ANALYSIS: A few things relevant to where the housing market goes are changing at the moment so let’s have a run-through of the bigger ones.
First, some banks have lifted their short-term fixed mortgage rates slightly in the past few weeks and the way margins have become newly compressed we could easily see some more small rises. Bank wholesale borrowing costs have risen recently because hopes of a quick end to the high inflation period offshore have been dashed by some stronger than expected inflation data in the United States.
Motivated by such data and the worry that the markets were getting much too optimistic, the US Federal Reserve Board Chairman plus his team members have delivered some strong warnings about the need for higher interest rates for potentially longer.
This has fed through to higher interest rates here with some extra small upward pressure on NZ bank borrowing costs from better than expected economic data. That is the second new thing underway.
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Our economy did not experience a recession in the first half of this year and instead shot ahead by 1.7% in the June quarter. This was not because of a surge in spending by you and I for which we already had data in hand showing the way in which we are reining in our spending.
Instead, the surge was driven by the reopening of the borders bringing in tourism revenue, plus the relaxing of Covid-related restrictions. Nonetheless, amidst other measures showing easing business and consumer pessimism, improving manufacturing, and especially a continuing excessively tight labour market, our inflation risks are not easing as much as was looking to be the case a few weeks ago.
This means the Reserve Bank may have to take the official cash rate above the 4% previously commonly expected, with a 4.5% rate now the common top pick. Plus, the chances of rates being cut before the end of 2023 have declined. Hence while borrowers can enjoy the lowest rates on offer by fixing for just one year, the two year period might also warrant some consideration – just in case.
The third new development underway is the return of first home buyers to the market, which I have been discussing in recent weeks. My surveys for almost a month and a half have been showing young people re-entering the market. For some the opportunity to pick and choose amongst double the number of listings of a year ago may be a motivating factor.
Tony Alexander: “Young buyers might be pulling back from the game of trying to pick the bottom.” Photo / Fiona Goodall
Prices sitting on average 12% lower than in November last year will also likely be attracting some in. Banks have also slightly eased their lending criteria recently, as have rules for accessing government assistance from Homes and Communities – Kāinga Ora.
Young buyers might also be simply pulling back from the game of trying to pick the bottom and getting on with their lives – in the complete absence of any proven ability from us forecasters to pick the tops and bottoms before they occur.
Some buyers may also be simply consigning the period of unusually low interest rates from 2019 – 2021 to the dustbin. That is, the one-year fixed mortgage rate currently sits just below 5.2%. The average for the ten years ending just before 2019 when deflation worries encouraged the Reserve Bank to cut rates aggressively, was 5.3%. The average two year fixed mortgage rate from 2009-2018 was 5.6% compared with around 5.4% currently.
Finally, a fourth thing underway is the mild appearance of investors into the market as well. As yet their presence is quite muted and that is understandable given issues with access to credit, tax changes, and slowing growth in rents. But it will be interesting to see what happens if political polls suggest a win for National in next year’s general election. Their promise to repeal tax changes could easily bring investors back – though that is more likely next year than now.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
