sign up log in
Want to go ad-free? Find out how, here.

ANZ economists say the Reserve Bank will need to 'move aggressively' to defend its inflation target from people's rising expectations - and that won't be good for economic growth

Business / news
ANZ economists say the Reserve Bank will need to 'move aggressively' to defend its inflation target from people's rising expectations - and that won't be good for economic growth
dollars-thought

The 'damage' to inflation expectations in this country may already have been done, ANZ economists are cautioning.

In an NZ Insight publication, ANZ economist Finn Robinson, chief economist Sharon Zollner and senior strategist David Croy have a detailed crunch on the causes of inflation expectations and look at the current situation in New Zealand. 

The Reserve Bank is charged with keeping inflation in a 1% to 3% range, with an explicit target of 2%. An important part of keeping inflation under control is controlling people's expectations of future levels of inflation. The RBNZ has its own survey that monitors that while a number of other surveys also tackle this subject.

Inflation expectations "matter" for monetary policy, Robinson, Zollner and Croy say.

"In fact, it’s hard to overstate how important it is for the RBNZ that agents in the economy believe inflation will be low and stable over the medium to long run.

"In essence, inflation expectations are a form of self-fulfilling prophecy. If people think inflation is going to be strong in the future, then they will likely put up their prices or demand higher wages now, in anticipation.

"If enough people do this, inflation will rise – and people may then revise up their expectations for inflation. You can see how such a feedback loop can quickly get out of hand, especially when it becomes a dominant theme in the media and in headlines.

"Figure 1 [see graph below] highlights one of the more alarming features of the economic data over the past year - the synchronised surge in various measures of inflation expectations. Across businesses and households, expectations for inflation over the next year have risen steeply – and show no signs of slowing. In our latest Business Outlook survey, a net 74% of firms were expecting to put their prices up. Overall, 92% expected higher costs – and that number was 100% for agriculture and construction.

So, the economists say, in many respects, the damage to inflation expectations "may already be done".

"We’ll have to wait for the next couple of months of survey data to find out. But the news has been saturated with coverage of the cost of living and rising fuel prices, and Google searches for inflation in New Zealand have gone vertical," the economists say.

For the RBNZ, the "evolution" of price pressures and inflation expectations since it released its February Monetary Policy Statement means it will "need to move aggressively to defend the inflation target from rising expectations".

"And that won’t be good for growth. It’s increasingly looking like the first half of 2022 will be pretty soggy in terms of ‘real’ economic growth, given surging cost pressures and ongoing Covid disruption. In fact, we’ve recently downgraded our outlook for GDP growth. But the RBNZ needs to bring surging inflation under control, so they need to keep on hiking interest rates even as economic activity struggles."

The economists concede this "might sound callous" if you’re a struggling businesses owner or mortgage holder.

"It won’t be easy, and the pain won’t be felt equally - just as the benefits of falling interest rates were not evenly shared.

"But at the end of the day, we know that letting inflation get out of control would be more harmful, requiring even more aggressive OCR hikes than the two 50bp hikes we’re calling for.

"Inflation isn’t just going to go away by itself – and the global forces which held inflation down in the post-GFC [Global Financial Crisis] decade are taking a hiatus (whether that’s permanent or temporary remains to be seen, but is a moot point for the RBNZ as regards its near-term decisions).

"If there’s one thing that economic history has taught us, it’s that spiralling inflation is devastating for economies, and the people within. The labour market is the tightest it’s been on the official record – and the best way for the RBNZ to support ongoing strength in employment is to restore price stability."

In terms of some of the things driving rising inflation expectations, the economists point to an outsized influence from the price of petrol.

"A combination of global energy shortages, robust economic recoveries from Covid, and the Russian invasion of Ukraine have seen oil prices surge compared with the extreme lows seen in 2020, and this has shown up directly at the pump. Indeed, petrol prices correlate pretty well with the most significant movements in the 1-year inflation expectations measure from the RBNZ’s Survey of Expectations (figure 2 - below)."

The economists say that in historical context, petrol prices have had an impact on inflation expectations that is disproportionate to their weight in the CPI basket (less than 5%). Headline inflation excluding food, energy, and fuel (ie a common measure of ‘core’ inflation) is also a significant driver – and together these factors explain a large chunk of the historical movements in inflation expectations in New Zealand.

