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Cameron Bagrie's Economic Update

Cameron Bagrie's Economic Update

What does the future have in store for those of us with mortgages? Cameron Bagrie explains the danger signs that could warn of a correction.

14 October 2021

Here’s where New Zealand is today. The economic expansion that started way back in 2010 is mature. We’ve had the odd hiccup, growth has been driven more by bums on seats than doing things smarter, and we have a housing crisis to address.

But growth is still growth, unemployment is falling, lots of people are in work, tax revenue is flowing, and there’s money in the bank, which is allowing the government to address some key issues.

We want this expansion to go on. For this to happen, we’ll need a strong emphasis on productivity. Particularly if inflation is to stay tame in an environment where there’s a lot of pressure for wages to rise and the temptation will be for firms to pass on those costs to consumers.

Keep the economy moving

The New Zealand economy is facing ‘late-cycle’ challenges as opposed to ‘early-cycle’ ones. Early-cycle challenges are all about getting growth and sales. They’ve about getting the economy moving.

Late-cycle challenges are about meeting growth. They’re about keeping up the momentum after it’s been started, and making sure the seeds of a downturn and correction are not sown.

They’re also about making sure the property market doesn’t become so overheated that it needs to deflate.

Kiwis who’ve seen a few property cycles come and go know that New Zealand is due for a correction. That opinion’s based on nothing more than the patterns we’ve seen in the past.

Downturns and corrections are typically driven by one or a combination of these:

· A global event. These tend to happen every 10 years. The last was in 2008-09.

· A nasty build-up of imbalances. These could include high debt, a large current account deficit, overvaluations of property or shares, and poor investment decisions. The bigger the ‘unbalanced’ boom, the bigger the potential bust.

· Heavy-handed policy. New Zealand was hit hard in 1996-97 and 2006-07 when the Reserve Bank aggressively lifted interest rates.

Orange lights globally

There’s no shortage of candidates for a global accident.

We have a potential US-China trade war, the US Federal Reserve is lifting interest rates (nasty things can happen when it does that), global debt levels are higher than they were before the global financial crisis, and there’s no shortage of other international problems.

The flipside is that the US Federal Reserve is lifting interest rates for a reason. It’s because growth in the world’s largest economy is looking good.

Corporate earnings around the globe are strong and unemployment is falling, China is still performing well and while the US Federal Reserve is lifting rates, a host of other central banks are not. It’s an orange combination.

Some red lights locally

Do we have a nasty build-up of imbalances locally? Some red lights are flashing. Auckland house prices trade at roughly nine times people’s income. Household debt was 158 per cent of income before the Global Financial Crisis. We thought that was bad. It’s now 167 per cent.

Rental yields have fallen. In many instances, they are below the interest rate landlords are paying. Landlords in Auckland are not seeing capital gain. And the costs of maintaining rental properties are rising.

The household savings rate is minus 3 cents; for every dollar earned, we spend NZ$1.03. Productivity growth is weak. Those are signs of exuberance, which is often seen late in the cycle.

A host of other traffic lights sit on orange. Banks made it tougher to get a loan late in the cycle and this slowed the property market and credit growth.

Loan-to-value ratio restrictions did the same. House price growth, at least in the most heated market of Auckland, has slowed markedly.

Offshore debt is down

New Zealand is less beholden to offshore creditors. Net offshore debt has fallen, from 85 per cent to 53 per cent of gross domestic product (GDP). That’s still elevated, but more manageable. Household debt levels are high, but debt payment outgoings look fine, thanks to low interest rates. The Reserve Bank’s Financial Stability report noted some improvements in bank balance sheets, asset quality, and fewer housing risks. Because of this, loan-to-value ratio restrictions have now been relaxed.

What’s most encouraging is that inflation is low; it’s a green light. Low inflation keeps interest rates low.

In my opinion, it’s hard to see where inflation is going to come from, with house prices flattening out. Government policy initiatives will keep that going for a while yet. The economy is lukewarm, as opposed to inflation-hot, and technology is removing pricing power.

Look out for threats

However, there are some inflationary threats.

Global trade-wars could ratchet up prices. Fiscal policy via more government spending will add to the growth pulse by putting money into people’s pockets.

That can be a good thing but can also require higher interest rates to offset it. Recently announced fuel price hikes will add to inflation.

Wages have traditionally been a key source of inflation. Higher wages force up business costs and firms often try to recoup those costs by passing on price increases.

There’s pressures for wages to rise, for good reasons. Skill shortages are mounting, public sector pay expectations are rising, there is a stronger political focus on redistributing the economic spoils more to wage earners, there are pushes for a living wage, and lifts in the minimum wage are flowing through.

We all want higher wages. They’re a by-product of success and a just society.

However, for the inflation light to stay green (and interest rates low) and not move to orange or red and threaten the economic expansion, we’ll need to offset any wage gains with improvements in productivity.

The jury is out on whether that can, and will, happen.


Gross domestic product (GDP): GDP is a measure of a country’s market value. It covers all goods and services produced within a time frame and can be used to compare nations.

Loan-to-value ratio (LVR): LVR is the amount of your mortgage compared to the value of your property.

Inflation: An increase in the price of goods and services, and a fall in the purchasing value of money.

First published 28 May, 2018.

Story by Cameron Bagrie

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