Every now and then it is a good idea to sit back and remind ourselves of the big picture and how we got to where we are at the moment. For the NZ housing market, the story is this. In the years following the 2008-09 Global Financial Crisis the rate of inflation failed to lift as expected and this resulted in interest rates not only not returning to pre-GFC levels but trending downward for a great number of years.
In fact, come 2019 the worries about inflation turning negative – deflation – led the Reserve Bank to cut the official cash rate to a record low of 1% despite falling unemployment and a strong economy.
At the same time as investors were being incentivised to buy property by low financing costs, we saw a migration boom into New Zealand from 2014 – 2019. This boom came right after the level of house construction in 2011 reached the lowest levels since the 1960s.
Putting these three big factors together produced a sustained surge in house prices starting in Auckland in 2012 then spreading to the rest of the country. Courtesy of the extra cut in interest rates over 2019 we entered the initial panic phase of the global pandemic with accelerating momentum in the housing market.
This momentum was such that within two months of starting the first nationwide lockdown we embarked on the mother of all house buying phases in our country. We were encouraged by a further cut in the official cash rate to only 0.25% and record low mortgage rates, the removal of LVRs, a surge in net migration flows, and a focus on lifestyle.
House prices soared, FOMO reached record levels and come November 24 2020 the Finance Minister was so concerned he asked the Reserve Bank Governor for help.
The Governor refused so the Finance Minister took matters into his own hands with new anti-investor rules announced on March 23 2021 and a new rule requiring the Reserve Bank to consider the government’s housing goals when setting policy.
Despite the tax changes, by then net negative migration flows, the return of LVRs in February and strengthening in May, plus mortgage rates rising from June, the housing market continued to boom. But in November 2021 LVR rules were tightened again and in December the CCCFA changes were made. The two measures together produced a credit crunch which brought the house price boom to a crunching end.
In the middle of last year there were signs that the speed of decline in the market was about to ease. An easing in price falls did in fact occur. But on October 18 the annual inflation number was announced as 0.6% higher than expectations at a shocking 7.2%. The news pushed mortgage rates up 0.5%. Another 0.5% was added on after November 23 when the Reserve Bank increased the cash rate by a record 0.75%, raised their forecast for where the rate would peak from 4.1% to 5.5%, and warned of an imminent recession.
From November consumer and business sentiment plunged and buyers stood back anew from the housing market – akin to going on strike. Prices fell on average 1.7% in December to sit 15.1% down from the November 2021 nationwide peak.
Now, we are in a phase where we await news on whether monetary policy tightening is on track to control inflation.
In the past few days, we have received data suggesting to us that the answer is yes. The annual inflation number to December was bang on 7.2% expectations which removed the risk of a repeat of the earlier inflation shock.
Data on price movements in the United States have been coming in lower than expected and that has pushed bank fixed borrowing costs here lower. Most importantly, on February 1 the annual wage numbers came in lower than expected and we learnt that employment rose only 0.1% in the December quarter after jumping 1.3% in the September quarter.
Now, wholesale interest rates are edging lower, banks are cutting their medium to long-term mortgage rates, and market attention is on when monetary policy may start to be eased.
Given that inflation is still ridiculously high at 7.2% it is unlikely the Reserve Bank will be talking about cutting interest rates anytime soon. But increasingly it looks like we have pushed past the October 18 inflation shock and are back in the endgame for the housing market decline. That means prices still falling further, but more and more buyers starting to get interested in re-engaging with the market as affordability improves and incomes rise.
Once there is generalised discussion about interest rates falling, we may finally see the period of housing downturn end. Best guess? Mid-year. But who knows what tomorrow’s data will show. Inflation risks are still strong. So, I feel safer writing about the downturn ending rather than engaging in outright speculation as to what the flat then growth periods will look like.
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