Summary.   The cyclical upturn in New Zealand’s residential real estate market got off to a hiss and a roar in the June quarter of last year with sales bouncing up around 20% after adjusting for seasonal factors. But since then things have settled down in most (not all) parts of the country.

Housing upturn delayed by interest rate worries

Tony Alexander

Friday 1 March ‘24

Some of the initial firm inflow of buyers would have been capped by the general election in mid-October making most people uncertain about many things. Then after the election the coalition negotiations to mid-November provided another reason for waiting to see what would happen.

By the time we learnt the full details of the new government and their policies I suspect (and wrote at the time) that people jumped straight through to placing big decisions on hold and enjoying a decent summer holiday well removed from covid, flooding, politics, and world events.

Virtually everyone is now back at work so can we say that there is new momentum developing which will see rising sales, falling numbers of days being taken to sell properties on average, and some additional upward pressure on prices? I think we are close but the new signs of life I have been spotting in my various monthly surveys would have been dented in the middle of February by one forecasting group’s prediction that the Reserve Bank was set to raise interest rates by another 0.5%.

No-one else explicitly predicted the same thing and I wrote that it was unlikely further monetary policy would be needed.

This past week we have had confirmation of that from the Reserve Bank in their first detailed review of the economy, inflation, and interest rates for 2024.

On February 28 they left their official cash rate unchanged at the 5.5% rate they took it to in May last year but continued to warn that we are not out of the woods yet.

It is easy to understand why they don’t want interest rates falling away yet when we look at some key numbers. The rate of inflation is still much too far above the 1% - 3% target at 4.7%. The annual rate of wages growth is twice the long-term average of 3.3% which has been consistent with inflation averaging just above 2%.

Business pricing plans are still running well above average. And many parts of the economy subject to minimal competitive pressure are continuing to boost their charges. This includes councils, insurance firms, supermarkets, and domestic air travel provider(s).

But at the same time as these measures easily provide justification for no monetary policy easing, we have strong evidence that the economy is in a weak state. House construction is falling away quite rapidly.

Retail spending volumes per capita are running 11% down from where they were at the end of 2021.

Business investment plans are well below average, exports are trailing some 7% down from a year ago, our top export destination (China) has a poor growth outlook, and the government is tightening fiscal policy.

Monetary policy is working underneath the surface. But until that weakness breaks out in signs of a worrying slowing in prices growth, mortgage rates will only mildly edge lower in the next few months. But does this mean the housing market will stay stalled? Actually, from my point of view this delaying of the period of interest rates relief reinforces the factors I have cited as reason for bringing forward one’s purchase in time rather than sitting back.

Specifically, the longer it takes interest rates to fall the greater will be the decline in house building therefore the greater the shortages in some parts of the country – especially eventually Auckland. Each month brings more above average population growth and therefore more demand for housing. Each month will also bring us closer to the period when 100% deductibility of interest expenses returns for property investors.

We will get updated data on the market from REINZ in the middle of March and some new strength is likely. But full action will likely be delayed until the interest rates outlook is a lot better and talk about shortages hits mainstream media.

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