By David Cunningham*
In a nutshell:
- Given how popular fixed-rate loans are in New Zealand, it takes one to two years for monetary policy decisions to trickle through to the economy, as people roll off existing loan terms.
- Decisions made on interest rate settings today will largely impact inflation outcomes in 2025 and 2026, not 2024.
- New Zealand’s economy is undoubtedly weak — and it has been for over a year, especially on a per capita (or per person) basis.
- The Reserve Bank’s (RBNZ) interest rate settings, although unchanged for 10 months, are still having a tightening effect on the economy. At current levels, there’s another 1% increase to the average mortgage rate still to come, which would take a further $3.5 billion p.a. out of Kiwi homeowners' wallets.
- Inflation is tracking down fast. There are some BIG numbers to drop out of the CPI calculation by September 2024, including the 1.8% inflation figure from the September 2023 quarter.
- In my view, the Reserve Bank Monetary Policy Committee should start lowering the Official Cash Rate (OCR) at the next announcement, on 10 April 2024, with a 0.25% reduction.
Being blunt, the RBNZ is almost single-handedly responsible for reducing New Zealanders' living standards over the last 18 months
Back in 2022, it set out to inflict a recession on New Zealand in order to tame inflation. And now, in light of the latest GDP stats out just last week, it looks like it’s succeeded in that mission.
In fact, per capita GDP is almost back to where it was in 2019, five years ago (the black line on the graph below).
In an excellent article for Squirrel, economist Rodney Dickens argues that the RBNZ is normally slow to realise there is an inflation problem, and equally as slow to recognise when it’s done enough damage to tame inflation.
“Monetary policy is more like a sledgehammer than a scalpel and the RBNZ’s inept use of it makes economic cycles more extreme. It means there are reasonably protracted periods of solid GDP growth followed by recessions.”
He points out that monetary policy changes take up to 2 ½ years (yes, years) to have any impact on inflation.
By implication, that means the RBNZ’s ability to do anything more to influence inflation outcomes over the next year is — at this stage — practically non-existent.
So, what’s happening right now with monetary policy?
To put it simply, monetary policy is tightening at a frightening pace.
This is because Kiwi prefer fixed interest rates on their home loans. As Rodney points out, it takes a couple of years for the impact of rate hikes (or cuts, for that matter) to fully impact households.
Take a look at the below graph from Core Logic, based on Reserve Bank data:
Source: Core Logic, RBNZ.
The top three lines are current fixed home loan interest rates — roughly what you’ll pay on a new home loan, or when you refix after your current term comes to an end. They’re around 7%.
The yellow line is the average interest rate Kiwi are paying on their fixed-rate home loans right now. It’s currently sitting at 5.8%.
The average mortgage rate got right down as low as 2.7% a couple of years ago, meaning it’s already climbed by a little over 3%. But it’s still got over 1% to go to get to the level of current rates.
In other words, about a quarter of the impact of all those OCR hikes we’ve had in this latest round (totalling 5.25%) is still to be felt.
Don’t kick Kiwi when they’re down and out, Mr Orr
New Zealand has been one of the worst-performing economies in the Western world over the last couple of years.
GDP (a.k.a. the country’s collective output) has fallen by about 4% per person since September 2023, and is back near 2019 levels.
And there’s further evidence of all that economic pain everywhere you turn:
- New Zealand’s GDP (output) is down 0.3% over the last year despite roughly 3% population growth.
- GST receipts are well below even recent forecasts.
- Business tax receipts are also below forecast – reflecting lower profits.
- Retail sales volumes were down 4% in 2023, in spite of that approximately 3% population growth.
- Everyday Kiwi and businesses are struggling. According to Centrix:
- Almost half a million consumers are behind on their payments to lenders and suppliers (e.g. banks, telcos, utilities).
- Over 12,000 borrowers have been flagged by lenders as being in financial hardship, an increase of 32% over the last year.
- 22,000 borrowers are behind on their home loans, up 16% over the last year.
- Business credit defaults are up 28% over the last year.
I could go on, but you get the point.
So, the reason we’re all feeling worse off is because, objectively, we *are*.
In my opinion, the RBNZ needs to start cutting the OCR, now
Inflation is a silent destroyer of wealth.
That’s why it was totally appropriate for the RBNZ to take aggressive action post-Covid, hiking the OCR to rein in our booming economy and inflation.
But now, the job is done. In fact, it's almost certainly overdone.
From here on out, the RBNZ needs to be looking to the future and taking action that will be right in a year or two, when the impact of any changes made now will be felt by Kiwi households.
Talk of holding out any longer on cuts just to be sure inflation is slayed is unnecessary — and the impact of that approach would be devastating for New Zealand and New Zealanders.