The importance of headline inflation makes sense – many agents in the economy will account for what inflation was last quarter when forming their expectations. Nonetheless, this dynamic simply adds to the persistence of higher inflation and inflation expectations, they say.

Even though the RBNZ may usually have the leeway to look through things like petrol price shocks, it would be very risky to ignore the impacts they have on inflation expectations right now, Robinson, Zollner and Croy say.

"The impacts are significant, and that matters when expectations are already so elevated. The [RBNZ] Monetary Policy Committee will be particularly concerned about whether the national conversation about the rising cost of living will be the catalyst that kicks off the self-fulfilling prophecy of spiralling inflation expectations – making the cost of living that much worse."

And, so as to whether are inflation expectations are starting to "flirt" with becoming unanchored from the RBNZ’s 2% target midpoint, the economists say:

"The horse, if it hasn’t already bolted, is at least trotting at a fair clip and already a good way from where it’s meant to be (although the RBNZ’s longer-term measures are still close-ish to 2%, that reflects a very small, unusually well-informed group of 33 respondents).

"If expectations have or do become unanchored, the risk is that inflation starts to gain its own internal momentum, requiring much larger interest rate hikes – and a corresponding hole in growth and employment – in order to bring that momentum back down.

"It’s already looking like achieving a soft landing for the economy will be a challenging prospect for the RBNZ – but if inflation expectations detach from the 2% anchor, it will be nigh-on impossible."

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

112 Comments

"It won’t be easy, and the pain won’t be felt equally - just as the benefits of falling interest rates were not evenly shared."

Read: After being told they were lazy and spending too much on takeaway coffee, recent FHBs face being wiped out after spending years stuck on the sidelines trying to hit ever-increasing deposit rules, and committing decades of 35%+ of their income to a mortgage on a starter home. 

Funnily it enough "the pain not being shared equally" looks a lot like the investors who spiked property prices and can now cash out with massive gains, in many cases tax-free, will now also get the benefit on the other side of higher interest-rate driven TD returns. How long will young Kiwis and struggling families put up with being the Nuclear Whipping Boys no matter which way the market turns? My hope for them is 'not long'. 

Up
21

Investors who understood the residential property market will know when to cash out. Speculators will not 

As with the conclusion of any market bubble a few will make money and many will end up with burned fingers.

Up
11

I'm sure there are a few 'investors' who didn't know when to cash out...and plenty of 'speculators' who have cashed out.

Whether they be 'investors' or 'speculators',they will be rubbing their hands at the possibility of house prices falling,so they can get back in,rinse and repeat.

All the more reason NOT to over turn the removal of interest deductibilty & 'brightline' extensions etc

Up
3

Yes the current economic settings (including monetary and fiscal policy settings) have created a morally corrupt society - very much lacking in ethics and principles, which if you look back in history, almost always results in financial and social instability.

But then again 'everyone wants house prices to keep going up' so why would anyone speak out against such a system if they are going to get covered in tar and feathers ('you're such a depressing doom, gloom, merchant' or 'you're just envious of my success' etc) for arguing against the popular narrative?

Up
20

I agree with the "morally corrupt" especially IO. My wife is on a Church committee and she has told me they have owned a rental property for over 30 years which they currently are renting out at $506 per week. Morally corrupt alright, profiteering more like it! Hypocrisy rules!

Up
2

Hi Murray86,

Bet your wife's a Catholic.

TTP

Up
1

Yes the world is a cruel place

Up
0

Homeowners can choose to sell and rent, if they wish.

That is what I chose to do.   You may want to consider doing the same, if falling prices would negatively impact on your lifestyle.

Up
3

Unfortunately I would like my family to have stable shelter and be able to access the same schooling for as long as they need, as opposed to being at the whim of a landlord who could well try to divest in a falling market and thus forcing me to compete for a rental in a country with a massive housing shortage, in a country that adds thousands more people than it can reasonably accommodate in a bid to suppress wages. And good luck convincing your bank you're selling up and going renting if you're in negative equity. 

There's also a lot of other things people could have done before we got to this point, but after political, regulatory and planning failures, it still ends up being people who want something as basic as 'one singular home without being financially ruined' that are expected to make endless sacrifices and continue sliding backwards in terms of living standards. Sorry, kind of sick of doing that for the benefit of everyone else. It's time for someone else to take the pain for once.

