Economists say the Reserve Bank (RBNZ) will be wary of new survey results that show a drop in shorter term inflation expectations but a rise in longer term expectations for both inflation and interest rates.
The results of the latest Survey of Expectations, carried out quarterly for the RBNZ, showed meaningful drops in the expectation of the inflation levels both in a year's time and in two years' time.
However, expectations for both five years' and 10 years' time both actually showed increases, albeit that both expectations were for inflation to be within the RBNZ's targeted 1% to 3% level.
Inflation as measured by the Consumers Price Index (CPI) was at 5.6% as of the September quarter 2023. The RBNZ has been pushing the Official Cash Rate up strongly since late 2021 in order to take the heat out of the economy and bring inflation down. The OCR is currently at 5.5%. Whether it will be increased again, or indeed will start to be dropped is the matter for healthy debate in the market place.
The economists at ANZ and Westpac among the major banks still think the OCR will need to be raised again. However, wholesale interest rate markets are now pricing in about a one-third chance of an OCR cut as early as May next year, and the markets are actually currently pricing in two whole cuts (of 25 basis points) to the OCR by the end of 2024.
Westpac senior economist Satish Ranchhod said the RBNZ will take some comfort from the fact that expectations at the "closely watched" near term periods "are gradually edging down".
"Similarly, expectations for wage growth over the next few years have also been softening.
"However, the survey’s respondents are more circumspect about the outlook for inflation further ahead. Expectations for inflation five and 10 years ahead have picked up and remain above 2%," he said.
The results of thes survey won’t prompt any change in the RBNZ’s stance at its upcoming November 29 policy meeting, with central bank set to keep the OCR on hold at 5.50%, Ranchhod said.
"However, the persistence in longer term inflation expectations does reinforce the likelihood that the RBNZ will have to keep the OCR at elevated levels for an extended period to get inflation back to levels consistent with its target."
Likewise, ASB senior economist Mark Smith said if the "upward revisions" in longer term inflation expectations persist "it could mean higher OCR settings will be needed, all else equal".
"Our view remains that the OCR will peak at 5.50% this cycle. Nonetheless, OCR cuts still look some way off (as late as early 2025, but potentially slightly earlier) and the RBNZ will be wary given the risk that high current rates of inflation will be slower to recede than they would like."
Smith also said it would be of worry to the RBNZ that longer-term OCR expectations (in the survey) were revised up (to 3.16% 10-years ahead) as were expectations for longer-term NZ government bond yields (10Y 4.88% 1-year ahead from 4.15%) "reflecting a high for longer interest rate view".
"The RBNZ will be wary for further signs of uplift."
Ranchhod reiterated that Westpac is forecasting another rate hike from the RBNZ next year.
"Given the lingering strength in domestic inflation and inflation expectations, we don’t think rate cuts will come on to the table until early 2025."
70 Comments
As expected, welcome to the new normal of expensive money. It's only expensive when the secured asset isn't performing enough to inflate away the cost. Considering house prices remain at a stretched price point to long term fundamentals, it's not looking good for the ones who persist with rearview mirror expectations.
Have to disagree, The replacement cost of a house is outstripping inflation. Coupled with high immigration and rising rents - houses are safe even if capital gains are flat for the next two years.
The concern people should have is cashflow liquidity. From what I can see though, the high interest rates are going to be sustained for a longer duration, rather than rise considerably further. As most recent mortgagees were tested against 9-9.5%, most of us will be absolutely fine.
Fair point Albert. I am bought in April so that is my framework of thinking that I should have disclosed.
Coincidentally, ANZ tested me at 9.5% in April. ASB 9%. Maybe it is different for different people. I had a new business and equity in a developing country so that might have been the reason they saw me as high risk.
