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Keep an Eye on China

If we look just at New Zealand, it appears we could be in for further interest rate increases. Immigration is continuing to be stronger than expected although a lot of Kiwi’s are also leaving these shores as well. Most economists are now picking house prices to rise gently over the remainder of this year and then have a larger increase over the 2024 calendar year. A change in Government which looks very likely at the time of writing is likely to bring some confidence back into the market especially for those who are property investors. First home buyers are already showing this confidence as per a recent survey conducted by Tony Alexander which has shown that after they were locked out by the Reserve Bank for a period of time that they are now back in force. 

While wage growth has slowed, and unemployment is increasing it is not really rising at any significant pace and rhetorically I can say from speaking to many different mortgage lenders across both the bank and non-bank arenas that they are not seeing much pain either.

We have seen mortgage rates nudge up over the last few weeks with ASB taking the lead there (who must be starting to lose market share with how far out of market they are with their pricing at present and banks offering cashback incentives to move) even though the Reserve Bank is sticking with its line that they believe their work on lifting the cash rate is done.

One key factor which may mean we don’t see rates go up further and in fact may drive the Reserve Bank to reduce the Official Cash Rate sooner than they had planned is China. The Reserve Bank mentioned China no fewer than 37 times at their most recent Monetary Policy Statement.

There is a saying that “when China sneezes the rest of the world catches a cold.”

There is currently talk of 70 million unfinished apartments in China with in excess of $10 trillion of work in progress. Fonterra and Synlait have cut their forecast on milk solids after disappointing prices at global dairy auction which is considered lower than break even. This cut is expected to remove about $5b from NZ economy and may get worse.

Often if we live in the cities in New Zealand we forget the backbone of our countries economy is our farmers and the rural economy, and the regions are likely to take a hit as they pull back on their spending. 

As a final point I read an interesting point in CoreLogic’s ‘Pain and Gain” report. They looked back at the property market and the general economy after the Global Financial Crisis. It took the best part of a year for the economy to start turning around after property prices had actually hit bottom and started to increase. 

I think we are likely to see a similar story this time.

Kris Pedersen
21 September 2023