Oh, dear. They mentioned it. The dreaded 'hard landing'.
In the midst of a blistering package of economic notes this week suggesting that the Reserve Bank's going to have to DOUBLE the Official Cash Rate to 2% by the end of May and that we could be looking at inflation of 7.4% by June, ANZ's economists did indeed suggest the possibility our economy could be derailed. The 'hard landing'.
For the record, this quote was a key 'take out' for me from ANZ chief economist Sharon Zollner and economist Finn Robinson in their note on inflation:
...We think that there’s significant upside risk to the RBNZ’s already strong inflation forecast. The RBNZ has to forecast inflation coming back to target within their forecast horizon if they want to maintain their inflation targeting credibility – and we think it’ll take 50bp hikes at both the April Monetary Policy Review and the May MPS to do it. Yes, the risk of a hard landing for the economy is absolutely real. But when it comes to it, the RBNZ has to respond to what’s in front of them right here right now. And that’s a wall of inflation.
A "Wall of Inflation". Yikes.
Will the economists at the country's largest bank be right about a 2% OCR by the end of May and 7.4% annual inflation as of the June 2022 quarter? Actually, I don't really think it matters as to the detail.
The important thing is that such forecasts reflect and help to engender a mood in the market place and a sense of anticipation.
The detail may or may not prove to be right - but you can bet the house (ooh, don't talk about houses) that in the near term the only way is up, and strongly for both inflation and interest rates.
And there's no doubt the RBNZ itself will be pleased with economists helping to shape anticipation and expectation - particularly of those higher interest rates at the moment.
In its last Monetary Policy Statement released on February 23 the RBNZ was palpably uneasy about inflation - clearly sensing that rising prices have got away on it.
I think the central bank was undoubtedly spooked by the results of its own survey of expectations released on February 11, which showed a serious kick upwards in expectations of inflation, including - disconcertingly - an expectation that inflation was still going to be above the Reserve Bank's explicitly targeted level of 2% in 10 years time.
Inflation expectations really count, as I commented on recently. If people expect future inflation they put their prices up. Employees seek higher wages etc. It become self-fulfilling.
The only way to kill inflation expectations is to kill inflation. Which is where we come in now.
The RBNZ was already clearly behind the eight-ball when it comes to dealing with the wave of inflation that is crashing down on us at the moment.
It's worth reminding ourselves that the February MPS was released just before the start of Putin's War. Things were already not looking good for inflation. The war and resultant oil price and general commodities shock has obviously just made things worse. And likely will continue to do so.
I would just say at this point that it should be remembered in future that central banks around the globe were ALREADY in deep trouble with inflation before Putin started his war. It may in years to come suit central banks globally to conflate the inflationary effects of this war with what was already happening.
But the reality is this war is an economic shock on top of an economic shock. It's making a bad situation worse.
As economists have said, ideally central banks would 'look through' the inflationary impacts of the war. Trouble is they spent much of last year 'looking through' the inflationary impacts of, particularly the supply chain disruptions, and were slow to recognise that the emerging inflation was not 'transitory'.
Anyway, all this means is that in New Zealand the RBNZ has some serious catch-up to do and it is now time to squeeze the life out of the inflation.
Trouble is of course the OCR is a blunt instrument. And the harder the RBNZ has to squeeze with it then so the risk is that is could start to squeeze the life out of the economy as well. Yes, the dreaded 'hard landing'.
How likely is it?
Unfortunately I think it's a real risk.
The thing that makes us especially vulnerable is that 40% house price rise splurge we went on from the start of the pandemic in early 2020 to the end of last year.
This means that particularly first home buyers have signed up for some momentous-sized mortgages. That of course was when fixed rates in the 2%-3% range could be had. Already we are now looking at rates in the 4%-5% range and the only way is up from here.
What happens when some of these people with these momentous-sized mortgages come to refixing?
This is something that is going to have to be watched very closely.
We are currently in a very interesting situation that we've got interest rates rising very strongly into what is now a falling house market. That's unusual. If we cast our minds back to the mid-2000s - the last time the RBNZ squeezed hard on the OCR - this was amid a fast rising house market.
So, the potential for stressed mortgage holders sitting on houses that are falling in value is something that needs watching very closely.
