I am pretty negative on the economy especially for the first half of the year and expect that many a business which relies on discretionary income (hospitality, retail and tourism being the main industries I am thinking of here) are likely hanging on hoping that spending through the festive season will keep them afloat.
For many it won’t.
I think we’ll unfortunately hear of many businesses hitting the wall from February onwards as the high mortgage rates hitting households continue to bite and achieve the exact outcome the Reserve Bank has been after with reduced expenditure assisting in the Banks fight against inflation.
While those who experience this hardship won’t see this as much relief, this should result in mortgage rates dropping earlier than many had been expecting. I remember doing a webinar with Kiwibank Chief Economist Jarrod Kerr in June this year and believe he has called this as accurately as any commentator with him being one of the earliest to comment that the Reserve Bank had done the job and did not need to hike further after their review on May the 24th. Most disagreed with him with some other economists as recently as the last month still predicting a further increase being required early next year.
We have now seen different data releases showing inflation numbers lower than expected and a shock last week where there was a 0.3% GDP fall for the September quarter when the Reserve Bank had been expecting a rise. The general expectation is that we will see reductions in the cash rate and more a question of when.
While the Reserve Bank is still predicting that they will not be reducing the cash rate until 2025 I expect we will see this reduced next year and potentially by the August review as this allows 3 further CPI releases to give comfort that the job is done.
The aforementioned negative economic factors should present some of the best buying seen in a while. I also expect dropping interest rates, strong migration and a more property friendly government courtesy of the recently formed coalition to be positive for prices in general across the next year and a much more active year for investors who understandably kept relatively quiet for the majority of the last 24 months.
Rents are likely to continue to stay strong with net migration and development failure meaning that we will continue to have a strong demand / supply imbalance.
The removal of interest deductibility should push many investors and traders back to the second hand property market (which may mean the new-build market takes a hit as it is generally priced higher). BNZ did some great recent analysis showing that the gap between building versus buying an existing property has never been larger. I expect many investors to now go back to the second hand market where it is easier to obtain properties at a discount and to add value.
While I am keeping a close eye on debt-to-incomes and how they may be introduced David Seymour in particular is likely to be more in favour of removing regulation than adding it which should mean an easier lending market moving forward for borrowers and there are signs of more new entrants wanting to come into the market as well.
Have a great Christmas and for those who are wanting to discuss their position for next year touch base HERE and we will arrange a time to chat in January.