What’s in store for 2024
Happy New Year and here’s to moving forward in 2024.
Interest rates reducing
Inflation easing
House prices settling and starting to trend upwards in some main centres
OCR likely to remain a tad restrictive for the rest of this year to manage a steady recovery
The state of play – taking a brief look at where we’ve come from to see where we’re at and where we’re going.
With the world coming to a standstill in March 2020 and associated craziness it was time to take action, the Reserve Bank ( RBNZ ) dialled back the Official Cash Rate ( OCR ) to 0.25% as at March 2020 as part of an economic stimulus package that dropped interest rates to record low levels and it worked. We all went crazy and spent up largely on borrowed funds and of course, huge demand created a shortage in supply on everything coupled with manufacturing delays resulting in massive cost increases. It was stand back and watch me spend my borrowed money at the real estate office and auction porches and boy did we spend like a boss. Houses listed and sold in 1 – 3 days like never before and property prices duly soared to record highs as did inflation and since we couldn’t go overseas we snapped up things like spa’s and waited a year for our new cars to arrive at the dealership and sold the trade for what we paid for it new 3 years prior … madness!
To be short lived, 17 months later in Aug 21 the RBNZ started cranking up the OCR to try and slow things down again, subsequently moving 12 times in 20 months to rest at 5.5% in May 2023 where it remains to this day. Floating Interest rates that were at 5.5% prior to covid with fixed rates a percent or so under that dropped to record lows and then soared to 8.5% on the items we just paid too much for. Then the rates we had locked in at some as low as 2.2% started coming up for renewal last year and refixed at 7.2%, currently 54% of all mortgages are on fixed term with a whole bunch about to renew this year, we’re thinking shorter term refixes at this point might be the order of the day since interest rates are easing.
So we went mad and now we’re paying for it but you know what … way before anything covid related, in June 2008 just prior to the Global Financial Crisis ( GFC ) the OCR was at 8.25% and floating mortgage rates at 10.9%, cue GFC and by July 2009 the OCR was at 2.5% and floating rates at 6.3% where they floated around 6.5% to 5.5% for the next 10 years until covid struck so (a) we haven’t gone anywhere we haven’t already been this century, in fact not even as far and (b) we’re currently only a couple of percent above where interest rates were for nigh on 10 years prior to covid and where they should be with all being well in the world and guess what, they’re already starting to come back down a tad, more on that in a minute.
By the way, check out my article on ‘Normalising interest rates’ which is quite enlightening I don’t mind saying and puts things into a bit of perspective … in short, the OCR would ideally be in the 2.5% - 3.5% range and floating mortgage rates around 5.5 – 6.5% and fixed rates a percent or two below that depending on the term with all being well in the world … it’s not all bad and from here, this Is an easy fix, all we have to do is wait a bit.
So where to from here?
The not so good stuff:
Inflation is still at 5.6%, and more than double the RBNZ target of 1 – 3 % so while that’s there the RBNZ will be holding the OCR at restrictive levels, word on the street is its likely to remain at 5.5% until Nov 2024 or even out to early 2025 but we’ll see, some say it should ease back sooner once inflation falls away which its doing but then we’re talking the RBNZ here.
Net migration is still way high which only serves to shore up demand growth which fuels inflation adding to the problem as well as rental property demand, that’s set to settle down this year.
The retail sector is likely to be a bit suppressed until interest rates abate and discretionary spending is once again a thing.
Primary industries, in particular dairy, red meat and forestry are feeling the pinch with large reliance on China who have dialled back demand so prices are down, again this affects the retail sector while surplus cash is unavailable, there’s hope on the horizon there however.
The good stuff:
Its not as bad as it has been or could be, we’re only a couple of percent above where we should be with all being well.
The world economy which we play in and has an effect on what happens to us here is coming right real quick with lowering inflation and interest rates -
Looking at a few of our trading partners we have inflation in America that’s come off its highest peak since the early 1980’s of 9.1% in June 2022 now settled to 3.2% and the UK peaking at 11.1% in Oct 2022 is now sitting on 3.9%. Canada is on 3.1%, France 3.9%, Germany 3.2 and Australia a little persistent at 5.4%, all with similar tales of high peaks in 2022 and expected to ease from here into the sub 3.0% range, all this much earlier than anticipated. ( source: www.tradingeconomics.com )
As for us, with inflation down from its peak of 7.2% in July 2022 currently at 5.6% with expectations of 3.6% in 2024 and 2.6% in 2025, we’re heading in the right direction, again it’s a steady hand approach that will get us there in due course.
International money markets where our banks and finance companies source funds from daily are obtaining cheaper funding ( wholesale rates ) creating wider lending margins so already we’re starting to see some competitive easing with banks reducing mortgage rates slightly, this is expected to continue with some predicting we may see more competitive easing as early as second quarter 2024 maybe by 1% or so and possibly continuing from there spasmodically given current spot rate pricing but it’s not something the RBNZ wants to see go too far just yet as they are playing the long game of bringing things down slowly and everything catching up with itself.
House prices
It’s the same story as above and goes hand in hand. With artificially pent up demand in 2020/21 seeing house prices soar to record highs then duly come back down to pre covid levels again, word on the street from economists is prices are now steadying and slowly starting to trend upwards in some main centres which is supported by the likes of CoreLogics House Price Index Report derived from actual sales figures showing slight house price growth in main centres in the last 3 months and slight decline in the not so populace areas with a NZ total average of -4.5% in the last 12 months to +1.1% in the last 3 months.
So going forward house prices are generally considered settled and to remain or slightly increase with the RBNZ keeping a close eye to ensure things don’t take off madly again.
With new builds having gone through unbelievable cost increases and supply shortages in the last few years, we’re now starting to see some easing as things get back to whatever the new normal is.
With the restoration of investor deductibility to 80% of interest expense from April 1st this year increasing to100% next year and reducing interest rates, we are likely to see more investors back in the market which means more rental properties available which is great news for the rental market which at the moment is very tight but also creating more competition in the market potentially fuelling house price increases.
So it’s a case of playing the long game, steady progressive growth with a positive outlook is right on the money for now.
So all in all we have a lot to look forward to, the further away we get from the madness or 2020/21 the better its getting and we’ll be celebrating 2025 as the year we got there. Once inflation in particular edges toward 3%, the RBNZ can then go about lowering the OCR which in turn triggers a reduction in bank interest rates which means we all pay less for our mortgages and other finance rates and if we’re renting then prices can stop going up as they have been, it’s all driven by the same factors. So we all end up with more money in our pockets to settle up debts and allows for discretionary spending in retail which means more consumption driving more production and economic growth once again … happy days.
It’s not all about mortgages and houses
While this article has focused on the above subjects, at Infinance a big part of our game is asset finance, plant and equipment, vehicles and personal loans which we will cover off in the next article in a couple of weeks, not to mention insurances and the fact we’re embarking on an Investment service for the likes of Kiwisaver on a referral basis until the licenses are obtained to do it ourselves.
So enough for now, well done if you got this far and we’ll look forward to producing our next article, in the meantime keep an eye out for our InfinanceNZ Facebook, Linkedin and Instagram posts and if you have any queries re the above then feel free to get in touch and we can take it from there.