Up
14

Likewise, I would never choose to rent for economic reasons.  Wouldn't put my family through the instability of renting.  Having been a renter in post-Earthquake Christchurch it was not a pleasant experience.  

Up
4

There are over 2000 available 3 plus bedroom properties for rent on trademe and over 8000 for sale in Auckland, not sure how that is a massive shortage ?

Overpriced for sure.

Up
3

I kind of feel like taking the situation as things stand now as representative for a country that imported 80K people a year is probably missing a fairly important part of the equation.

Up
2

There are a total of 16 houses to rent in the entire Manawatu/Horowhenua region

Up
0

DGMs Zollner and Co. at it again.  Why people have this fascination with economic reality and consequence is beyond me. 

Up
8

Why the fascination with such mediocre economists more like. Rotten track record, back of the class stuff.

Up
4

Good article. After a year of failing to have any meaningful impact on inflation it would be more surprising if the public didn't express doubt in the Reserve Bank meeting its targets. Failure begets failure.

Up
9

The least regrets policy seems poorly implemented now doesn't it. Surely hyper inflation is something very regretful compared to a lack of inflation.

Up
3

“There will be some people who find themselves in a negative equity position,” said ANZ chief economist Sharon Zollner.

What's up with DGM Zollner over the past week/s - why has she ramped up her press releases etc.? She's almost doing the talking for RBNZ at the moment... Always question the motive & timing of these bank economists statements.

https://i.stuff.co.nz/life-style/homed/real-estate/128130152/just-bough…

 

Up
11

Thanks for highlighting this article. That is some change in a couple of months. Anyone noticed the progression in the narrative - "House prices will increase", "house prices will make modest gains", "house prices will stabilise", "there will be modest falls" and now "negative equity will be short term". What next "we are all doomed"?

Up
17

Yes late last year they were saying falls of 3%, then that changed to 7%, then 10%...

On the one hand economists need to be prepared to change their forecasts, however I would argue that 3% was ridiculously low in the first place.

Up
4

-10% seems ridiculously low considering they just went up 30%. Assuming that 30% was due to record low interest rates, shouldn't it disappear when interest rates go back to where they were pre Covid? And most predictions are interest rates much higher than where they were pre Covid. 

Up
11

Too be fair waikato,the global situation has changed somewhat quickly in the last few months,have you seen that Ukranian war thing on the news at all?

Up
1

I take your point but the changes were happening before the Ukraine conflict, the writing was on the wall before Christmas.

Up
2

Lol, I don't remember they were called DGMs when they forecasted weak economy growth and downtrend OCR back then...

Up
4

Yes, the general populace get poorer as the result of another wealth transfer to asset owners (primarily boomers).

No such thing as a free lunch they say...

Up
7

Many of the boomers I've run into this last year are out cruising the country in their RV's, with the electric bikes and car attached behind them, receiving superannuation and rental income - they're far to busy finding the next cafe and cycling track to worry about a generational wealth transfer taking place!

Up
20

I live at the junction of state highway's 3 & 4 - i have a clear view from my kitchen window & there has been a large rise in the amount of flash motorhomes on the road recently.

Up
8

And cray-cray prices being received for second hand RV's and caravans.  A neighbour is on his 4th do-up of 60/70 Era 'vans.  Keenly sought after.  Light, easy to tow, no flaky electronics. 

Trailer parks beckon when the Dino juice gets too expensive???

Up
1

IO. Can confirm same observations on the boomers.  Including my own, who just treated themselves to an RV upgrade. 

Up
5

Lol - yes I did a bit of traveling around the south island over summer and there were boomers on e-bikes everywhere and boomers driving around in RV's. Talking to them they didn't have a care in the world...mortgage free and receving superannuation plus rental income for many....

They appear to think life is great.....then again more people that I meet and talk to in their 20-40's suffering from anxiety and depression and mental health issues (and recently know of the suicide of another person in their late 30's).

We've made things great for one demographic of society.....and a complete hell for others.

Up
14

... and let's not forget that every sacrifice made for covid was done for them. 

It wasn't the younger folks dropping dead from a cold.

Up
3

Go the Boomers. They can be blamed for everything. Even that the Sun rises and sets everyday

Up
0

Read a piece last night but can't find the link now...but was saying the Taylor Rule would indicate that the Fed effective funds rate should be at 9.5% now or in the near future to contain inflation!

And if you look back at the corresponding data between the effective funds rate and the Taylor rule, it holds a reasonable link/correlation of what has historically happened.