Still, that's the widely-held stance among bank economists, many of which are picking rate cuts to start in late 2024, with a couple even looking to 2025.
I suspect this is partly reflective of what they think the Reserve Bank will do, rather than what it should do — and there’s a real opportunity for this group to be more proactive in arguing for different monetary policy settings.
In my view, which is very much at odds with the above, the Reserve Bank’s Monetary Policy Committee meeting in April should be the start of a gradual cycle of interest rate cuts over the next couple of years.
And so that’s why I’m calling for a 0.25% OCR cut on 10th April 2024.
*David Cunningham is CEO of Squirrel, a mortgage broker that also offers peer-to-peer lending and savings and investment products and services. This article first ran here and is used with permission.
188 Comments
I agree. Low interest rates just allows us to live beyond our means by pulling future income into asset prices today. Even worse it is someone else's future income that is supporting that increase in your asset value.
For our long term good, a change in our collective mindset is needed, and I think we will need a much bigger correction to asset values yet to achieve it. Call it tough love if you like.
I don't see the relevance of Louis Vuitton, sure people are probably spending more than they should on it but it's hardly the main driver of our overconsumption and raising GST would be unlikely to curb their sales all that much.
The issue is that GST is on basically everything. I don't think it would be an exaggeration to say that 50% GST on groceries would literally kill people.
How about GST on anything that isn't a primary item?
So things like timber, rice, wheat, sugar, meat, cocoa etc have no tax on them.
Then people can do the maths whether it's cheaper to make what you want yourself, or pay someone else to.
We do have an exceptionally high standard of living, and much of it's dependent on there being people living off much less to make it for us.
And we're borrowing money, even to pay them.
I remember Labour facing some heavy criticism over a proposal pretty similar to what you're suggesting. While it might have some good points, it seems like it would be a nightmare to manage. You'd have endless debates and lobbying over what should or shouldn't be exempt from GST. It kind of goes against the whole idea of our tax system being straightforward, broad-based, and low-rate, by throwing in all these complications.
We do have an exceptionally high standard of living, and much of it's dependent on there being people living off much less to make it for us.
So your solution to this is to implement a bunch of regressive taxes to lower the living standards of low and middle-income households whilst not really affecting asset holders at all? Considering how slanted our tax system is towards income-earners already I am quite glad you aren't in charge. The group of people living furthest beyond our means causing a huge trade deficit aren't the ones who will be most affected by raising GST to the moon.
Everyone would pay it. If someone's buying a luxury car, they'll be paying a truckload.
We have massively depreciated the value of manufactured consumer items. While at the same time, our basic staples are often really expensive.
That wouldn't be the only policy in Pa1nterstan. There'd be a massive overhaul of the housing industry, hopefully reducing the cost of a new freestanding dwelling to 350-500k for a new house.
So the basics of life become subsidised, but the more discretionary parts of life are paying for it.
One might just as easily mount an argument that it's the size of debt that's the issue, rather than the current interest rates; it's the amount of debt that's killing GDP.
EDIT: or to put it another way, interest rate rises are the proximate cause of current distress and lowered GDP, but not the ultimate cause.
The debt is a prime driver of GDP.
The real problem is what that debt, and the GDP represents.
My view is that it masks the lack of positive net output of an economy. I still can't reconcile how advanced economies can have consumption levels above 50% (Ours is nearly 60%, and the US is 75%), and have that end up without the bulk of a society being underwater.
Where the debt goes becomes a function of demand, and where it's likely to be paid off.
The fact much of it's going into housing, as opposed to productive enterprise, is indicating productive enterprise has become a tenuous proposition. So either a ceiling, or an environment not conducive to it.
So the debt is fuelling GDP in a way to mask that our "productive" economic growth, has reached a plateau (or even decline).
Money was made off capital gains for a while. Some spent a lot of energy chasing that. But that was then.
Now is different.
I wonder how the economy will change if house prices slide down for a number of years. Not saying it's sure to happen but it's reasonably likely, and in my view desirable.
If they fall and keep falling for years (depends how many years), that means interest rates are likely high, and will stay high surpressing the overall economy.
You're also going to be down all the ancillary spending that comes with more development that usually comes with stable pricing.
I don't think our economy would pivot well enough, quick enough to cover the shortfall.
So, in this chart, we’re looking at investment or gross fixed capital formation for China, and then for the UK, US, Japan, and the world. So, China is this red line here that you see, and the UK is this orange line, the United States is the blue line, and the world is this purple line.
And what you see here is that basically, and the chart goes from about 1960 to 2022, so you can see that China has grown essentially by increasing the share of investment in its GDP. And the slow growing country, so Japan for a while, of course, had a fairly high, although China’s share of investment of GDP today is higher than what Japan’s was in the heyday of Japan’s growth at close to 40 percent. In China’s case, it is above 40 percent, reaching in some cases to 45 percent. But what you see in the case of Japan as well is that Japan’s share of investment to GDP began declining, and declined particularly markedly in the early 1990s. And today, it is kind of at the world average. It is higher than that in the United States and the UK, but it is at the world average.
