30 September 2022

These three factors are generating falling sales for many retailers. There is extra downward pressure from fixed mortgage rates rising 3% – 3.5% in a ten month period as compared with rises of less than 3% over a four and a half year period the last time the Reserve Bank ran an extended fight against inflation from 2004-08.

Additional weakness for our economy comes from businesses closing down or suffering crunched profitability because they cannot get staff or materials. There is a correction underway in the house construction sector as the end of panic buying of property has made presales difficult to get so projects are either not starting or stalling.

House prices have fallen on average near 11% and the feeling of reduced wealth felt by many people acts to further constrain willingness to spend.

But do things add up to recession soon? Probably not because our economy has some unique supporting factors this time around never before present during a recessionary period. First, the NZ dollar is undervalued near US61 cents, down from 68 cents a year ago, and has not been at painful high levels for a great number of years.

This is very important for our exporters which by definition means the regions – particularly because of the second unique factor. Our export prices are 19% higher than at the end of 2019. The world is facing a food crisis. We are a food producer and will benefit from high food prices just as Australia benefits from the European energy crisis causing soaring sales of LNG and coal.

The third positive factor for our economy is the return of foreign visitors. Even though recession in parts of the northern hemisphere will restrain flows down here, this coming year promises to be vastly superior to anything in the past three years.

The fourth factor is foreign students returning and their inflow will be particularly supportive of a recovery in the Auckland CBD.

The final special factor is the tight labour market. Because they have been unable to hire staff there is no pressure on businesses to engage in layoffs let alone the mass layoffs we always associate with recession. High job security felt by people will act as a buffer against falling spending and means something very important for the housing market.

Investors stood back from the market immediately after the March 23 2021 tax changes announced by the government. They remain out of the market to a great degree even though more are expressing interest in buying, principally because finance has become much harder to get.

First home buyers however are stepping forward according to the most recent results from my monthly surveys of both mortgage advisers and residential real estate agents. These young buyers do face above average interest rates, still high prices, worries that prices will fall further after they buy, and less access to finance than before.

But more and more are abandoning plans to try and delay buying until they think the market has bottomed out. They are instead taking advantage of the doubling of property listings from a year ago and vendors finally accepting the old prices of late-2021 are gone and now meeting the market to get on with their lives.

The housing market is still weakening and will continue to do so for a few more months. But we have entered the endgame for this period of falling prices and sales and the conditions are falling into place for rising prices and sales through 2023 and 2024. However, the recovery when it comes is unlikely to be strong.

Through all next year net migration flows are likely to be negative. It will also take a long time for mortgage interest rates to decline much beyond the 0.2% – 0.4% falls which have happened since peaks were reached in the middle of June.

The government is likely to loosen fiscal policy in the May 2023 pre-election Budget and that will encourage the Reserve Bank to keep interest rates elevated through 2023. But because underlying inflationary pressures will be easing, we are likely to see some good falls in borrowing costs late in the year. For depositors the outlook is for potentially some small rises in rates from current levels – though not by much as household bank balances are actually over $30bn higher now than they were at the end of 2019.

All up, recession is not likely and even if one appears the tight labour market and firmly supported export sector mean it will not feel like any recession of the past. The housing market continues to weaken but things are falling into place for improvement a few months from now. And for borrowers the worst rate levels have probably been passed, but rate declines for the coming 12 months are likely to be fairly minor.

Disclaimer: This article is general information only. Although every effort has been made to ensure this article is accurate the contents should not be relied upon or used as a basis for entering into any products described in this article. To the extent that any information or recommendations in this article constitute financial advice, they do not take into account any person’s particular financial situation or goals. We strongly recommend readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed. Neither First Mortgage Trust nor Tony Alexander accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this article.