ANALYSIS: Last week the Federal Reserve Board in the United States boosted the country’s key interest rate 0.25% and indicated a plan to get it to just below 3% come sometime in the latter part of 2023. We have also seen a third rate rise in a row by the Bank of England and the next review of monetary policy here will happen on April 13.
The chances are extremely high that the Reserve Bank will lift its cash rate from the current 1.0% to at least 1.25% and maybe even 1.5%. Inflation numbers here and offshore continue to come in higher than expected and central bankers are increasingly worried about the surge in inflation coming from soaring commodity prices getting locked into higher wages, which then leads to a further round of business selling price increases.
The central bankers, including our own, should have started raising rates a year ago and now they are playing catch-up. As noted here previously, we should expect to see some strong statements from the Reserve Bank aimed at showing their resolve to get inflation back under control after being negligent in restraining it.
These statements are going to scare some people because they will allow some easy headlines about people coming under financial pressure. Eventually we are going to read about potential for mortgagee sales.
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There will be some of course. But a wave such as we saw during the Global Financial Crisis is very unlikely. That is mainly because of the strong labour market in New Zealand, which will keep people looking for property and both willing and able to continue to service their mortgage.
A second large supporting factor will be the fact that everyone borrowing money in recent years has had their debt servicing ability worked out at interest rates closer to 7% rather than the 2.19% they might have initially signed up at a year ago.
Economist Tony Alexander: “We are not going to see houses suddenly move into ‘affordable’ territory.“ Photo / Fiona Goodall
Some people might feel there is support also coming from the 165,000 migrants who have become eligible for a special residency visa. But most of these people are not going to be in a position buy a house straight away, and their buying will be offset by a net loss of Kiwis to Australia.
The housing market boomed beyond all reason, and now there is a reality-check underway involving a correction of prices back to more reasonable levels. We are not going to see houses suddenly move into “affordable” territory. But maybe three years from now things will look a lot different.
Back between 1970 and 1987 inflation in New Zealand averaged almost 13% a year. There was a boom in house prices leading into the middle of the 1970s and then a major correction afterwards. Prices in nominal terms did not fall. But allowing for inflation they declined by about 40%.
We are already seeing house prices falling, but we are not going to see another 40% decline relative to the overall level of consumer prices. Reasons include the absence of the quadrupling of oil prices in the early-1970s, the loss of markets for our primary exports in Europe as the UK joined the EU, and institutional factors suggesting a vigorous wage/price spiral will not develop this time around.
But if prices fall on average by about 10% as most of us expect, then allowing for inflation near 7% we can say real prices will fall by about 17% this year. Then if we leap ahead a year when prices might be flat but inflation is about 4%, the real price decline moves to more than 20% all up.
There is a price correction underway. But it is only when you allow for inflation that one sees the true extent of the price change. Having said that, we don’t measure home affordability by house prices versus consumer prices on average, but in comparison with wages. Given that wages will not rise anywhere near as much as consumer prices generally, the real house price decline from a wage purchasing power basis will probably be closer to 15% than more than 20% once the cycle is no longer falling or flat.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