So, these are essentially the slow-growing parts of the world economy, and they are characterized by a low rate of investment, which, in the case of the US, it is actually under 20 percent. In the case of the UK, it’s actually under 15 percent. And it’s no wonder that these economies are ailing. And the reason is simple. Investment is absolutely critical to expanding production, and also increasing productive efficiency. You always need an investment. And so, you increase productivity efficiency, you increase productivity, and therefore, you increase the capacity of people to increase their own material welfare, if you think about it, in terms of what it means on the ground. Link
That's the linear line of thought, sure.
But the investment doesn't guarantee a linear return - i.e once you get productivity or efficiency to a point, every extra dollar spent has a diminishing return.
Let's take bricklaying as an example. It's fundamentals and methods have been the same for centuries, if not millennia. The next step, is deemed to be a bricklaying robot. To replace a human bricklayer, you need:
- the robot, which costs many multiples of a bricklayers annual wage
- a technician to operate the robot, and potentially another one to load up and/or service the robot
- another human to do the pointing of the bricks
So currently, any additional investment, is malinvestment over just training and having a regular bricklayer.
This is a super simple example, but I feel indicative of where many matured economies are at.
Bricklayer robot scans and pickups block off the truck, and can scan and do its own pointing. Far less labour, and much faster placement. A good example of elimination of inflation bloated labour that is comingfast. Applications and AI will do the same to law and accounting.
While the leveraged think its a good idea, inflation anyone...?
How much does this particular robot cost (both initial outlay and running costs), and can you point me to the information about it?
And it's totally autonomous, it doesn't need anyone to transport it, set it up or monitor it?
Coming up with fictitious productivity increases is fun. Why not just a terminator style robot that replaces 95% of human endeavour, that costs 500 bucks.
Robotics and AI is the new snake oil. As investors it would pay to be cynical and conscious of vaporware - being sold a product that is yet to exist.
The bricklaying robot is a good analogy for product design without comparative costs factored. The robot vacuum and lawn mower on the other hand is where improvements are likely. The robot revolution is less likely to be a single humanoid butler, and more likely to be an army of helpers IE the kitchen bench is cleaned overnight - i would extend that to the floor except it would be hard to beat a household dog at that.
AI is yet to present a functional replacement to people other than in cetain narrow functions. IE google maps route finding. Anything requiring degrees of creativity, assessment and appreciation, and contingent decisions is still best done by people. Thinking a robot to take over bricklaying will be cheap is to not understand the minor complexities and innate decisions bricklayers (or any trade) work with every day, let alone the implications and liability of failure.
Robotics and AI is the new snake oil. As investors it would pay to be cynical and conscious of vaporware - being sold a product that is yet to exist.
This is currently happening with vertical farms. The theory sounds amazing to the unitiated, but replacing free sunlight, circulatory air and water with an indoor environment is not economically viable. Hence, many of these startups are falling over left right and centre.
Agree it probably is snake oil. Even if it isn’t I doubt it will take over many jobs for a long time yet.
Look at something like couriers, mobile technology has completely transformed it, you could have predicted the efficiencies would have made many courier drivers redundant, but actually it just made couriers cheaper and increased demand.
I saw an interesting comment somewhere;
We thought we invented AI and robots to do the hard work so we could all be merchants, artists, and musicians. It turns out they are no good at work but can copy art and music like nothing.
Establishing crap dropshipping is happening now. Accounting, reading and interpreting legal precedent is possibly next.
Example; AI Johnny Cash sings Barbie Girl
What this misses are the cultural and leadership differences, and the difference between developed and developing economies/nations. China, because of it's starting point and size was able to invest heavily in GDP. Hence it became the manufacturing hub of cheap goods for the rest of the world.
The rest of the world with already established market incumbents, especially domestic providers has to create new markets because it couldn't compete with China for cheap manufacturing. Hence the expansion of service industries. The cost of competing, entering established markets has been too high.
Instead the Anglosphere has simply expanded financial services and financial investment in returns. All we've done is convert everything into financial assets, which only increases the cost of living as higher returns are demanded. We don't invest in GDP anymore - have we really ever? We've only invested in profits at the expense of everything else. The pure economic focus on productivity is ultimately perverse and demented. It's literally how do we increase returns and profits without humans, with no care about the impact on human wellbeing.
Economics is ultimately a failure in this regard. It's too hellbent on fitting reality to it's models. Pure financial thinking like the author above continues to miss the point, is just a continuation of the problem. And focusing on China means one is failing to address the issues in their own home.