1689 Baptist, given the timing of your purchase, what are your expectations?
The intention of the buyer at time of purchase is critical here. From an investment perspective, considerable capital gains are expected as opposed to buying a home to live in and raise a family. The high cost of money alongside insurance, rates and upkeep will be a hard swallow when substantial gains fail to eventuate. Remember, house prices are already stretched now and vulnerable to numerous negatives scenario going forward.
I'm expecting zero capital gains and rents increasing 5-10% p.a over the next couple of years. So probably not that great as a short term investment but has that ever been the case for property?
The soonest I foresee I could be selling is 10 years away so I am not really interested in short term capital gains. What I care more about is cashflow. And cashflow is only going to improve with rent increases (2024-2026) or interest rate cuts (2026 onwards). Today is as bad as it gets.
I am being conservative with my expectations before anyone accuses be a spruiker. Most economists are predicting capital gains of 5-10% over the next two years and interest rates to start dropping 2024.
Just out of interest:
1) what was the gross rental yield on your purchase price in April?
2) are you renting your property in the long term rental market, student rental market or the short term rental market, or other?
3) what city / town is your rental property located?
That would be new. Possibly even a first.
What's happening in Auckland is that 'houses' - we should be calling them 'dwellings' - are on increasingly smaller and smaller bits of land. Thus the land on a per square meter basis isn't selling for less. There are of course some outliers but on average this is correct.
(FYI: Some of these outliers, e.g. south Akl areas, were bid up by developers looking for large sections when i-rates were down around 2.5%. They went up quickly - and came back to reality quickly - thus, as they were never a true reflection of value, I've excluded them in my analysis. Hence my opening paragraph.)
And your replies show your intellect on the subject. I only wish you live long enough to see it do as stated above.
Enjoy your abysmal returns against inflation 😂 younger generations aren't throwing their wealth at housing fools.
@Zwifter, you need to realize there is Bitcoin then there is crypto.
Like there is gold, then there are metals, or any material for that matter
"the ones who persist with rearview mirror expectations."
Seen on a NZ property forum:
"If housing inflation was exactly the same as the reserve bank has calculated for the next 50 years, as it was for the last 50, a 1 million dollar house would be 57.6 million equivalent in 2073
Housing that cost $1,000,000.00 in 2023 Q2 would cost...
$57,558,079.50
in 2073 Q2
5,655.8%
Total percentage change
Multiply this percentage number by the value of houses you already own.
Insane amount of money."
You are correct, investors are now a tiny percentage of buyers. Total numbers of sales to FHBs may be down by a small fraction, but it is surprising that many young people can make a purchase, given the comments on this site that it is impossible for a young person to buy a house.
I called them young because the age range is 25-40 years (usually), and therefore they are not middle-aged, though am sure that some middle-aged people are FHBs.
Anyway, I wasn't really focusing on age, and I could have dropped the word "young". The point I'm making is that FHBs have been consistantly buying in the past 12 months despite headlines of prices likely to drop further and interest rates Higher for Longer.
Yes and no. Back in the 1970's and 1980's you had people rushing out to buy homes in their early 20's. That's demonstrated by the fact that they'll tell you incessantly about having to take out 3 mortgages at huge interest rates to buy a house 2 - 3 x their annual household income.
Had they saved hard and bought at 30, well they'd be paying cash for the house.
Your statement only makes sense if all houses are purchased for the same amount. They obviously are not.
I'd expect FHB are buying at the lower end of the market.
Do you access to figures that show FHB are actually buying in the price range as everyone else?
Just a note on that note: The B&T sales figures seem to suggest that price rises in Akl are being driven by purchases well above average values of all existing houses. I.e. it tis hose with existing equity who are driving prices. Or put another way, those that bought years ago don't mind paying a bit more for what they want. Or put another way, when you are buying a $2m house, do you care if the mortgage goes from $300k to $400k if you're getting exactly what you want? (Note that this behavior is consistent with a recovery ... and a bull trap.)
So I'm right. Thanks.