And the other point of course is that there will be the double whammy that homeowners face considerably increased mortgage payments at the same time as they are coping with fast rising inflation, yes, probably of circa 7% and potentially higher still.
We are vulnerable.
A saving grace at this point is that we have more than full employment. Anecdotally employers are having to up the ante with pay just to get bums on seats (more inflation). But at what point do the combined impacts of higher staff costs, higher equipment costs and potentially lower returns (as stressed homeowners don't spend) start to even have an impact on the jobs market? It seems to me to be inevitable there will be a contraction in the employment market from here, albeit from a very heated situation of worker shortages.
What would or should the RBNZ do if it sees the economy starting to go off in a big way? If we do start with the dreaded Stagflation that it has seemed to me for some time we may well face?
Well, within reason, I think you will find it will plough on with rate rises, since I think the conventional wisdom is that the way to tackle Stagflation is to get at the 'flation' bit first. And as the ANZ economists say, we currently have a "wall" of it.
This is not looking like a year for the faint hearted. I suggested less than a month ago that this was looking like a strap-yourself-in kind of year.
Well, strap yourselves in a bit harder. This looks like a bumpy ride.
92 Comments
The OCR must be raised aggressively, and urgently - not doing so will simply force the RBNZ to go even higher and tighter later on.
I thought this would have been quite clear to the RBNZ by now - the longer you wait the bigger the mess that you have to deal with later on. If the RBNZ acts now there is still hope that the damage will be mostly on the housing market and that the landing of the whole economy is not going to be too hard. On the other hand, if they prefer to bury their heads under the sand and wait for things to really get of of control, then a hard landing becomes almost inevitable. There is going to be some pain to be endured, unfortunately there is no way around it and the real NZ economy will have to pay a price for the incompetent and reckless ultra-loose monetary policy of the RBNZ.
The RBNZ are a World-leading, data-driven central bank and like all of us, do not have the benefit of hindsight or even absolute autonomy in setting monetary policy. I have absolutely no difficulty believing they will do what needs to be done, and the Governor has given fair warning that those who’ve chosen to take on excessive risk/debt are exposed to the coming pain. We don’t seem to analyse things as meticulously here as they do in the States, but the language used in last month’s MPS coupled with the evolving data makes it clear that Zollner and Co’s call will be proven accurate.
OK, let's not blame the RBNZ... their mandate was only to control inflation.
They must not have had the insight, data or world class practices to know that slashing the OCR and removing LVRs would light a fuse in the property market.... and blow the highest house prices in the OECD in 2019 on most metrics... up another 30-50%.
I'll blame myself for being concerned about the next generation saddled with record debt, to own a poor quality home... and who will spend 15 years effectively paying interest only before they are making any sizeable mortgage repayments (on a 30 year mortgage)... to hopefully be still above water.
Yeah, when financial historians write about this period, I'm pretty sure they will blame FHBs and young homeowners for not being financially literate enough to find an extra $50k per annum to take their 2023 mortgage repayments on the chin.
Don't worry, it's no point engaging with Yvil on this stuff. He's a libertarian, whose bible is 'Rich Dad, Poor Dad.' He has an unerring belief that anyone can achieve anything, if only they put their mind to it.
The thing is, he's partly right. But only *partly*. Taken to it's extreme, it's unrealistic and dangerous nonsense.
I'm not better off Yvil. I'm just pointing the finger their way as I can't blame Ashley & Tony entirely for this mess.
I agree with your beliefs and attitude that you get out of life what you put in. It's one of the pillars of a free society.
Rise early, work hard, buy a couple of properties has been pretty straightforward wealth creation for anyone born before 1990, or anyone who bought before 2010.
No central bank can appease everyone, so there will always be winners and losers of their actions.
We all knew we had major societal problems, a major residential property bubble, and most thought we would be OK as long as interest rates stayed near record lows.
OECD Report July 2021
"If things are looking bad in the OECD, they're abysmal in New Zealand"
"But things aren't set to come crashing down soon like they did in 2008. Shah says even though risk metrics are high, interest rates are low, lending standards are higher and prudent policies are in place"
https://www.newshub.co.nz/home/money/2021/06/new-zealand-tops-bloomberg…
We can look forward to their updated report in a few months to see how we're tracking.