The real takeaway from this article;
So, the expansion of the domestic market was made into an explicit goal. And that, I think, can only be a good thing, because at the end of the day, what is development about but increasing the material standards of living of ordinary people, increasing their consumption of meaningful things, obviously, not just superfluous and, in fact, sometimes even harmful goods that we often end up counting as part of consumption in Western countries.
But there’s an associated theme here that I also wanted to bring up, because I promised earlier that I would clarify what I mean by the Chinese meaning of globalization. You see, in the West, we think of globalization as essentially an ideology, and as Western governments promote it, it is an ideology of free markets and free trade. The idea is that the government should step back from any role in the economy and should not try to manage trade flows, capital flows, investment flows, etc., etc.
This is the meaning of the term globalization in the West, and the purpose of this meaning is actually not, the West continues to practice all sorts of protectionism and regulation and what have you, but the purpose of it is to open up the rest of the world’s economies to Western corporations, Western capital, Western commodities, and, of course, open them up in order that they may supply Western needs for resources, cheap commodities, cheap labor, cheap manufactured goods, etc., etc.
So, this is the Western meaning of the term globalization, and as most people will recognize, the essence of it is to subordinate most of the economies of the world to Western economies. It is an imperial subordination project.
In China, it means something completely different. In China, the Chinese kind of recognize the simple elemental economic adage that the more you have a division of labor, as Adam Smith pointed out, the more we can all benefit. So, we can all benefit from specialization, we can all benefit from increasing scale of production, and so on and so forth, but this should not be done in a zero-sum game. This can be done and should be done for mutual benefit.
And this;
Whereas the Chinese conception realizes that harmony is a value and you have to work to produce harmony. You have to do it through deliberate actions of both households and businesses as well as governments. So, harmony is not spontaneous. It is something that is consciously aimed for and produced. And that is the difference.
If you look at Chinese ideas about international relations, the core concept, the core concept is harmony. I mean, actually, it’s one of the core concepts in Chinese thought, the idea of harmony and living in harmonious relationships with others, which means understanding the kind of internal dynamic of others and then working with them to develop their potentialities, rather than imposing.
The Western model is that you sort of imprint, your model on something where instead of looking at their own internal capabilities and helping them move in a positive direction.
So some of the core concepts in Chinese international relations are things like guānxi (关系), or “relationality”; or gòngshēng (共生), which means symbiosis; or tiānxià (天下), or “all under heaven”.
And that leads to these ideas that the way you help yourself is actually by helping others. So by helping others, you actually help yourself. So it leads to a quite different view about the way in which the relations between countries should be organized, the principles governing the relations between countries.
This is what we are lacking. Much of this comes from the teachings of the Tao te Ching, and Buddhism. Harmony is the antithesis to competition, to greed, to fear. Transformation as a human is growth. We're focusing on the wrong type of growth.
Yes. Our whole economy is built on private + public debt increasing by 2% (200 pts) more than GDP every year. Debt is literally the fuel for the economy. Sadly we are pumping credit into consumption and asset bubbles rather than development and productivity. We may be on the verge of being found out.
For me it's been apparent for a couple of decades.
But on the flipside, I cannot see where/how development and productivity gets us out of it in a way that provides net positive returns. Most international examples (which there are few of) involves niches that aren't replicable.
Really, it seems much of the West/developed economies are riding on historical fumes of a time where they had asymmetrical advantages over much of the rest of the world.
While there is little chance of a rate cut next month, at the rate the economy is deteriorating, I would not be surprised to see a cut in July and/or August.
The RB doesn't only consider absolute inflation numbers but also the drivers of those numbers. If we see another "surprise" in the next unemployment release I think that will be the catalyst for the RB to turn more dovish.
Seeing as higher interest rates are the only thing that actually works to stabilise the insanity that is our housing market, my preference is it never goes down again, stays the same or even increases. No sympathy for those who over extended themselves during the insanity of low rates or those who enabled that over extension. We need stability not sky rocketing house prices
Much of the empty homes are in locales with the lowest demand (or seasonal demand).
A big part of the issue is the changing nature of society - household sizes have shrunk by about 1/3 over the past half century. So you either need 30% more homes, or convince society to increase household sizes.
Last I checked the ratio of total households to total number of private dwellings hadn't changed much since the mid 90s (admittedly, this was only up until mid-late 2010's - but still well within the modern 'supply shortage' era). Taken together with the lack of any significant fall in household size over the same period, what does that tell us about why we might have a shortage of available housing? Two sides to the supply and demand equation. Investment demand has increased substantially. Owner occupied dwellings are the only type that can't be vacant/underutilised by definition. If you put two and two together...
we've built 100,000 less homes that needed over the past 20 years
I see this sort of statement a lot in the media. Never any reference to methodology though. When I looked for stats myself, I didn't come away with the same conclusion so can only assume that the methodology must include demand for investments (and that demand is somewhat artificial in my view).
