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Current Interest Rates

Indicative rates current at 22 June 2021

 

Floating 4.40
Fixed 6 months 2.69
Fixed 1 year 2.19
Fixed 2 years 2.55
Fixed 3 years 2.99
Fixed 4 years 3.39
Fixed 5 years 3.69
Revolving Credit 4.40

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Market Commentary – 1 June 2021
This Commentary has been brought to you by the renowned New Zealand Economist, Tony Alexander:

It would be good to be able to say that things are settling down now in the world economy and our own, and that we can make some reasonably robust predictions as to where interest rates might go and therefore perhaps the housing market. But with Covid-19 spreading in India, Taiwan and Singapore and causing new problems in Victoria, we remain in a world of high uncertainty.

However, just because there are some clear negatives still around does not mean one has to adopt a negative outlook for growth if there are other factors which are strongly positive. In the case of our economy there are, and this has some strong implications for interest rate risk management and eventually the housing market.

When we economists consider the outlook for the New Zealand economy our starting point will almost always be the prospects for growth in our export markets. That is because about one-quarter of expenditure in the NZ economy derives from export sales and we can often see some big changes in income for our export sector.

Clearly, in the tourism sector the level of income is miniscule and unlikely to become robust again until our borders open up – perhaps from the middle of next year. But for our primary sector exports such as red meat, dairy products, seafood, horticultural products, forest products and so on, conditions for most currently are good and look set to get better.

Our export prices are sitting about 16% higher than they were on average at the end of 2019, and Fonterra have recently announced their highest ever starting payout projection for the coming season. The positive outlook for our export receipts and therefore the likes of the farm servicing sector and the regions stems from accelerating growth in countries such as the United States, Australia, the United Kingdom, and China.

The driving forces vary from one country to the other. In the US and UK successful vaccination campaigns are a key positive and in the US a huge fiscal stimulus is underway. In China factories are running flat out making the many consumer goods the rest of the world is demanding in place of spending on international travel.

In Australia there is strong growth underway in sectors like house building, infrastructure, mining, farming, and various care sectors such as health, early childhood, and the aged.

The second thing we economists look at when assessing our growth outlook is household spending. This typically makes up about 65% of our economy and although it is bigger than exporting the direction of influence tends to run from exports to households and not always the other way around.

There is very strong demand for staff across virtually all sectors and all parts of the country both now and anticipated for the future. That means not just increased household incomes from more people in work, but higher willingness to spend from good job security as well as eventual faster wages growth.

People will also feel happy to spend from the average 26% increase in NZ house prices over the past year. Plus, there is about an extra $10bn sitting in our bank accounts at the moment than what would otherwise have been the case without Covid-19. This will help keep spending up even as we eventually start pulling back from buying more spas and adding more rooms to put money aside for overseas travel again one day.

The third thing to look at is what we generally call capital expenditure. This covers things like house building, purchases of machinery and computer systems by businesses, infrastructure development, and commercial construction.

In all of these areas prospects for growth are strong, especially for house building where construction is almost running at the highest level compared with our population since 1975. There is clearly a lot of spending to occur on infrastructure, and businesses are looking to build more warehouses and distribution centres to handle the need for higher inventories and more online retailing.

The interesting factor here is business spending on labour-saving machinery and technology. This has tended to be an area of weakness in New Zealand over the long term and one of the likely reasons the government is cutting back on working visas is the observed tendency for businesses to facilitate their growth more by bringing in migrant labour than investing in better systems etc.

The lower average level of productivity and therefore income per capita in New Zealand than the OECD average can be explained to a large degree by too small a capital stock. The next few years then for many businesses will be very challenging because while labour availability is bad now, it is going to get a lot worse.

It is not just that the government is changing the working visa rules. A surge of growth in Australia always drags Kiwis across the Tasman to earn more and build nest eggs of savings which they may or may not return with. The upturns in other countries like the United Kingdom, and United States will have a similar effect of not just encouraging some Kiwis to go offshore, but to dissuade a great number of Kiwis from coming back.

Overall, prospects for growth in our economy look good, the labour market is tightening up rapidly, and that is why the Reserve Bank recently signalled that they anticipate raising their cash rate from 0.25% to 1.75% starting in the middle of 2022. They anticipate rising inflationary pressures and eventually central banks overseas are likely to see things the same way.

But because a tightening of monetary policy in NZ is likely to occur before other countries move, the NZ dollar is likely to generally move higher over the next couple of years.

What impact will rising interest rates have on the housing market? Keeping in mind that a strong economy with sturdy job security tends to naturally push up house prices, rising floating rates from mid-2022 and rising fixed mortgage rates well before then will slow down the pace of increase in prices.

Extra slowing will come from the new tax rules announced on March 23, plus the introduction of a 40% minimum deposit requirement for investors from May 1. There is also strong growth in house supply underway, and the pace of growth in our population risks being a bit less than people have been thinking these past 15 months, once the borders reopen.

The upshot is not that average house prices are likely to fall because that generally only happens when we have a recession. But the pace of growth will slow to perhaps 5%+ in the coming year then slightly less for the 2-3 years after that.

Can we see signs of slowing already? Yes, in that the pace of growth in average house prices nationwide has already eased from 5.3% in February to 2.7% in March then 0.6% in April. The various surveys I run also show that investors have stepped back from the market to wait and see how things develop. First home buyers, taking their cue from these investors, have also stepped back though not to the same degree.

Both the Treasury and the Reserve Bank have recently predicted that house prices will barely rise in the coming year. But they may have an excessive degree of faith in the effectiveness of their recent policy change. Until the second half of next year the floating and one-year fixed rates which people largely still borrow at will remain near their record lows. And although there are plenty of other things which people can invest in, none of them will be done with a bank lending an investor 3-4 times their capital in order to do so. Housing is the only investment banks will willingly help someone gear into.

Go to www.tonyalexander.nz to subscribe to his free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

By Tony Alexander  (Market Commentary sourced from NZFSG Adviser Services, 1 June, 2021)

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