The following article is written by Tony Alexander; an independent economist with additional commentary available at www.tonyalexander.nz.
Since I wrote my previous column at the end of February, we have seen falls in bank wholesale fixed borrowing costs of about 0.2% across the board. We have also seen some cuts to bank fixed mortgage rates but only by amounts between 0.05% and 0.1% for the shorter terms. Margins have grown again.
On the face of it we can reasonably conclude that banks are still not choosing to compete much for new business. However from my monthly survey of mortgage brokers I can see that little bit by little bit the lending criteria used by banks are easing up.
I can also see that banks are offering discounted rates to those who ask to a greater degree than has been the case for a couple of years at least. These changes are positive, but it is still fair to say that credit conditions are quite tight.
Banks don’t want to take the risk of making aggressive cuts to fixed lending rates for the short terms which people are interested in currently and risk upsetting the Reserve Bank. As yet they and we cannot be dead certain that the inflation genie is walking steadily back into the bottle.
The current inflation rate is still more than twice the 2% target (1% - 3% actually), wages growth remains too strong, one measure of household inflation expectations has just increased 0.5%, and still twice the average net proportion of businesses say they intend raising their selling prices in the coming year.
The intransigence being shown by some inflation measures is especially frustrating when we consider the many signs of weakness in the economy. Retail spending per capita is running 11% down from the levels of two years ago. The unemployment rate has risen from 3.2% to 4.0%, export receipts are down on a year ago, the value of business capital goods imports is off 13% from a year back, and consumer sentiment measures remain well below average.
The commentary about our economy in the media is decidedly downbeat and most recently attention has turned to a key development of relevance to the housing market which I warned about in 2021 and have been increasingly highlighting recently. Falling house construction.
Wary buyers are reluctant to make purchases off the plan so developers of multi-unit complexes cannot meet bank requirements in order to secure finance which would allow them to commence construction. The stock of listings of existing properties has risen about 16% since the middle of last year and buyers feel less than normal need to purchase a new dwelling.
House construction is falling, builders and associated businesses are closing down, and this is happening at a time when population growth is running at the fastest pace since 1947. This interaction of rising underlying demand yet falling new supply will eventually produce a period of strong rises in house prices.
But this won’t happen until the Reserve Bank clearly signals that they will cut interest rates well ahead of the mid-2025 period which they have pencilled into their forecasts over the past few months. Even then, with rising unemployment and a large net loss of Kiwis offshore (more than offset by low-skilled immigrants) it will take some time until the housing market sparks back into life as it did for a while in the middle of last year.
It is hard to know when this will happen and for now buyers can enjoy a good number of properties to choose from – provided they can meet debt servicing criteria with bank test interest rates near 9%.
For borrowers this outlook of weak economic activity (we are officially back in recession again) implies increasing scope for a period of rapid interest rate cuts. If I were borrowing in the near future, I would remain inclined to look at fixed rates ranging from six to 18 months. As for when rates might next bottom out and 3-5 year rates become the best choice – that is impossible to pick this far out from the easing cycle even beginning.