I took the population increase, divided it by the average household size to derive how many homes needed to be added, and compared it to the number of new homes consented - unfortunately much of the data we collect is on consents rather than completion. Which is actually generous, because not every consented home gets built.
No we have not, building a house is market driven by the number of people who can buy one. If we had 100,000 extra homes tomorrow they would all sit there empty and unsold. The mistake people make is that if somehow there were an extra 100,000 homes tomorrow they would be half price, sorry the market doesn't work like that.
You don't improve availability until you have built a surplus.
Intuitively, yes. But as a counterexample, what do you think would happen to the stock of available housing if the short term rental market disappeared or kiwis owned half as many second homes?
N.B I emphasise 'available housing' because is the ultimate measure - not the total number of dwellings.
See above. Based on the population increase for the last 20 years vs household size, we are 100,000 homes short.
You can obviously mince around with the occupation of existing homes, ban short term rentals, tax empty houses, force people from the city to less populated rural environs, get everyone to join Gloriavale and live 10 to a dwelling, but that's going to be less effective than just having a large influx of new housing.
You can obviously mince around with the occupation of existing homes, ban short term rentals, tax empty houses, force people from the city to less populated rural environs, get everyone to join Gloriavale and live 10 to a dwelling
Hhaha. Sounds like it'd be pretty effective to me! Only problem is the Gloriavale bit. For every couple that end up there you'll end up with a dozen more people given a little time.
Seriously though, indications are that the proportion of underutilised properties is highest in cities than rural areas.
To be honest, the most productively minded subsets of our society, have extremely strong religious underpinnings.
If we look at Brethrens, when an individual wants to establish a new business, rather than bootstrap something small from the ground up, the whole congregation chips in, and builds a much larger operation, allowing for greater economies of scale and revenue.
Our predominant culture of every man for themselves, not working so well.
Lower interest rates funded the increase in investment properties, the buying up of existing houses. Lower interest rates makes a higher mortgage more "affordable", but not the house itself. We've had building booms in the past when interest rates were higher.
It all depends on the availability of affordable land or creating a demand for higher prices. Which one works better in the long run. We've seen the result of the latter.
And what about other borrowers that are not borrowing to buy houses?
You know ... The ones actually investing in producing things that we need. Or the ones investing in new plant and machinery, and training, so we can produce more ... and maybe for less?
NZ Inc's economy is NOT the housing market, Last Realist. (Although you'd be forgiven for think so reading the comments on just about every article.)
Less money for business to spend themselves, and less money for the punters of said businesses.
I don't really know what the answer is though, unless you subsidize business lending, which creates its own problems. There's an 80% chance a new business funded today won't be around in 5 years, but a house has an almost 100% chance of still standing (natural disaster or some other mitigating circumstances aside).
Housing shouldn’t be NZ incs economy, but unfortunately until we start to incentivise other forms of investment, and encourage people to invest in business and growing productivity, the reality is Housing is a large part of our economy. And it shouldn’t be, here in lies the problem.
Unfortunately, the real issue is our concept of investment and business. The western capitalist world is stuck on investment for financial return. And business as a word, as a construct is far removed from it's origins. Economics has perverted the human being into human doing. It's why we have such a breakdown in societal cohesiveness, cooperation, and especially harmonious relationships of all kinds.
You can have a capitalist or mercantile economy, but if you don't have any shared cultural norms, chances are a centralized welfare system cannot replicate a decent shared culture.
Arguably, we require people motivated and unconventional in thinking to push progress, and then a decent labour force to do the mahi. How much either of those should be compensated, hard to say.
Watch NZD crash if interest rates are dropped before FED which would send inflation up again.Rates are not high historically the problem is low rates just pushed up house prices and are now way overpriced compared to incomes,some people are just starting to understand this.
A NZD crash would make imports more expensive.
Given how cash strapped most Kiwis are - and the elasticity of demand for each product - they'd be buying less, and maybe more local stuff.
Hell! We might even run a trade surplus! And that would be very good news for NZ Inc.
Is the writer about to run out of 5 year cheap fix...
Rates are not the problem. It's the level of unproductive debt. The only way to flush that out of society and the junkie like mindset around it is to hold the line. Yes there will be losses, but only for the over leveraged unsupported by income.
but only for the over leveraged unsupported by income.
And any ancillary business who's income partially or wholly derives from the debt based spending (or maybe cheap debt based spending).
So like, a huge chunk of the economy. In short, without it, we will reveal (and currently are) that as a whole, we're a lot poorer and "productive" than we think we are.
"The only way to flush that out of society and the junkie like mindset around it is to hold the line."
