Shock and awe is a phrase which has been around for a while in military circles but which many of us came across for the first time in the 2003 US invasion of Iraq. It now could be a way of describing what the Reserve Bank has just done to the NZ housing market.
On November 23 when the Reserve Bank undertook its review of monetary policy and released updated economic forecasts, equal media attention went on the words used as the record 0.75% rise in the official cash rate.
The Reserve Bank spoke of having to put the economy into recession through 2023, the unemployment rate rising from 3.3% to 5.7%, house prices all up falling 20%, and inflation being of high concern. In the financial markets the 0.75% cash rate rise and near 5.5% peak had almost already been factored into bank costs of borrowing money to lend at fixed rates. Nonetheless, banks took the opportunity created by the fog of confusion and concern surrounding the policy change to lift their fixed mortgage rates another 0.5% or so following similar rises right after the October 18 higher-than-expected inflation outcome.
Banks have now got their lending margins back to long-term averages and there is a 90% chance that this is as high as fixed mortgage rates will go this cycle. But that is not what I want to write about here.
Instead, the intense discussion about recession has triggered a surge of concern amongst businesses and consumers
This has caused people to sharply rein in their spending plans on everything but groceries, including housing.
In my monthly survey of real estate agents many of the measures have gone back to where they were in the middle of the year. In particular, whereas at the end of October a net 15% of agents had said that they were seeing more first home buyers in the market, my late-November survey saw this change to a net 16% seeing fewer first home buyers. People have been shocked by the recession talk and predictions of 9% (floating) interest rates and for now have taken a step back from the housing market.
I can see the same shocked results in my monthly Spending Plans Survey which is currently underway. Whereas a month ago a net 28% of people said they planned cutting back on spending, now a net 46% do. A net 21% of people plan cutting spending on an investment property from a net 13% last month, and a net 10% plan stepping back from buying a house to live in from a net 6% a month ago.
At face value these measures easily suggest much greater falls in house prices and recession. But the thing with shock and awe is that it passes, and passage of time is likely to see people realise a few things which will bring the buyers back to the table – led by the first timers.
First, there is a growing body of people who feel the Reserve Bank has now gone too far, that the official cash rate will not in fact go to 5.5%, and that interest rates apart from floating rates have now peaked. Acceptance of this by the general population will take perhaps a couple of months. But when that happens buyers will come forward again.
Second, the labour market remains tight and the Reserve Bank’s unemployment rate forecast of 5.7% does not add up. The near 3% shrinkage in our economy during the GFC period caused a 3.1% rise in the unemployment rate. It beggars belief to expect their predicted 1% economic shrinkage this time will produce a 2.4% unemployment rate rise when labour availability is the worst on record.
Good job security will keep buyers looking at the real estate market even if they are not attending open homes.
Third, the net migration numbers are getting better faster than any of us expected and in a few months time the net flow could be positive again with one forecaster predicting a net gain over 2023 of almost 40,000 people.
Fourth, buyers are being scared off ordering new builds because of company collapse stories. They will revert to looking through listings of existing properties.
Fifth, the stock of listings is now falling and there is an established correlation between this happening and prices rising.
Sixth, the political opinion polls are suggesting a change in government next year and that will bring investors back to the market towards the middle of the year potentially in anticipation of interest expense deductibility returning.
There are other factors, but what they add up to is this. For the next few months, the negatives surrounding the Reserve Bank’s very belated shock and awe strategy will dominate. But the groundwork is being established for stronger market conditions over the second half of 2023 after prices have perhaps fallen by another 5%.
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