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Going Up, Going Down Autumn 22

Economist Cameron Bagrie takes a good, hard look at New Zealand and how we’re going as a nation.

10 March 2022

What we buy

Inflation has risen to 5.9 per cent and doesn’t yet look to have peaked. The finger is being pointed at Covid-19 and global aspects, but that doesn’t cut it.

Non-tradable or domestic inflation is 5.3 per cent, reflecting an economy that has excess demand relative to supply and too hot to trot.

What we pay for mortgages

Surging inflation means higher interest rates.

The Reserve Bank has hiked interest rates 50 basis points so far and financial markets are saying the Official Cash Rate could go 200 basis points higher to 2.75 per cent, meaning one-year fixed lending
rates of around 5 per cent could be just around the corner.

With around $170 billion of mortgages set to refix in the next 12 months, some borrowers are in for a rude shock.

The houses we’re building

There were 48,899 new homes consented in the year ended December 2021.

Auckland led with more than 20,000 new homes consented over the year, driven by multi-unit homes such as townhouses, apartments, and flats.

There are fewer of us

Population growth has taken a massive hit and there are repercussions we’ll face. Growth has slowed from 90,000 extra people a year pre-Covid to less than 30,000.

The latest net migration figures report a small outflow.

It concerns me that building consents are massively outstripping population growth. Much slower population growth and rapidly rising building consents, if sustained, equals what for housing shortages and prices?

Well, you be the judge.

A tight squeeze

Credit conditions have tightened, and lending growth has slowed. New monthly mortgage commitments were $7.9 billion in December 2021, down on the prior month of $9.1 billion.

New home loan commitments fell below levels seen in 2020 for the last four months of 2021. There were $1.7 billion fewer new loans in December 2021 than there were in December 2020.

The exit door

Auckland saw a small population loss in the past year. There was a natural increase, but it was offset by people exiting into the regions.

This exit is nothing new. It’s been happening for years, but Auckland’s population growth was masked by strong gains in external migration from offshore. With borders shut, the mask has been ripped off.

Expect the push into regions to speed up. Covid is one reason, but affordable (or should we say less unaffordable) housing is another.

Pointing the finger

Slowing loan approvals have been blamed on the Credit Contracts and Consumer Finance Act (CCCFA) and banks’ knee-jerk reaction to it. I agree that the criticism is fair. The legislation needs to be changed.

But we should look at the bigger picture. Interest rates are higher, loan-to-value ratio restrictions are being applied, some banks are hitting borrowers with debt-to-income restrictions, and the banks’ appetite for risk has dropped.

Housing credit growth of just under 11 per cent in a year is not normal. Housing debt has risen NZ$31.5 billion in the past year, at an average of NZ$2.6 billion a month.

That sort of borrowing hike is not sustainable, amid 5 to 6 per cent income growth, and rising interest rates.

Credit growth is shifting to a slower lane.

Going in all directions

The unemployment rate is 3.2 per cent. Firms are desperate for staff. Surveys report acute staff shortages. Wages are on the up, sharply.

So why is it we’ve seen a 50,000 rise in the number of working-age people on a benefit in the past two years, and one in nine people of working age are now on a benefit?

Some hard questions need to be asked.

A rocky start

Asset prices have had a rocky start to 2022.

The cause? Inflation and expectations of higher interest rates from some key central banks such as the US Federal Reserve.

Interest rates worked their magic lifting asset prices when interest rates declined.

Taming inflation is not growth-friendly and central banks have a big job ahead of them.

While Bagrie Economics uses all reasonable endeavours in producing reports to ensure the information is as accurate as practicable, Bagrie Economics shall not be liable for any loss or damage sustained by any person relying on such work whatever the cause of such loss or damage. Data and information have been gathered from sources Bagrie Economics believes to be reliable. The content does not constitute advice.

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