The only way? You know what a false dilemma is, right?
Any objective assessment of the data will conclude that RBNZ have already overcooked it, and 2024 will be terrible on multiple fronts. And, yes, RBNZ overcooked the stimulus too, which was not needed because Govt spending was appropriately boosted (as it should be now!)
The corner that RBNZ are in is in large part the result of our trade deficit. Our trade deficit leads to offshore ownership of NZD, which leads to offshore ownership of Govt bonds ($80bn of bonds owned offshore now). Add in the maddening crowd of currency dealers and it is clear that moving ahead of the Fed will cause a drop in currency value - maybe even a full on run if big enough players short the NZD.
Now you could argue that a country that exports primary goods and imports technology *should* have a lower currency value - but that is what nice, secure western Govt bonds are for, to qualify for the top tier of countries that extract resources from poor countries (cos that's the order of things).
Anyway, RBNZ have prepared to defend the currency drop, but how much FX reserves are enough? Will they have to guarantee to buy bonds at a floor price as well - and pretend it is not QE? Will RBNZ decide that waiting for the Fed is a better strategy - and sod the dire consequences?
I think the problem is that Mrs Watanabe has been balls deep long AUDJPY and NZDJPY, she is going to be forced out by stoploss, its going to be a big flow and with BoJ moving rates north some of this flow may find local domestic alternatives to our high interest economies. These situations can move very quickly. Corporates/Insto love playing this game in FX.... once every 10 years it's a bloodbath, feels like now
That opening paragraph pretty much sums up how bad the performance of our RBNZ has been. Textbooks will not be kind to them. But it will be richly deserved!
Re a still late, but earlier-than-expected drop in the OCR:
The NZD will fall, but I expect it to be smaller than many are predicting. And it'll be transient. The RBNZ shouldn't look to defend the NZD - just profit from trades using their FX reserves. I suspect given our awful GDP figures and persistent trade deficits, which we've had for so long now, not too many major players will be very surprised. (BTW don't expect the NZD to recover to past levels - when national debt rises, and you run trade deficits, and with neither showing signs of slowing down - something has to give.)
Inflation will spike. But as per normal, it'll be vastly overstated as consumers simply haven't the spare cash to buy expensive imported stuff and they have become pretty good after two years of hardship at substituting and/or doing without and/or making do with less. But of course our daft inflation stats won't reflect any of this behavior - only the price rises in the products they believe we're still consuming at past rates. The RBNZ would do well to look through this spike.
And it might be quite a benefit for our balance of payments. Sudden price rises in imported items may see demand fall off a cliff until FX rates normalise. Golly - we'll could even run surpluses!
Had the RBNZ been making small adjustments down - back in November 2023 - together with words to the effect of "softly, softly" then the reaction in FX markets might have been quite mooted.
Now? The RBNZ is screwed. I expect a greater deterioration in economic conditions than the RBNZ are expecting. The RBNZ will be forced into rapid and/or large reductions in the OCR. (God forbid they start playing with the LVRs et al again!) It'll be clear the RBNZ is panicked and the FX markets will smell blood and the sharks will be circling for a feeding frenzy. Hope I'm wrong but that's looking likely.
The RBNZ needs to polish their crystal ball and drink more tea. They are so far behind the game it's becoming a national embarrassment.
I hadn't thought about the market perception of a sudden recession-forced shift vs a gently-gently approach (starting earlier). Good point.
I don't see how we balance trade. We are not selling anything valuable enough and we are reliant on imported oil, cars, machinery, technology etc. Now add a modest $5bn a year increase in infra spending, and that's another $1bn - $2bn of extra imports (and the infra commission say we need to be spending $10bn a year for decades). Look at our current overall position - it's serious! Compare that to Denmark. Or have a laugh at the hegemomic monster... USA.
If Govt had the balls and the nouse, they would start a conversation with the public about what it will take to get the country 'back on track'. Explain calmly that we do not have the spare resources (productive capacity) for infrastructure-building, electrification, high quality education and health services, 21st century transport, thriving towns and cities, so we will need to do some rationing - e.g., fewer luxury imports, jetskis, city tractors, international flights, 600m2 McMansions etc. In short, we need more people building stuff and teaching our kids, fewer people selling us crap we don't need in Briscoes. We also need a huge clampdown on unearned income (e.g. people extracting rent from asset ownership). We need people actually working for a living (and the country).
It is a bit of a pickle.
In Bhutan, they have initiated GNH (gross national happiness) as opposed to GDP. The state/kingdom ensures every house has electricity, water, and connectivity. The state wants to focus on cultural basics and values, not over development, over-tourism, and to retain their natural environment.
The problem? The youth want all the trappings of western consumerism and high incomes, so leave in droves. They have a district in their capital called Little Perth, where expat mining incomes have funded property development that costs over 100 times the average Bhutanese income.