If this correlation is representative, and the Fed behave in the same/consistent manner as they have in the past 50 years, they might be far more aggressive in raising rates that what the general narrative currently is (they won't because of markets etc).

Up
2

IO - there was a piece on interest yesterday where the Fed Chair "declared war on inflation". He also confirmed that the situation in the Ukraine was being viewed as inflationary and would prompt aggressive OCR hikes as some were speculating that there will be an impending world economic slow down which necessitated a more cautious approach to raises. 

If the Fed go 50bp's we'll no doubt follow. Rinse and repeat.

Up
1

You can't have an inflation target and an unemployment target because they oppose each other. I explained this to my 11 year old last night and he understood it pretty quickly, so the academics who could grasp it if they wanted to, but they don't.

Up
7

Generally yes. On Orr's mentality, let's remember that when he had wriggle room on one variable (inflation) back in 2018, he slashed interest rates in order to stoke growth and employment - even though there seemed no compelling reason to be so aggressive.

This time, unemployment is meaningfully below the RBNZ's measure of sustainable maximum, therefore he could argue that they have plenty of room to hike interest rates, even to the point that growth is smashed.

Up
4

Yeah agree.

For me, then, in terms of the OCR the key question is how quickly the economy deteriorates and unemployment starts increasing significantly.

My central view is that it will start worsening quite a lot by July, and that could cause the RBNZ to pause the OCR hikes by July/ August.

If any worsening is only mild by July, then yes it's quite feasible to see OCR hikes continuing on right through the year. And I would be very wrong :)

 

Up
1

If we do have stagflation on our hands than the central bank might be juggling rising prices with rising unemployment.

Was reading that the Taylor Rule suggests that the Fed funds rate should be at 9.5% now to contain inflation! And its been a pretty accurate measure for the last 50 years of economic activity in the US.

Trying to avoid problems post GFC really has put central banks in a rock/hard place and created widespread suffering for many people in society (and unjustified riches/gains for others).

Up
3

I am having doubts about my OCR peak of 1.75 prediction. I think it's dependent on the economy worsening a lot before July, and I'm not sure it will.

At the same time I can't buy into the notion, at all, of the OCR being 3% or higher. I think our economy will be toast by the time it gets to 2.5.

Up
2

Yes the economy can be toast...but if prices are still rising then its the central banks mandate to stop them from doing so. The economies were toast in a number of countries that had rising inflation....and they did nothing to stop it.....and it cycled out of control into hyperinflation.

In the same way that if price were to fall (i.e. deflation) then look at the extraordinary response they took in 2020.

Perhaps they will be just as insane in the opposite direction.

I do agree that bond curves indicate a probable delfationary event in the future....but what scares me is that will mean central banks will pump even more $$ into the system and that will make things even worse down track...not better! This cycle has last 2 years.....2020 to now and it appears to be over....instead of the usual 7-10 years. What happens next? Just massive swings from 'hey we need interest rates at 15% to control inflation....oh hold on we need another QE round to prevent deflation?' That appears to be where we are heading....Its insane. We need a more measured approach where we set the price of money at a reasonable level (say OCR at 4-5%) and let prices regulate around that as oppose to central banks trying to play and destroying efficient/free markets, price discovery and the concept of risk vs reward.

Up
1

Usually if the economy turns to toast and unemployment soars, that has significant deflationary impact. Plus the RBNZ has its employment mandate.

I still think this will happen, it's just that the OCR might be closer to 2.5 before it does turn to toast.

Another big question is the extent to which emigration to Aus might surge, helping to limit rise in unemployment. This could be a big factor in how the OCR path evolves.

Up
0

I tend to agree with this position....the only doubt I have is that we could have the economic slowdown of a recession and GDP falls etc....usually we have continued to import cheap foreign made goods which has helped with the deflationary response....and so we push the OCR down....

But what happens if this time really is different and we get the recession/fall in GDP/rising unemployment but the cost of imported goods (fuel, food, construction goods, clothes etc) all continue to rise across the whole basket of goods? Sure demand might drop, but the prices may not that quickly because the foreign distributors input costs are still rising? Do we hope that they also become deflationary as quickly as our economy is slowing down? And by dropping the OCR in response to this only gives people more cash flows to help push prices higher does it not, make the current situation worse, not better?

The line between runaway inflation and deflation appears to be on an extraordinary fine balance at present....

