the factors which will limit the extent to which the Reserve Bank raises interest rates this year and into 2023.
Falling house prices mean falling paper wealth and that tends to restrain the willingness of some people to spend. Falling house prices also make it difficult for property developers to gain presales needed to satisfy banks before they will advance funds to allow construction to start. That means the house building outlook is shifting to the downside.
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Interest rate rises will also be limited by the soaring cost of living which has already severely dented the ability and willingness of householders to spend. That is important because the aim of the Reserve Bank when raising interest rates is that you and I pull back our spending plans. We already have and we are going to do so even further as offshore inflation makes its way into our shopping baskets.
Economist Tony Alexander: “Falling paper wealth tends to restrain the willingness of some people to spend.” Photo / Fiona Goodall
There are three further factors to come into play. The first is starting to appear already in the form of some hefty revisions to forecasts of net migration flows. Forecasters are shifted from expecting a rush of Kiwis back to New Zealand following the opening of our borders to realising the wage and cost of living attractions of Australia will see a generation shift there – as has happened in the past.
We Kiwis have historically shown high sensitivity towards migration flows – blaming migrants for pushing house prices higher when net inflows are strong, and getting quite despondent when the reverse happens. Discussion of the brain drain is going to be a further factor constraining our willingness to spend. It will also inject some doubt into the minds of businesspeople thinking about raising their selling prices.
The second extra factor is not yet here but will come before the end is out – worries that Auckland will face an over-supply of new houses and townhouses. As the stock of listings of existing properties grows, prices fall, and caution prevails, discussion will arise regarding how the many new dwellings will sell when net migration flows are negative.
The third extra factor possibly shortly to appear is worrying statements from the Reserve Bank warning of recession should employees demand, and businesses grant large, inflationary, wage rises. These warnings of potential deep pain are a powerful weapon not used enough in the previous monetary policy tightening cycle from 2005-08.
Put all of these factors together and we have a challenge to the view that because in the short-term inflation will spike higher as a result of Russia’s invasion of Ukraine, interest rates must necessarily do the same thing. By boosting our worries and our cash outflows for many things like petrol, the war is partly acting as a de facto tightening of monetary policy.
Some forecasters recently have revised up their prediction for how high interest rates go this cycle. But if I change my long-held view of a 3% peak in the official cash rate this year it will more likely be to cut it than increase it.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