"I don't see how we balance trade."
We could buy less.
I'm old enough to remember 'luxury taxes' used a bit in NZ and extensively overseas. We could implement them through GST. Mobile devices, vehicles over 2.0l, etc. but not foods (which would be barbarian.) I don't think that'd trigger any trade agreements. Will go down like a cup of sick with the entitled rich (and wannabe rich) tho. I think I can live with their whining. I'd expect Treasury to come out with the well worn mantra of "must be kept simple" and want to apply to all and everything to try and kill any such moves. (They're pretty predictable.)
Another way is more electrification. We import oil but make our own electricity and we have the capability to make much more. And store more. Extends into rail which would take imported trucks and the imported fuel they consume off the roads, and roads themselves consume imported by-products. (Coastal shipping is an area I'll be looking at towards the end of the year if I get the nod.)
And we could sell things differently ...
I like the "R and D, free in N Zee" concept but haven't quite figured out how to make it work yet. But this could be a biggie in the longer term. A small cut on anything developed here would eventually amount to serious, very serious, sums of money in the NZ context. Our range of climate & geography make us a great location. NZ is a bit like how actors take small sums of money for acting a part but if they had taken a tiny percentage of gross sales (which are enduring - think Groundhog Day) they'd have made much, much more.
There are lots of ways ... But we'll need to wait for a new leadership to start on such a programme. As you, treadlightly et al are doing, helping the great unwashed understand macro-economics is great for our progress.
I like the "R and D, free in N Zee" concept but haven't quite figured out how to make it work yet.
Your chief challenge is funding and geography.
You're talking about tax credits (which we already have), which is competing directly with other nations directly subsidizing R&D to the tune of billions of dollars. The competition amoung many nations to try and R&D their economies into the black is fairly fierce, and the returns are diminishing.
And trying to entice outsiders to a location significantly distanced from other markets.
We should though be employing R&D into improving our core competencies. Which actually happens, but the nature of much of our industry makes improvements fairly involved, with decent lead times to implement.
I doubt the textbooks will be written. 13 years after the GFC and everything written about it, the consequences of QE, and still the RBNZ followed this course of action.
We are unable to critically rethink economic theory, apply the required market and political regulations per original theories. We're unable to expand our minds and thinking to incorporate new "economic" thinking, new (old) wisdom.
I agree we're in for greater deterioration in economic conditions. Unfortunately, I also think it's our own fault - we didn't learn from the past. I also don't think the RBNZ is able to save/rescue us. If anything it will just further confine us to the status quo - how's that working out for us.
Looks like we are seeing the true impact of Labour with gdp backwards to 2019. We need innovation and productivity to grow the country, not just focussing on welfare spending, by borrowing.
As for interest rates, they will ease when inflation comes in at 3%. Inflation affects the poorest, so unless we want more civil disorder, let’s keep this well in check. The rich are into assets which inflates so they are well protected. We take for granted price stability, this is a critical foundation for business and trade as well. So, let’s stop the myopic focus on house prices and think about NZ future. It is scary how we are losing our brightest and talented offshore and replacing with lower skilled migrants. This country has abundant resources and government has an enormous challenge ahead just to get the country back out of the hole it’s in.
We are seeing the 'true impact' of every NZ Govt since the 1980s. All Govts of the last 45 years have used a combination of increasing private debt and migration to keep the economy growing. But, once you strip away the housing ponzi, all that we are is a primary goods producing consumption economy with a competent enough Govt and Central Bank to keep our currency over-valued so that we can continue to pretend we have an advanced economy.
The current Govt are just blue-tinted mediocrity - following the red-tinted mediocrity that preceded them. All the signs are that National are failing their first test spectacularly. Will you still be blaming Labour for the recession and rockting unemployment next Christmas?
One Hundred people in an economy, and we need to reduce demand by ten percent. Do we kill ten people? Or find a way to convince everyone to spend ten percent less?
The proportion of New Zealanders with either a mortgage or an interest in placing money on term is outweighed by the proportion who are debt free or spendthrift. Why do the adults in the room not acknowledge this and come up with a more effective tool than the OCR?
It's maddening to see them accept this as the 'best solution' when there are clearly so many alternatives. Despite this being seemingly obvious, people are regularly pilloried for even suggesting that we ask which groups benefit from the situation as it stands, and how else we could slow the economy when needed.
Compulsory Kiwisaver contributions? OCR becomes a % increase above the taxpayer's contribution setting. There'll be people without Kiwisaver, so hold their funds in IRD account under "Kiwisaver" but it's not an actual investment fund?
That way, we can control inflation but people won't see that money disappear forever.
If you want income, net positive returns can be higher with a decent business, than owning something like a rental property.