First home buyers are well wise to purchase low and pay off fast. NZ's dwelling prices aren't going up for some time unless the NACT reverse the NPS-UD and actually follow through on ditching the MDRSs. (If you've not read my reasoning for that statement, ping me in another 'house price / supply' article and I'll explain again ... especially if you're a FHB.)
Percentages are pretty meaningless, as all it means is that less owner occupiers and investors are buying and selling. Which of course they are as many cant meet current servicing requirements to get a new mortgage, and in the case of investors, new rental investments are haemorraging cashflow. What are the absolute numbers of FHB? Are they increasing or decreasing? Who are the FHB (citizens or immigrants with PR)? How many are low deposit buyers? These are all the more interesting questions.
Investors have been put off buying property due to high test rates by the banks (around 9.5%), but for reasons I don't understand, FHBs haven't been put off. I can't see how they are able to service their mortgage, especially in Auckland where the median price for FHB was close to $900,000. Maybe some are rich immigrants who have attained PR, and already have $200,000 to use as a deposit (or maybe even cash buyers with $900,000).
BTW, I like your comments and questions. I understand that the absolute numbers of FHBs has remained approximately the same. I don't know how many are immigrants or how many are low deposit buyers, but maybe someone out there has some information? Thanks K.W.
The Banks seem to be very happy to lend about 4x income. Remember that housing transactions are are all time histroical lows (based on per capitia).
The deposit is the biggest hurdle and the BOMD (bank of mum and dad) is the most likely source of that.
The likely profile of a first home buyer in AKL: A professional early 30's couple likely to be earning over $200K combined which results in potential borrowing of $700k to $800k. Presumably $200k or $300k from the BOMD + Kiwisaver @ $150k combined + maybe $50k savings.
Approx 2000 sales in Auckland Oct 2023. @ 30% FHB= 600 house sales to first home buyers (in a city of 1.6 million people).
Approximately 600k dwellings in AKL. With an average turnover of 70k per year (in a normal market) which suggests that the average per month should be around 6,000 with 1,750 FHB entering the market (based on 30% of the market).
These numbers are dire if you are an over-leaveraged speculator. Prices will probably remain steady as long as volumes continue to bump along the bottom.
"The deposit is the biggest hurdle and the BOMD (bank of mum and dad) is the most likely source of that. "
"Presumably $200k or $300k from the BOMD"
Would be interested to hear from other readers - what are the potential solution(s) to those people who are renting without access to the bank of mum and dad (i.e parents unable or unwilling to provide / assist with a deposit)?
Got a few relatives in that position and very likely quite a few others in NZ in that position. (Assume they are unable to move to another city / town as they would be unable to find suitable employment for their skill set)
This article appears very onesided to me, as the commentary in the ANZ writing doesn’t actually say that it will be HFL and actually also indicates a contrary view that there is considerable downside risk and Lower Much Quicker may also be eventuating. Just look at recent swaps.
Why don’t we also include Lower Much Quicker in this headline? Doesn’t fit the narrative for the DGMs?
Not fair!
The DGM's aren't saying this. This is from bank economists!
I'm saying the opposite and I consider myself a DGM at this time ... and I believe rates will come down faster ... and I've been saying this for 6 months or more ... why? Because this cycle doesn't appear to be any different from previous cycles. And such cycles run on an established timelines.
Bank economists have a vested interest in saying HFL. And their words become nothing more than 'disingenuous marketing babble' when they are not 100% sure. Which they are not. In fact, I'd suggest they actually know they are on extremely shaky ground making HFL predictions.
Hi David, your headline should more correctly read "Bank economists say ...." (for obvious reasons)
Here's an interesting question: Do you know how many of your customers are struggling and may cease to even exist in the next six months?
Most of us probably don't know. Or we may have inklings but no real idea. For many businesses, the loss of a few customers may push them into a perilous situation. Ergo, "expectations" for one's own business of what the future holds, when the economy is stressed and likely contracting, should be couched accordingly.
