BNZ chief economist Mike Jones says significant mortgage rate relief is unlikely this year and he's 'not confident' the housing market can 'right itself' till it is clear mortgage rates have stopped rising

There may yet be further small gains in short term mortgage interest rates, according to BNZ chief economist Mike Jones.

In a BNZ Eco-pulse publication, Jones said BNZ economists had been highlighting that, even though mortgage rates for some (longer) terms may have peaked, "significant mortgage rate relief is unlikely this year".

"Recent events play to the grain of this view. If anything, the risks are tilted towards further small gains in shorter-term (one and two year) mortgage rates," he said.

He pointed to the "eye-catching jump" in wholesale NZ interest rates through February.

"One and two-year rates rose 40-70bps to hit fresh 15-year highs. While it’s tempting to pin this on the Reserve Bank meeting, it’s mostly a story of rising offshore interest rates sweeping NZ rates higher. In the US, financial markets have reluctantly caved to the view of the US Federal Reserve that stubborn US inflation warrants at least another three rate hikes, and hopes for cuts this year are… just that."

Jones said a less gloomy global backdrop, a "more upbeat data tempo", and a marginally firmer inflation outlook all fall on the "higher for longer" side of the interest rate risk ledger.

And this is all of relevance to the housing market.

"Just when we were starting to think the housing market may turn a corner a little earlier than our roughly mid-year expectations, we’ve become cautious again.

"For one thing, there’s the firmer interest rate story noted above. We’re not confident that the housing market can right itself until it’s clear mortgage rates have stopped rising. We’re not quite at that point yet.

"There’s also the disruption from the recent North Island weather disasters to factor into the mix. This will lower housing market activity relative to what we would otherwise see."

Jones said the reality is that it will be a few months before the underlying trends can be properly assessed.

"...But, for now, we remain okay with our views that: 1) house price declines are expected to bottom out around mid-year; 2) the total peak-to-trough correction will amount to roughly 20%, implying additional falls of around 5% from here; 3) the recovery out of the other side of the correction will be tepid."

Jones noted that the "soggy" global backdrop certainly hasn’t deterred people from travelling.

"The trend towards so-called 'revenge travel' is showing up in NZ both via higher short-term tourism arrivals and longer-term migration swinging back to net inflows. Both are running stronger and, in the latter’s case, quicker than anyone might have expected.

"Tourism numbers for the December peak were back up to around 70% of pre-COVID levels. Further recovery looks likely as Chinese tourists – historically our 2nd largest source of tourism arrivals – start to hit our shores again.

"The bottom line is that the tourism recovery, in tandem with parts of the goods exporting sector, is helping to buffer the NZ economy against increasingly recessionary domestic demand conditions," Jones said.

He said the latest official retail spending figures were "instructive".

"Overall spending volumes declined 0.6% for the quarter, but that hid an almost two-speed pattern of spending. Strength in the more tourist-orientated accommodation and food & beverage categories caught our eye (up 2.3% and 2.4% for the quarter, 31% and 15% for the year). By contrast, there was clear signs of weakness in housing and durable-related categories like furniture & houseware, recreational goods, and electronics. Increasing evidence that cost of living and mortgage rate pressures are taking a toll on discretionary spending."

Jones said that "to be clear", 2023 still looks like a slog in many parts of the world, as last year’s global scramble to get interest rates higher catches up with the global economy, particularly the interest rate sensitive bits like housing, spending, and construction.

"But it’s taking longer than many expected for this impact to be felt. Economic data for the month of January roared ahead of expectations almost everywhere (NZ included), leaving analysts scratching their heads. Genuine resilience, or dead cat bounce?

"We suspect the pleasant data surprises may prove temporary. But, regardless, it’s clear that the odds of global recession have reduced."