ANALYSIS: One of the stronger comments I’ve been making for the past six months has been that the record net migration surge would place extra upward pressure on rents and encourage extra house buying which will set the scene for recovery in the house construction sector – probably from early-2025. The Reserve Bank seems to have the same view as evidenced in the review it has just undertaken of the Official Cash Rate (OCR).
The decision to leave the rate unchanged at 5.5% was universally expected. But the comments the Reserve Bank made were slightly more hawkish than anticipated and a key reason is the extra inflation it sees coming from the migration surge. Sure, there is a more rapid easing of the labour market underway. But evidence of new weakness in the pace of wages growth is not yet there and until and unless that appears the Reserve Bank for now has shifted from its neutral migration position. It now sees the boom generating more inflation overall.
It also noted that the NZ dollar is sitting at slightly lower than expected levels (higher prices for imports), and that the migration boom has contributed to household spending being stronger than it expected this year.
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Taking these things into account alongside a weak world growth outlook and easing shipping costs, the Reserve Bank debated two things – leaving the cash rate unchanged and raising it. It did not debate cutting it and perhaps that is why it has allowed for one further rise in the cash rate next year.
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Is the cash rate likely to go up again in 2024? My pick is no for a number of reasons. First, the Reserve Bank has taken the logical position that until Treasury runs the numbers again to take into account the policies of the new government, it will stick with its previous fiscal policy assumption. But it looks like policy will be tightened slightly and that will help monetary policy slow the pace of growth in economic activity.
Independent economist Tony Alexander: "Mortgage rates are high and the restraint they are imposing on buyers will continue." Photo / Fiona Goodall
Second, the Reserve Bank has also taken the view for now that there will be no negative impact on farm incomes from El Niño. That seems unreasonable and the risk of drought on the east coast of the North and South Islands is something already causing farmers to close their wallets.
Third, the odds are good that the continuing high migration inflows will cause a sizeable slowing in the pace of wages growth and the eventual proof of such will be greeted positively by the Reserve Bank.
But for now, mortgage rates are high and the restraint they are imposing on buyers will continue. I can see that restraint in my latest survey of real estate agents which is currently underway. There is no evidence of any frenzy and little evidence of a fresh lift in demand from investors following confirmation of an acceleration in the pace with which full interest expense deductibility will return.
Alongside rising costs for insurance, maintenance and council rates the numbers don’t stack up yet for investors. For young buyers this is good news. The window of opportunity for making a purchase remains open. But once the inflation outlook improves and interest rates start moving lower that window may close quite quickly – depending on what happens perhaps with debt-to-income rules set to be introduced at some stage next year.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