Methinks the banks are doing whatever they can to get people to fix long. I think their predictions are wrong. Further, I'd go so far as to say they likely know they're wrong too.
Expectations for immediate inflation that are are low tells me the economy is soft. Expectations for longer term inflation being moderately higher tells me that the expectation is that central banks are going to have to drop rates before they can get inflation fully down to the level that they want it to be.
This inflation has been caused by supply problems due to Covid, followed by the Ukraine war and a Russian oil supply shock. It has been further maintained by savings held over by US consumers from US Covid stimies.
The supply problems are gone. The Russian oil shock has been blunted by Indian refiners and European consumers switching to other fuel sources. US consumers savings look to be running out.
However Jay Powell has paused but not reversed the interest rate rises. So NZ must also pause but not reverse interest rate rises. Our central bank must follow the US lead.
The oil price is declining due to weak demand. Weaker demand is beginning in the US. China is not moving fast enough to reverse the damage to it's property sector. Our exports are down and there is no help coming from overseas anytime soon. Our govt will be spending less under a more conservative govt so there is no help for aggregate demand there.
Where is the help for the broader economy in NZ coming from without private sector spending generated by a revival in the property sector?
So we must wait and see whether the political dysfunction in the US is enough to trip the American economy into recession and allow interest rates cuts there so that our central bank can also cut rates.
Because the revival of the property sector is the only game left in town. National know this so they will attempt to engineer such a revival with or without interest rate cuts. Hence if the push needed to get things moving is foreign buyer's money, then National will have to accommodate Winston's provincial growth spending plans to get some form of jump start through and that will also be good for aggregate demand growth and bad for the long term interest rate.
Don't sell 2 billion dollars of property to rich foreigners every year? Don't give lots of money (tax relief) to those who own the most assets (land)?
'No plan' is better than a 'good plan' to do the wrong things to my mind. Each to their own though. I guess if you own a lot of property, you talk yourself into feeling you deserve more support from the government?
Yes, aside from Labour's actual law changes in recent times to make property speculation less attractive and encourage people to actually work instead, one would not have suspected the "the same economic plan as Labour" would've been a National fan's first resort when defending the party's positioning as a "party of business".
A good, well reasoned comment.
The "Our central bank must follow the US lead" statement I disagree with though. There is no reason why our RB need do this. In fact, I expect them not to. Evidence? They started raising way before just most others that needed to. (Shame they needed to though. A problem of their own making that affects us all.)
OK, wild prediction... OCR will come down on 22 May 2024 - probably by 50 pts, maybe more. By then, deflationary forces from overseas will have got inflation down (CPI data out on 17 April), jobs will be disappearing at an increasingly rapid rate, and the political pressure to take the foot off the neck of families and the housing market will be too much for RBNZ to withstand.
RBNZ will of course use the opportunity to declare victory (for now) over inflation - having had a minimal impact with massive collateral damage.
The panel of business leaders and professional forecasters consulted for this RBNZ Survey of Expectations – predicted inflation would be as below 2 years ahead of those prediction dates
1.9% Mar 2020 1.2% Jun 2020 1.4% Sep 2020 1.6% Dec 2020
1.9% Mar 2021 2.0% Jun 2021 2.3% Sep 2021 3.0% Dec 2021
Sep 2023 CPI was 5.6%. So they were pretty close.
The correlation between business forecasts and what happens a year or two years later is around 40% - although they never predict a sizeable movement up or down.
The correlation between what business leaders forecast and official inflation rate at the time they make the forecast is close to 90%.
What this basically tells you is that (a) business leaders are pretty good at guessing whether inflation will go up and down - as long as nothing shocking happens, and (b) their forecast is typically just the current inflation rate - sometimes with a slight shift.
It also tells you that the people surveyed turn to prices rises to maintain their profits as opposed to creative cost cutting or business expansion or business integration (vertical or horizontal).
Why should we be surprised that their 'predictions' become self fulfilling?
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