The Market – what’s next?

When we look at the property market and try to forecast where it is headed, we all know that it tends to act like a rolling ball. Once it starts in motion, it tends to move in that general direction or stop for a while. When the ball is pushed in another direction it is usually announced all over the news so there are no surprises.

There are a few economic variables that can be looked at to find out which direction we are moving, how far it will go and when it is likely to change direction. These include:

1. NZ recognized Economists view points.
2. Immigration
3. Interest rates
4. Bank behaviour

Economists

This variable has been watered down some-what after the announcements of where the property market was headed during the pandemic. (1). Most, if not all the viewpoints that hit the press forecasted property prices to drop yet the average house price soared in the opposite direction to the tune of a 20% increase (2).

Immigration

The number of people requiring housing, be it to own or rent is a significant variable in the ratio of supply and demand. The NZ Herald has published news that a net migrant level of approx. 100,000 more people arrived in NZ last year, the highest in decades.(3) This is good news for the demand/supply graph if you are hoping for the house prices to increase.

The new government has increased the ‘green list’ which will encourage more people to come over in search for employment.(4) For those unfamiliar with this list, it  is a list of jobs that NZ is finding it hard to fill, where the demand exceeds the supply. Most of the new jobs are for mechanical engineers, pavers, panel beaters, welders, panel beaters plus engineers in the roading and aircraft trades.

Given that the unemployment rate has jumped towards the end of last year (5), does this indicate that our specialist trades are no longer training in these fields’ or have they all sought greener pastures in Australia? The unemployment rate usually climbs with the rise in the Official Cash Rate (OCR) and Interest rates as business are less likely to afford to grow/employ new staff when they are struggling to pay the higher interest rates. The inverse is true when the interest rates go down, business’s have more disposable income which they can put towards growing the business.

Interest rates

This variable, as we know is the ‘big kahuna’ and other variables usually have to go through the Interest rate door if they want to move the property market. No matter what happens with the other variables, as the Labour party found out, unless interest rates move significantly lower people just will not be able to afford to pay the higher prices.

As we all know interest rate movements are intrinsically linked to the rises and falls in the Official Cash Rate. The latter determines the rate which the banks can borrow money and then they add on a few percent and set the mortgage rates for consumers.

What we have seen lately however, are predictions that the OCR will either stay the same or move upwards in 2024. ANZ Chief Economist, Sharon Zollner (6) has predicted that the OCR rate will increase in February or April due to inflation still stagnating or going up slightly. This is due to business confidence where the average business owner is still increasing prices to cater for losses or at least down due to people not buying as much (because they cants afford it due to interest rates going up). So you see how everything is linked to everything else.

Banks

What is bound to happen which will happen sooner or later, is that the banks will start to sweat because they are not meeting their profit targets with more mortgage clients coming on board. A market study was introduced last year to find out whay competition doesn’t seem to be working and what to introduce to make it work (7).  Several of the banks have reported lower profits in the second quarter of last year and surely this will set off alarm bells to take some action (8).

Banks are like any other business out there, they either sell less items with huge margins, similar to a jewellery store, or sell a lot of items with a low margin like a $2 store. In this property market where people have bought properties they could barely afford at 3% interest rate (which is now 7%), the interest rates going higher now will break the camel’s back. So, the banks are left with little choice on their direction, they have to move into the business practice of the $2 shop and sell in quantity.    

As will happen sooner or later, the fat cats drinking from the bowl of sweet cream that the covid area provided. This will to come to an end. The bowls have been empty for a year and they are licking the final whisps of cream off their fur lined lips. As many who are active in the property market know, funds have been tight in 2023 and many purchasers have been turned down mainly due to the restrictive instructions provided by the Reserve Bank.

Now the banks have to do more business to satisfy their shareholders if they want to continue the high profits they enjoyed up until the second quarter of last year. So, the competition will eventually start and the market wheel slowly will turn toward the borrower.  We will move towards a borrower’s market where the banks will bend over backwards to gain a customer over their competitor, albeit may not happen this year. When this eventuality comes to pass, this is where the fun starts and all mortgage customers out there should consider bargaining with at least 2 banks when looking for a new mortgage or re-fixing their existing one.

 I remember back in the year 2001 when my bank manager was ringing me up regularly to see if I would consider buying another investment property and telling me they they will pay the legal fees and with the extra mortgage insurance (where they would cover the premium) they would lend me 90%. I don’t think it will go that far this time, but it would be great if it did. Power to the consumer!

 Summary

Towards the end of 2023 many believed the interest rates were at their peak, not so much because inflation was heading toward the target range of 1 to 3% (which it isn’t), but because the market couldn’t withstand any more rises before something broke.

In February 2024, it seems that this prediction of stability and easing may be stretched a little and even the OCR may slightly go up in early 2024. So, batten down the hatches and hold out there for a bit longer, the storm is not over yet. An enlightened chap in our office called Murphy has mentioned that this is the opportune time to start buying investment property now and fixing the interest rate for 2 years at 6.5%. Maybe he’s right!

References

1. https://www.rnz.co.nz/news/business/414847/covid-19-economist-predicts-house-prices-to-fall-at-least-10-percent
2. https://www.auckland.ac.nz/en/business/about-business-school/property/property-connect-newsletter/property-connect-newsletter-edm/issue-1-2021/why-housing-prices-soar-despite-covid-recession.html
3. https://www.nzherald.co.nz/nz/nz-and-auckland-house-prices-what-can-we-expect-from-the-market-in-2024/WAASNTETRFGVRJHG27D5345QGM/
4. https://www.immigration.govt.nz/about-us/media-centre/news-notifications/changes-to-immigration-settings-announced
5. https://tradingeconomics.com/new-zealand/unemployment-rate#:~:text=4%25%20in%20Q4-,The%20unemployment%20rate%20in%20New%20Zealand%20rose%20to%204%25%20in,below%20market%20expectations%20of%204.2%25.
6. https://www.rnz.co.nz/news/business/508787/top-economist-predicts-ocr-set-to-rise-to-6-percent
7. https://blog.nzab.co.nz/with-bank-profits-falling-be-very-wary-of-the-2024-response