Chuckle - the Homes.co.nz website informs me that our house is now down $50,000 in a month - yes it's a crappy algo based system but it won't go unnoticed by the mass of folk to whom such info is part of their everyday conversation and who are presented with similar results when they log on. Hard not to see +20% falls from here (with all the impacts that has on the economy). The RBNZ took a decade getting us into this mess and they ain't going to get us out of it without some powerful blood letting..........
No, RV is a bit under $900k. Buts that just plain wrong on this house for some reason, and has been for a decade, its barely above the price we paid in late 2019, despite this suburb supposedly being up 32%. It was wrong in 2017, the RV set then was below both recent sales (2015 and 2017).
Algo based valuations are sometimes nothing but random number generators.
My RV is also low, it was mobbed pre-auction with people viewing because of it. I'm not complaining down here because if the rise was more than 49% your rates were going to rise. People out Papamoa with gains in the 55% plus are going to be paying more. Mine shifted 44%. The estimated value is quite close to the RV now and more realistic.
I was saying about 3 years ago that 2022 would be the year that the shit hits the fan for housing in NZ, and our economy.
I was saying, correctly, that a financial crisis strikes once every 8-10 years and back in 2019, when I commented, we were at 11 years since the GFC.
I also said, repeatedly, that unlike previous crises, we won't have the scope to rescue the housing market when it falls.
I was described as a DGM. Well, it looks like I was absolutely on the money.
If you’re buying a house with the money, you don’t care about CPI inflation, you care about house price inflation (deflation). Money in the bank is gaining in value considerably compared to houses, and it is by far the least risky place to put it. It’s a no brainer. Keep your eye on the only metric that matters - nominal house price inflation.
Rjn1 said it best, you don't care about anything than watching house prices if you intend to buy within the next few months. My mother is currently out of the market and I have advised her to wait now for 3 or 4 months and buy in the dip. despite all the sudden excitement within the DGM community on here, the shit has not even started to hit the fan yet. There is now definite potential for the market to crash and burn, but its yet to be seen.
Good article. One small observation I might make is that people can typically make adjustments to their mortgages to reduce repayments, take a repayment holiday or downsize the house/loan in times of financial stress. People can't typically opt not to buy food, pay bills or fill the car however.
Consequently there is often far more ability to absorb interest rate increases than reduce spending. We know that once real wages decline it often takes consumers years for shock to wear off and spend freely again, it's the worst outcome for the economy. So I would suggest we'd be better to run inflation at or under the rate of wage growth.
Exactly. The bottom of the market will be when interest rates stop rising, or when demand returns. Who knows when that will be.
Right now, stay renting and save a bigger deposit. You might not time the market perfectly, but you will be reducing your downside risk significantly.
The outcome relies on Orr to do his job and squash inflation. While easy to say, he is clearly avoiding a significant OCR increase for some reason or another. Perhaps he has a large rental portfolio. Mean while the trading banks continue to gouge the hell out of NZ with record profit after record profit.
Meanwhile, some of us are wondering if we're ever getting out of our starter homes, especially if we take a bath during the upcoming winter months.
So yea, no offence but having a house AND a holiday home puts you in a pretty fortuitous position, all things considered.
Well of course he's in a "fortuitious" financial position, he's the RB governor! Also he used to have a pretty high ranking job anti major bank before. So what if he owns a house and a holiday house? Good on him. PS this doesn't has nothing to do with the quality of his work at the RB
No offence taken, and I agree having a house and a holiday home is something more and more can only dream of, and RBNZ policies are one of a number of factors driving this.
Just pointing out that he's not on a Graeme Fowler level, or even a mere Christopher Luxon level, when it comes to house hoarding.
Time here to focus on the upcoming FED announcement which is only a week away now on 15-16th March according to their calendar. This will be a pivotal moment and once God has spoken it will give the green light to the RBNZ to pull their finger out and raise rates. Clearly some epic rises in the OCR are now set to happen so I hope all of you out there already have your ducks in a row.
For housing that would be even worse, probably, if you expect those new incomers to be low wage peps.
Electorally hardly defendable, remember that whoever wins will not be alone. Neither Lab or Nat will get to 51.
So.. yeah, not going to happen, we will not have 100k new immigrants ready/keen to work for watermelons. I am ready to bet body parts on that.
'Well, strap yourselves in a bit harder. This looks like a bumpy ride.'