Up
2

I think that's likely. 

ie, the economy does start to tank as rates rise, as HouseMouse predicts... but there's no option to stop raising because of global factors. 

My bold pick for the year is the $NZ to US$0.55ish... the fundamentals of our economy are absolute trash, relatively low existing gov't debt is the only weapon we have and I don't think that will be true for much longer.

Up
2

wow, 55! I think I said something like that a few weeks ago.

Yeah our flimsy economy is going to be shown up.  

Up
1

Agreed on the NZ economy. You can create money out of thin air, but you can't create wealth (merely redistribute it).

Up
2

Sam B .....if the NZD goes down to 0.55c USD we'll only get more inflation, so not good for anyone here in NZ Inc. but exporters will like it , but they will only have to pay more for running costs etc  .....but TOTALLY agree on "the fundamentals of our economy are absolute trash" 

Up
1

If we don't aggressively raise like the Fed sound like they are going to do, then yes I can see 0.55 to the USD this year.

Then also if we have another deflationary reaction to that and the world starts scrambling again like in 2020 to safety (USD/Gold etc), then again I can see the NZD to 0.55.

Up
0

But wouldn't that inflation be imported inflation, on the supply side? Which raising the OCR will do little to impact.

Up
0

Raising the OCR raises the currency and brings down imported prices. 

Up
0

a little bit

Up
0

Doesn’t a stronger currency also increase our export prices, making us less competitive and have a negative impact on primary industry? 

Up
1

I'm with you HouseMouse, I do think the OCR increases will slow down demand and local inflation pretty quickly. But to me the big factor is imported inflation. If fuel etc keeps going up I don't think the RBNZ will have a choice but to keep raising the OCR even if the economy is tanking. 

Up
3

Oh and also I think your 1.75% prediction may well be surpassed in 2 reviews time, they have to pull out the 0.5% increase soon as they are so far behind the curve. If inflation is at 7% a 1% OCR looks very embarrassing doesn't it?

Up
2

Quite possible.

I'm allowed to adjust my view, just like bank economists do frequently :)

I'm still very confident it won't go north of 2.5

Up
2

I wouldn't be surprised if it was 1% in two years time after the current OCR increases crash the economy, or 10% in two years time with 1970's style inflation. The central banks have behaved so badly that we are in very unchartered territory. 

I think the RBNZ should have stuck with the real path of least regrets: normal monetary policy with OCR targeting inflation, no money printing QE rubbish, no other factors considered. 

Up
1

Uncertain times for sure!

Up
1

In New Zealand, home ownership rate was about 64.50% by the end of 2021. Within this 64.50%, if 40% people who are still sitting on positive equity  and still have enough money to buy a new RV or to renovate their houses, our economy won't turn to toast as demand is still there. This means we still have room to hike the OCR.

Up
1

I would say if 60% of NZ stop discretionary spending that would be worse than toast regardless of what the other 40% do. 

Up
1

I am not sure how discretionary spending data is looking at the moment, feel free to share the data to prove me wrong. But I don't see' what you've mentioned above is happening soon until 2 year interest rate goes up to 7%. Here are the reasons:

1. Bank stress tests borrowers mortgage servicing ability at rate of 7%. This means they will be still living a fairly comfortable life when interest is at 7%.

2. Based on how much housing price increased in the last two years, majority owners who've bought their houses before 2020 still have decent capital gain even if there is 20-30% price drop.

3. People who haven't bought house yet and will unlikely buy this year, will likely get wage increases in coming months due to inflation and would likely to increase their discretionary spending.

Up
0

Hi HouseMouse,

You write:

I think our economy will be toast by the time it gets to 2.5.

You'll be toast well before then.

TTP

Up
5

I'm intrigued as to why you think that.

Up
2

Im intrigued as to why you think that there is any thinking behind the try-hard troll nonsense.

Up
1

HouseMouse

You are sounding like a bank economist.

You were very adamant that the OCR maximum would be 1.75 % . . . and that mortgage interest rates were going to return to the 2 to 3% range (now) in under two years. :) 

Up
1

I'm allowed to adjust my view right? Just like bank economists do all the time :)

It's just I try not to change like the wind, like they do.

And I still think a peak of 1.75 is possible, if things get really bad before July. But less likely than I previously thought. 

But probably I'd say 2.25-2.5% is more likely now. Confident it won't be more than 2.5. 

