Check out JB's latest market update below, or scroll down to read the full article:
We’re back again with our latest property market update—where we take a look at everything that’s been happening New Zealand’s housing market and economy over the last few weeks, and what that all means for Kiwi borrowers in terms of interest rates.
We’ve been saying for a while now that continuing weak economic data would likely force the Reserve Bank to drop the Official Cash Rate (OCR) much earlier than planned—in late 2025—and that interest rates should start to come down sometime towards the end of this year.
And considering the latest round of data coming out for the June 2024 quarter, which has continued to paint a picture of a really weak economy, it increasingly looks like that will be the case.
Inflation is finally back in its box
Our latest CPI inflation numbers were released this week—with results for the June 2024 quarter coming in at 0.4%, which was even lower than what the RBNZ had been predicting (0.6%).
All the media headlines are still reporting annual inflation at 3.3%, which is slightly outside the upper limit of the RBNZ’s target range. But it’s worth noting that 1.8% of that is a hangover from the September 2023 quarter, before we started to get our inflation problem under control—so, we're just waiting for that to drop out of the equation.
It seems ludicrous to me that we would hold the OCR up for longer on the basis of a historic inflation data point that is verging on a year old. If you instead look at inflation data from the last three quarters, and annualise that, the figure comes in at 2%—and that feels like a much more realistic picture of current inflation.
We had more good news with the latest food price inflation data. For the first time in six years, food prices actually fell by 0.3% over the 12 months to June 2024.
So, yes—in my mind, we’ve well and truly slain the beast.
There’s no doubt many parts of the economy are doing it tough at the moment, and that doesn’t bode very well for GDP
Retail sales continue to trend downward, with the latest electronic payment data for June showing a 4.90% year-on-year decline. Construction inflation figures have also slipped into negatives.
ANZ’s Truckometer Heavy Truck Index is an interesting one. It measures truck traffic levels as an indicator of economic health. The latest figures for June show activity across our heavy haulage sector is down by 5.2% month-on-month, and 0.9% year-on-year. This is a leading indicator of a contraction in economic activity so that doesn't bode well for GDP.
The same goes for the state of our manufacturing and services sectors. BNZ-Business NZ’s latest PMI Index, which tracks levels of manufacturing activity, came in at the lowest we’ve seen it since the GFC. And its June PSI Index (measuring activity in our services industry), at 40.2, was the weakest it's been since records began 17 years ago.
In addition to all of that, roughly 10% of employers are now saying they intend to reduce staffing levels over the coming quarter.
So, despite having marginally positive GDP in the last quarter, my view is that we were still in recession in June.
But this won't be reflected in the official data until the next round of GDP numbers is released for the June quarter (in late August). That means we're in for another six weeks of negative economic news but it pays to remember that the headlines are backward looking and simply telling us what we already know—the June quarter was tough!
Moral of the story: it’s looking more and more likely that the OCR will start dropping soon. I've been predicting for a while a 0.50% drop in November, but it could easily come before that
In recent weeks, several of our bank economists have brought their forecasts for interest rate falls forward from mid-2025, and large parts of the market (us included) are now picking a 0.5% OCR reduction in November.
But with two more OCR announcements to come before then—in August and October—there’s an increasing likelihood that falls could come earlier, which would be welcome news for struggling Kiwi mortgage borrowers.
The RBNZ believes that a neutral OCR—one which neither fuels nor restricts the economy—is 2.75%. Given the weak GDP signals we’re seeing out there, I think the Reserve Bank will be in a rush next year to get us back to that point. So, once rates start falling, they should fall relatively quickly.
In theory, that should mean mortgage rates get back to somewhere between 4.50% and 5.00% within the next 12 to 18 months.
The housing market is also looking weak
It’s typical for activity to drop off during winter, but house sales were particularly low in June—down 35% year-on-year in Auckland, and roughly 25% year-on-year across the country.
From my experience, June can be a funny month for house settlements. This year we had four Fridays and last year we had five Fridays in the month. It pays not to read too much into one month’s data.
On the flip side, we’re still seeing many properties come to market, with listing numbers up 25% year-on-year in June.
Despite weak sales and growing listings, house prices have been relatively stable. Even given the slight fall in prices over the last couple of months — around 2.5% — they’re still up year-on-year.
As interest rates drop, that will boost consumer confidence—and my prediction is that we should start to see a gradual recovery in house prices after Christmas. A lot of damage has been done to the economy.
Balance sheets and scars take time to heal, so economic recovery will be slow. My advice right now would be to not hope for miracles. Hope is not a strategy.