I think Gary Larsen best describes what this really means:
https://external-preview.redd.it/-g_d6w9pVW7lpcuhemXvaFk5bREPiZOKDwciJ-…
Wow I just looked at the family homes and a few others I keep an eye on on Homes NZ. A townhouse in a great location in Wellington Central is down $300k as at today. That’s a serious reduction. Hold on to your tickets. We might be looking at a revamping of NZ home values like we have never seen before. Where I live there are a lot of homes coming on the market. Some rental rubbish, executive homes and lifestyle properties. They have missed the peak of course and they will need some luck to sell them as it is hard to get finance.
Its important not to confuse the homes estimates with the actual sale price data. The only time homes is accurate is for a few months after the house actually sells, after all it only worth what someone is prepared to pay for it. The new RV's probably couldn't have come at a worse time, not only are they dated back to 1st July the market has stalled at precisely the time they have been released. It looks on paper like a double whammy but the fact is the actual market has hardly changed as yet.
I imagine the estimate on homes.co.nz is based on other sales in the area. If your house was estimated at $1mil and then goes down to $700k, its because other houses in the area are selling for 30% less than they were. Yes they do use the CV/RV as well, but that would be to proportion the estimates while the actual sales give the baseline values.
Yep shit algorithims indeed.
Although our revised value on their website looks a lot more realistic, they've still got nonsensical outcomes showing, like a two bedroom townhouse (with one carpark) two doors down from us having pretty much the same value as our place (which is three bedrooms and two carparks)
The website is a joke.
Property is pouring on the market all over the country. This is not unusual when the market has already peaked be it equities or houses. Most people miss the signs and of course humans are generally greedy and think it will keep rising. The more property that comes on the market and the higher the interest rates go the worse it will get for sellers. And the Banks will get cautious about valuations so finance will get even tighter to get. The party looks like it is finally over and good stuff. Those who were born in the wrong generation might be able to buy their first home at last. And that is their right. Of course the boomers and those born in the generation after them will think otherwise. As a boomer myself I believe I have been very lucky to be born in the fifties. The biggest loan I ever had for my family home is $100k and that house is worth some $3m or so today. I should say it was worth $3m but that will change as reality sets in the housing market in New Zealand.
Yes, those websites are useless, and I wish buyers and agents would stop using them. As a valuer, it is one of the most irritating things in my job, that owners and buyers pay any attention to them at all. Worse still, banks use them too! That makes the whole system and market even more precarious. I am buckling in , and cant wait to see how low values go. Sure, valuers incomes are going south at the moment, like agents incomes, but it is a price they pay for creaming it in the good times.
Very astute article, thanks.
I know very little about economics. Yet as soon as Western countries imitated the CCP's lockdowns, started printing money, and (in NZ) deliberately stoked a housing boom, it seemed bleeding obvious that this wasn't going to end well.
Looking back at some notes I scribbled down last May:
1. Unprecedented money-printing, low interest rates, relaxed lending rules etc, general economic stimulus.
2. Massive consumer spending, asset boom, stockmarket and property bubbles.
3. Massive inflation!
4. Panic interest-rate rises to contain inflation.
5. Stockmarket slump. Possible gold/silver boom (and perhaps crypto).
6. Residential property market crash as mortgage rates rise, banks demand more equity from borrowers, businesses close, jobs lost.
7. Destruction of savings due to inflation.
8. Global economic depression.
If an economic ignoramus like me can predict persistently high inflation then why can't the experts? Hopefully I'm wrong about 6, 7, and 8...
Lol sure there's no way to prove that, but you've missed the point. Which was, surely anyone with two brain cells to rub together could see all this coming, right from the time government locked down and borrowed obscene amounts of money to stimulate the economy? So if the experts all knew, then why did governments and economists pretend that everything was hunky dory, that inflation was "transitory", etc? It's no wonder conspiracy theories are thriving...
Easiest way to deal with inflation is to change the way you measure it. They'll do anything to protect bank equity, and that means keeping asset prices high. So strap in for several years of hard core financial repression. They may indeed raise rates, but real yields will be deeply negative for some time. That's my prediction.
If anybody wants to know what NZ could look in the future or what it did look like before the first Labour Government dragged the NZ populace (yes, that's you and me, but you won't know it) out of poverty, then you couldn't do better than read the book "Children of the Poor" by NZ author John A Lee.
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