Up
1

House Mouse

As you claimed at the time ANZ economists were fools, does this make them lesser of fools and you more so? :) 

Your call when re- fixing that interest rates were returning to 2 to 3% within two years (contrary to signal from RBNZ and bank economists) seems most likely going to hurt. Ouch.  :(

Up
0

No one in this space is right all the time, or anywhere near it... 

I've been pretty good so far, including my 2019 prediction of a house price crash in 2022-2023 which makes me look a bit like Nostradamus, doesn't it? That was made in mid 2019, before I bought in October that year. So I walked the talk.  

And yes I still think ANZ are fools, or maybe alternatively cunning and manipulative:

- OCR unlikely to go equal to or higher than 3% as they predict: the economy and employment will be toast before we get to even 2.5%

- If it does go higher than 3%, their prediction of 'only' 10% house price falls looks silly: likely to be 20-30%  

Also, they have been all over the place in their forecasts. They have gone from 3% falls, to 7% falls, to 10% falls in the space of about 4-5 months.

It's fine to recalibrate, but if it's done too often it doesn't look particularly credible does it.

Let's see how my other predictions go:

- House price falls of 5-10% (HPI) in 2022 calendar year

- Big drop away in house building in late 2022, with consents falling away by around mid year

And who knows, maybe my OCR pick will still be right (or close to right). Or at least the general thrust of it - that the OCR will peak much lower than most are picking.

What are your forecasts P8?

 

 

 

Up
2

Nah, it won't hurt much at all. We are a pretty high income household with plenty of fat in the budget, and I did pretty well out of the shares I sold in October.  

I will have two loans paid off by late this year, the outgoings on those will just effectively transfer to increased outgoing on mortgage payments. So I won't be any different in net terms from now. 

Plus, I think it's quite likely that the OCR will be coming down again by mid 2023. 

All good :)

 

 

Up
2

Mmmmm . . .

So back in 2019 you foresaw COVID even before the WHO and RBNZ thought about OCR cuts, FLP, and then raising the OCR and rates etc. . . 
And in October last year you foresaw the invasion of the Ukraine even before the USA . . .
I should be impressed but there again one shouldn’t  confuse insight and rational decisions as opposed to luck / chance. :)

We will see how that maximum 1.75% OCR, inflation done by the end of 2020, and mortgage rates of 2 to 3% within 2 years that you are very adamant on . . .  but I see you regularly pushing these out.
Cheers 

Up
0

No, I saw a financial / international (I didn't specify) crisis happening in 2022-2023, based on analysis of financial cycles and international events over the past 50 years.

Does it matter as to the precise reasons? - looks like the prediction (big correction / crash) is happening when I roughly said it would. Hardly anyone was calling a crash in 2019, let alone giving a pretty accurate timing for it. 

And you just keep trolling on my OCR prediction - I've said I'm not so sure about it now, that doesn't sound 'adamant' to me....

Hope you and your sons' property investments don't get too badly hit in the looming carnage.

Are you CWBW? are your sons 'the boys'?  

 

Up
1

And you can see my prediction in the thread in the link below, when I was 'Fritz'. Elsewhere I was more specific and said 2022/2023, but I can't be bothered searching anymore:

 https://www.interest.co.nz/business/101483/big-bank-economists-are-mull…

Up
1

I think Orr has successfully walked a very tight rope

Up
0

Hence central banks are jawboning the markets. Conning them into thinking they will keep raising the OCR to 2.5-3%. That then strongly affects inflation expectations. 

Up
1

Houses will take longer to sell this year, but the market will start to rise again next year.

We're v busy. Just put prices up 8% to cover the inflation we've already seen, but hopefully that should be enough for this year. No sign of any slowdown yet - almost the opposite in fact.

It should all work itself out in a year or so - so long as Biden doesn't press the button.

Up
2

Put the prices up on what if you don’t mind me asking?

Up
3

Whips, probably.

Up
4

The market and its recovery will strongly depend on the path of the OCR.

If I am right and the OCR peaks at 1.75 (or maybe 2%), then potentially starts dropping again next year, I agree the market will start recovering. 

If I am wrong and the ANZ is right - OCR going to 3% by mid next year - I think you will be wrong - the housing market will be very weak next year too, and we will probably see a 20-30% price fall over 2022 and 2023.

