Going Up, Going Down - Spring 2022
Economist Cameron Bagrie takes a good, hard look at New Zealand and how we’re going as a nation.
21 September 2022
No longer a one-way bet
From the new Chief Economist of the Reserve Bank in his first speech. “For several decades, we have traded houses among ourselves at ever-increasing prices in the belief that we were creating prosperity. But the tide may well have turned against housing being a one-way bet for a generation of Kiwis.”
Following the trail of debt
When interest rates rise, you follow the trail of debt. Household debt has risen $88 billion in the past four years. Around $165 billion of mortgage debt is due to refinance in the coming 12 months. A one-year fixed rate has gone from 2.2 per cent to 5.5 per cent. Ouch.
Stating the obvious
The Chief Economist’s statements are hardly surprising when you consider that interest rates are higher than they were in 2017 (and house prices are still around 45 per cent above 2017 levels), and migration is now a net outflow, not an inflow. We are consenting a lot of houses such that supply is exceeding population-based demand. Credit conditions are tighter and the tax regime less friendly.
What goes up…
House prices continue to retreat. The REINZ might still be reporting annual growth in house prices, but house prices have fallen considerably after peaking in November 2021. Since that peak, house prices nationally are down 9 per cent and in Auckland they have dropped 13 per cent.
The annual rate of inflation looks to have peaked at 7.3 per cent. Now, the focus is on how quickly it can come back down. That is the real challenge. Many economists, including myself, expect inflation to be stickier, and difficult to get back to 2 per cent consistently. Reasons include a modest reversal of globalisation (think outsourcing to China); worker shortages and wage increases exceeding productivity growth; climate change costs; a rising presence of government; and ongoing supply shocks.
Accentuate the positive
Out of the economic gloom and talk of a recession, there will be some positives. Investors will be reintroduced to Mr and Mrs C Ash, investments that make money and are not dependent on capital gain. Rising interest rates bring back risk. Investors now need to take real risk to make real money. Both sound sensible outcomes, and their reinstatement signifies how out of whack investing became with ridiculously low interest rates and turbo-charged capital gains.
Counting some numbers
The maths on higher borrowing costs goes something like this: say you have borrowed $500,000 and your interest rate has risen from 2.2 per cent to 5.5 per cent, this means $11,500 additional borrowing costs. Remember that is an after-tax number. You need more than $15,000 of pre-tax income.
The attrition rate
Around 51,000 residential building consents have been issued in the past year. Odds are a lot will not make it to first inspection. Construction costs are up almost 20 per cent and house prices are falling. The scrum is screwing towards buying existing stock. The construction sector can only build 35,000 houses a year anyway.
Eyes on the labour market
According to the Reserve Bank we are exceeding maximum sustainable employment, a fancy way of saying we have too few workers relative to the jobs on offer, and an unemployment rate that is too low. Falling house prices are one piece of the bitter medicine to get on top of inflation. Another is a rise in the unemployment rate. This could get politically sensitive!
Inflation proves destructive
We have the lowest unemployment rate in more than 30 years, and the same for consumer confidence. A strong labour market amidst consumer despair signifies the destructive impact inflation is having on households. Households do not like inflation. They do not like the bitter medicine to contain it either.
Inflation is the #1 concern
Inflation/cost of living remains the top concern to households, for the second quarter running. Housing is number two. Housing previously held the top spot for numerous years. Law and order is now number five and of rising concern.
Gross New Zealand superannuation expenditure is projected to exceed education expenditure in the upcoming fiscal year ($19.5 billion versus $18.6 billion). Welfare needs are surpassing the most critical investment we can make in our future.
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