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Where else would we start for this market update, if not with the big headline news this week?
New Zealand is officially – if only just – in recession
Stats NZ released its latest GDP (gross domestic product) figures on 15th June, reporting a 0.1% fall in economic activity over the quarter to March 2023.
It’s our second consecutive quarter of GDP decline, following a 0.7% drop over the three months to December 2022 – a figure that was revised upwards from the 0.6% that was initially reported.
We’ve only met the technical definition by the smallest of margins, but “recession” is a fair and accurate description of what’s happening in the economy
Looking at retail spending, total sales figures were down 1.7% (approximately $113 million) in May 2023, compared to the month prior.
When you consider inflation’s still running pretty hot – and the price of goods continues to climb – those figures won’t actually illustrate the true extent to which people are tightening their belts.
I’m not expecting to see a recovery on the retail sales front any time soon, as the fallout of higher mortgage rates continues to trickle through to borrowers.
The average mortgage rate for existing borrowers is now sitting somewhere between 4.50% and 5.00%.
As more and more Kiwi roll off low fixed rates, there’s still another 1.50% of increases to be passed through to the economy, as the average mortgage rate climbs to 6.50% or thereabouts. And that’s going to hit retail hard.
There have been several commentators come out and say the state of the economy is going to get worse before it gets better – and I’m inclined to agree. The next few months are going to be a tough grind.
On the interest rates front, it’s a mixed bag
In one respect, the Reserve Bank’s announcement last month that we’ve now hit peak OCR (official cash rate) at 5.50% is good news. And all the signs I’m seeing out in the market suggest that we’re definitely at the top of the cycle, and things should start to stabilise from here.
Interestingly, however, we’ve also seen a number of the banks hike their 1-year fixed term rates in the last week or so.
They’d been sitting at around the mid-sixes (6.55% to 6.60%), but now the lowest on offer is 6.89% with Kiwibank, with most of the other banks edging closer to breaking the 7.00% mark.
It’s a move, I suspect, that’s driven by nothing more than the banks’ desire to pick up a bit of extra margin on the mortgages and home loan side of the business. Not that they really need it, given the exceptionally high profit numbers the banks have reported in recent months.
Longer-term fixed rates have climbed slightly as well in recent weeks – but those should remain pretty stable.
I’d still be cautioning borrowers against going for those 3- and 5-year terms, in light of the expectation that interest rates will start trending downwards within a year or so – and being locked in longer-term could expose you to break fees in the event you want to take advantage of lower rates.
And out in the housing market, “green shoots” are everywhere
I’ve seen this term being used all over the place in recent weeks, to describe what’s going on out in the housing market at the moment – and it’s an accurate reflection of what I’m seeing out there as well.
With more and more signs pointing to the fact that we’re at the bottom of the market, price-wise, and with interest rates stabilising, people that had been sitting on the sidelines are making their return in greater numbers.
And as a result, there’s also now a growing expectation that house prices will soon begin their slow recovery – with house prices likely to start picking up again by the end of the year.