Up
4

The swaps curve is currently pricing a 3.5% OCR by mid next year.

Up
6

The window to buy will be this winter before market flattens next year. Any significant rise won’t happen for another 3-5 years.

2023 - people spend up large and focus on overseas trips, domestic spending well down business suffer.

2023/24- tourists slowly coming back in bigger numbers, immigrants, students..

 

Up
0

You’ve got to be joking. Prices “up” next year? 
 

Somebody tell ^him he’s dreaming.

Up
12

Funny how people think they can keep putting prices up, but you look at consumers across society, they don't have the cash flows to support higher prices.

Who is going to take the loss?

Up
8

people will have to pay more, but they will be paying more a lot less

Up
8

Well put, and quite zen :).

I agree. Transaction numbers will be much reduced. And pricing behaviour needs to be very mindful of this.

Up
0

Hospo. Tourism. Specialty food producers. Gyms. Providers of everyday luxuries.

I predict a lot of cashed-up speculators wandering the aisles of your local supermarket, bewildered, wondering why they their favourite tapas aren't stocked anymore, and why no one wants to buy the used jet-ski they've put on TradeMe.

Up
1

Neil21, I think the sentiment on here today is on the button. Steep rises in OCR, followed by a huge tension between OCR rises and a contracting economy with a rising unemployment. Q3 is my pick for the OCR vs economic downturn to come to a head but it's a guess. I think what is going to happen is plain to see, when is harder. 

None of these influences are good for the housing market so I just can't reconcile this with your view of a rebound. I think the property market for owner occupied favoured properties will drift 10-15% and stagnate. Those properties favoured by investors will drop 30% or so. Both will then stagnate for 2-3 years. 

Immigration is still murky in terms of its effect. May perk up CBD Auckland apartments a little but I think net effect on population will be neutral or slightly negative and so will be inert in terms of property pricing.

Up
2

On 14th of July 2021 I made comment below on RBNZ moving their excuses from "transitory" to "uncertainties" yet still choosing not to act to increase OCR. Two days later, "Annual inflation soars to 3.3% - a 10 year high". We would be in a different position if they actually did their job when they saw the data.

Today, these inflation expectations show people start losing confidence in RBNZ.

 

by company of heroes | 14th Jul 21, 2:35pm

Soon enough the fear of uncertainty that RBNZ is holding will cost us big time... The strength of domestic NZ economic data is undeniable so far and the inflation is out there already. I hope they don't regret when they see this Friday's CPI data.

Reserve Bank: 'Monetary stimulus reduced' | interest.co.nz

It's a scorcher: Annual inflation soars to 3.3% - a 10-year high | interest.co.nz

 

Up
3

It's all a game of cat and mouse. Not that different to a chess game, or war strategy.

Up
2

There’s a lot of discussion currently questioning the received wisdom around inflation, echoed in this article.  This received wisdom essentially argues that Reserve Banks need to sharply rise interest rates to avoid the 1970s experience of unanchored inflation expectations and a wage price spiral. However it’s been pointed out that adjacent inflation experiences (eg post-WW2, and the early 1950s, during the Korean War) ended without any of those happening. See https://www.employamerica.org/researchreports/expecting-inflation-the-c…

 

Up
0

An OCR peak at 5%, and mortgage rates well above 7%, are now a very concrete possibility. I can see years of high interest rates coming. And the longer the RBNZ waits to act decisively, the higher they will be forced to go later on.  

Up
10

But what will this do to house prices? They will crash.....  therefore I don't think this will happen. I think they will just amend the way the calculate inflation to magic this inflation away. They will also amend the RBNZ mandate (again) to place less emphasis on inflation. Asset owners call the shots in this country not wage earners and renters. This group will fight to the bitter end to protect its interests. The property market is too big to fail.

Up
2

Is it just add house prices to the items in the inflation calculation and then our inflation will be heading back to zero. Pity about the poor renters buying food and clothes for their kids.

Up
0

https://www.interest.co.nz/property/69025/census-figures-show-home-owne…

 

Homeowners have been less than 50% of voters for around 10 years now. (People often quote 64% homeownership rate but that includes children living in their parents house)

 

I'm not sure that the government would come to the rescue nowadays.

Up
1

If you think you are likely to inherit a house you will vote with your parents.  We own 3 average properties but have 6 adult children and my wife is likely to be alive for another 30 years - our kids would probably vote whatever way would get house prices back to sanity.

