Contact UsContact Us

Knowledge Hub

Interest Rate and Market Update

Unfortunately, we don’t appear to have hit the top of the interest rate cycle yet. Economists were predicting the inflation (CPI) numbers to come in at 1.5-1.8% for the September quarter. The numbers have come out today at a much higher 2.2%

Note that is for the quarter. The Reserve Bank’s mandate is to keep it between 1-3% annually.

Well at least it was before they then got lumped with another mandate to maintain maximum sustainable employment (which while it may sound logical can contradict the inflation mandate) and a further requirement to have regard for house prices. This in my opinion is part of the reason that annually we are currently tracking over 7%.

It feels like a long time ago, but it is only just over a year where we were not talking about rampant inflation, hiking interest rates or cost of living. Since October last year the Official Cash Rate has been hiked 8 times in a row with most commentators expecting a 9th time in November and a 10th in February. The last 5 times have been by 50 basis points each to have us sitting with a current OCR of 3.5% but economists thinking we still this will keep rising until we hit 4.25% (ASB expectation) through to 4.75% (ANZ expectation). I think that there is a pretty good chance the Reserve Bank hits us with a full 75 basis points (0.75) at the November review now.

While not all of this will get passed into fixed rates it does appear that the top end of the interest rate cycle is going to be higher than most commentators were predicting only a few weeks ago.

Another concern I have leading into next year is politics. Market research company Ipsos have released their latest regular polling of major issues in NZ which show (people can nominate up to 3) where the major parties are at now and how they have changed from 12 months ago:
 


If this polling continues there will obviously be a large incentive to Labour to throw some money around in an election year to try and rectify things. To give you an idea on how the current spending is going it is worth a listen to Mike Hosking reviewing a recent article by NZ Initiatives Chief Economist Eric Crampton HERE.

It will only take a domestic spend up leading into the election combined with further upward rate pressure (think continued market concerns around the Russian / Ukraine situation and the US Central Bank hiking their cash rate more than expected) to result in even higher rates than are predicted now.

Property prices have taken a decent hit in some of the main centres since the peak of late last year with Auckland down 11.2% from September last year and Wellington knocked even harder with a 17.3% drop.

Interestingly though we have noticed an increase in activity over the last 4 or so weeks. First home buyers are back and we have also noticed a large increase in property investment activity. This is likely to be from a myriad of reasons including:
 

 

Investing is always a case of balancing risk against potential return. While risks continue to exist, they can be mitigated. Building costs will continue to put a floor under how much prices decrease; household incomes and an exceptionally low unemployment rate will continue to put upward pressure on rents, and this isn’t even taking into consideration that at some stage that the loan to value ratios are relaxed. Note that I am picking that this happens at the May 2023 Financial Stability Report the RBNZ undertakes with a 10% announce this next month.

Every investor needs to do their own due diligence, but I would suggest it’s a far better time to look to buy when there is a small drop to go in house prices and minimal competition versus waiting for prices to rise again but having to battle full auction rooms.