Unless you have been on a complete spending freeze it would be hard not to have noticed the rapidly escalating costs of goods and services. Nowhere is this more evident than in the building industry which has been hit hard by supply issues. For years New Zealand has had relatively low inflation which is an indication of slow growth. One way to stimulate growth is to lower interest rates because it encourages people and businesses to borrow. Adding more money into the economic system is designed to stimulate growth which in turn holds inflation at an acceptable level. But it may be that the Reserve Bank has gone too far on this occasion. NZ has an inflation target between one and three per cent but currently we have an annual inflation rate of 3.3% which looks likely to rise even further in the coming quarters. So, what now?
As we welcomed in 2021 there was great optimism, the vaccine was ordered, the Trans-Tasman bubble was opening up and we were told that interest rates would stay low for years, so spend up! Fast forward seven months and we are looking at a very different situation. Talk of interest rate rises are being predicted across the board with some commentators suggesting that the official cash rate could lift in the next few months. If this is the case, the cost of borrowing will rise and those on short, fixed term or floating loans will have increased outgoings. The glass half full might be starting to appear half empty.
You can tell a persons’ age by the different interest rates they have paid over the years. Boomers love to tell tales of interest rates which escalated as high as 20%. Generation X somewhere in the 8 to 10% range, with millennials having a ‘lucky’ run of between 2 and 5%.
During the 1980’s many homeowners had first and second mortgages to top up their borrowing. The first in the late teens and the second over 20%. While this is a great war story, they fail to mention that the debt to income was around only three times the average salary. Fast forward to 2021 and we’re in double digit territory.
At the end of the day, interest rates and the subsequent ability to service the debt are a major factor driving house prices. Over the past decade interest rates have only gone one way, and that’s down, so it will come as no surprise that house prices have risen dramatically over the same period.
The Reserve Bank is an independent and apolitical body. Although it must be hard not to be influenced by governments given that the role of governor is appointed by the finance minister and the building you occupy is within spitting distance of the Beehive. This year, a very public exchange of communication between the Minister of Finance and Governor highlighted the need for the RBNZ to consider houses prices. This was because of the impacts on the property market when it came to movements in the official cash rate and banking policies. With the goal of sustainable growth in mind, the RBNZ has some big decisions when it comes to the OCR. Do they become the first developed nation to lift interest rates in an attempt to cool inflation despite the fact that it will add cost to debt? Or do they believe that the current spike in inflation is temporary and there is no need to jump just yet. I’m just glad that I’m not the one making the decision.
Debt servicing over value
New Zealand, like the United States, has a high level of personal debt thanks to the ease in securing it. The most important factor in the eyes of our lenders if whether or not you can service that debt. The problem with high personal debt means you are more susceptible to changes in the market. An increase in the cost of servicing debt means less discretionary spending for the wider economy which in turn puts businesses at risk. It may be just one more blow for our tourism and hospitality sectors if kiwis start tightening their wallets.
The Wellington market
A few months ago, we really started noticing a reduction in numbers, with fewer buyers offering and some properties even being withdrawn. But that short blip doesn’t appear to be a trend, not just yet anyway, with some cracker results across June and July. We anticipate the mood for the rest of the year is likely to be determined by two things: interest rates and stock levels. If the status quo of low stock levels remain we are likely to continue achieving great prices. Should stock levels and interest rates rise however, a softening is more likely. I would be a fool to make any predictions, but I’ll leave you with this. Currently our team has the same level of stock booked for August that we would in a busy February or March. How do you think this is likely to play out?
Wellington market quick stats
What’s on this August in Wellington?
Wellington On a Plate, 01 – 31 August, Various locations
No matter when you visit, Wellington is a city obsessed with good food, great coffee and out-of-this-world craft beer, but come August, it gets taken up a notch. Visa Wellington On a Plate (Visa WOAP) fills the Wellington region with the most delicious, creative and unique culinary experiences. Here’s an overview of what the festival is all about.
Madagascar The Musical, 04-15 August, The Opera House, 111 – 113 Manner Street
Take the familiar film Madagascar, add some lively music and dance numbers from an all Kiwi cast, as well as a whole lot of fun, and you’ve got yourself Madagascar – The Musical.
Beervana 2021, 13-14 August, Sky Stadium, 105 Waterloo Quay
New Zealand’s premier festival of beer is back with a plethora of crazy, one-off, Festival beers and theatrical, interactive brewery stands in an immersive fantasy land of all things beer.