[Sanity: land value as per annual profit if growing strawberries and multiple by 20.  House price as per use of a giant 3D printer ~ at a guess $150k is the sane price for a decent home.  Above that you are gambling that this ponzi is continuing.  That is my gamble but if I lose out then our six kids will be squabbling over $400k instead of $2m.]

Up
1
Up
1

So the endless scare stories about inflation and the need to *do something* are increasing inflation expectations and making people think prices are out of control? Wow.

Good job inflation expectations are complete nonsense - yet another reckonomics theory that keeps reckonomists in jobs.

Up
2

I don't have time to read the whole article unfortunately - but do deflation expectations suffer from the same fallacy?

And if so, can we then justify the actions of the central banks back in 2020 as they predicated a deflationary cycle that could only be saved by created billions/trillions of more money?

We have actual recorded CPI far above the target window now (i.e. real data) but they wait and watch.

We didn't have deflation....yet they took extraordinary action to prevent it occurring. Why the different response when deflation and inflation can both be as damaging as one another if left unchecked?

Up
2

Increasing the OCR will increase the flow of Govt money to banks and investors, increase costs to businesses - putting pressure on prices and viability, and do basically nothing to reduce the prices of the things that are driving increases in the cost of living (petrol, building stuff, rates, imported food). Hikes to the OCR will however calm down property prices and misinformed commentators - so that's great.

 

Up
1

And keeping interest rates low will do nothing but incentivise investors to go deeper into an already grotesquely engorged housing market, worsening inequality, increasing debt, and materially reducing the standard of living.

Low interest rates are not encouraging productive investment and haven't for some time. The problem is a structural inability to get capital deployed usefully, and that inability is patently not because interest rates are too high. 

This problem won't be resolved until people see a return somewhere that beats housing - and that might be because housing craters, or it might be because interest rates have made TDs and bonds worth investing in again. Higher rates cause those things. 

Up
7

I agree - it's time to focus on the quality of credit - where it goes and what it is used for. Otherwise, as you say, credit will simply flow into property. 

Up
2

The interest rates are going to get crazy. Beautifully on track for a -30% Crash in home prices by December this year.

Up
5

I bought 15 years ago. -30% and I'll still be laughing.

Up
2

Well done being born at the right time, I guess?

Up
8

I'd rather be younger than wealthier than Gates, Bezos & Buffett combined.  I wish I'd been born later when parents drove you to school instead of forcing you to walk in the rain (ref Monday in Auckland).

Up
2

If your parents had driven you , you would have likely been less happy.  Independence to safely move around on their own has a significant impact on children's sense of confidence, freedom and flows through to their happiness levels.  It is one of the reasons Dutch kids are the happiest in the world, they design their transport system to be more equitable and children can travel freely on their own from a young age. In NZ if you don't drive your needs are pretty much ignored. 

Up
2

For the RBNZ, the "evolution" of price pressures and inflation expectations since it released its February Monetary Policy Statement means it will "need to move aggressively to defend the inflation target from rising expectations".

Inflation expectations are muted in this yield curve. In fact yields right across the curve are below current inflation.

Up
1

I think the OCR will not go any higher than 3% this year, with the current Labour government related to trying to provide protection for the poor and working middle class. 

Up
0

Said it before will say it again if the FED starts massive increases we have no choice but to follow. The rises could go outside what the RBNZ is able to control. 

Up
2

I had a Jacinda moment today with the house across the road for sale, it wasn't so much that house but the fact that another SIX that have suddenly come on the market in my street when its typically ONE tops.

Up
2

Yip a bunch popping up in the local as well - some have been empty holiday homes I think the last few years but now on the market. Usually there might be one a month in the general area, there are about 5-10 now which is very unusual.

Up
0

Imagine being enough of an idiot to listen to CWBW, TTP, Printer8 and their ilk at the end of last year and buying your first home with that hard saved 20% deposit.

Life wrecking move right there.  Those "fluctuations".

Up
3

Exactly.

Should have listened, to me, formerly Fritz, and my warnings of a crash in 2022-2023 (made back in 2019).

As you allude to, it's on everyone to do their homework and make their own minds up. If you are too dumb to think critically and not question the dominant narrative, well that's too bad.  

Up
2

Listening to any Property Broker agent like TTP lacks wisdom. Printer8 sold his Marine Parade house in Napier way to early.

Up
1