You can deduct capital expenditure, interest, some R & D, and expenses. It's fairly easy and cheap to form a company in NZ (running one can be another story).
I don't know how much more attractive you could make entrepreneurship in NZ. Funding is an issue, and this can be impacted by the high failure rate and longer paths to profitability that more innovative or aspirational businesses require.
Although I also don't know what you're including under more productive assets. My assumption is some sort of business that makes or does something.
Being a broken record again but a land value tax (LVT) would be more effective at reducing demand than increasing the GST for several reasons:
• Targeted Impact: LVT is levied on the unimproved value of land, which means it doesn't penalize productive investment or labor. It's a way to reduce speculative demand for land without affecting the broader economy
• Efficiency: LVT is considered efficient because it doesn't distort the supply of land; the tax can't be passed on through higher rents or prices due to the inelastic supply of land
• Equity: LVT tends to be progressive, impacting wealthier landowners more significantly than middle or lower-income earners. This contrasts with GST, which is regressive, impacting lower-income individuals disproportionately as they spend a larger share of their income on consumption
• Revenue Recycling: The revenue from LVT can be used to reduce the tax burden on low and middle-income earners, potentially offsetting any negative effects on these groups
• Housing Affordability: By reducing speculative demand, LVT can help stabilize or lower property prices, making housing more affordable and potentially reducing the need for high levels of borrowing
• Government Revenue: While GST increases government revenue, it also increases the cost of living for all consumers. LVT, on the other hand, provides revenue without increasing the cost of goods and services
• Unavoidability: One of the most compelling aspects of LVT is its inescapability. Unlike other forms of taxation, where individuals or businesses might find loopholes or employ tax avoidance strategies, LVT is levied on the land itself, which cannot be concealed or relocated. Since the value of land is publicly assessed and recorded, it ensures that everyone pays their fair share. This characteristic of LVT not only makes it a reliable source of revenue but also discourages the hoarding of land, as the cost of holding onto unused or underutilized land becomes financially unviable.
The whole concept of our tax system is to be low-rate and broad based, jacking up GST prices goes against this and would have a bunch of negative effects that might end up doing far more harm than good.
Keep up the good work E46. So many article writers and commentors coming up with creative ways to increase productivity when a simple LVT would do the heavy lifting without breaking a sweat.
On the Government Revenue side, I think it's worth noting for others (I'm sure you'll be aware) that an LVT will pull tax in from non-tax residents (overseas landowners) and 'under the table' landlords. Therefore, an LVT would reduce the tax burden on existing taxpayers by casting the net overseas and cracking down on tax avoidance (big tick for fairness of the tax system).
For the haters, no I'm not saying it would solve everything, just that an LVT represents the low hanging fruit on the taxation reform tree.
Cause it takes too long and we don't/can't produce a whole bunch of the stuff we want.
That and the Reserve Bank can't really control supply side, only react to it.
Some European economists have attributed 60-70% of post COVID inflation due to supply side issues. The OCR needed to hit that, and the money supply related inflation at the same time, has had to be huge.
I'm not advocating their behaviour.
Care to share any alternatives?
The rules of this game, OCR can move up and down, are well known by all the players, just learn the cycle and you are good to go....
Sure we could change the rules, but meanwhile pull up a stool, buy some chips and play the game. The smart money is busy playing the game, rather then complaining about the rules...
What is sad is that shelter got dragged into the game, not the game itself. If we can get it back out via cap gains tax, land tax etc great.... but the game is well defined and there will be unintended consequences in ignoring that OCR is an effective tool, if new tools are added. QE was pretty dumb as well. The coming bottom could well see -ve rates of OCR.
For to many property investors, this is their first Rodeo....
What is sad is that shelter got dragged into the game, not the game itself.
Both are kind of sad. If you have a stimulatory mechanism like an OCR that can expand or contract an economy by shifting a lever, you're going to have commensurate levels of fortunes for many stakeholders in an economy.
It's arguably much worse for non asset collecting participants, be they business owners or workers.
Yes look at the value of USD since it unfixed from Gold..... $35 to $2190 ish..... just another rule of the game, move $$$ to assets AT the right point of the cycle. Our entire NZ banking system is now tied to the property market via 70% of lending book ...... ponzi or not.
The central banks made it easy for people to borrow way more than they can afford, soon many will be in negative equity and paying most of their income on mortgage payment’s while credit cards push interest payment way over the 20% mark, in the end house price’s will crash as people have to exit market. Honestly what we’re people thinking when paying 10 x income for a 3 bedroom house on a tiny section in Auckland.
"Honestly what we’re people thinking when paying 10 x income for a 3 bedroom house on a tiny section in Auckland."
Many buyers were told the following reasons by the property promoters with their vested financial selfish interests so that buyers would transact (and property promoters would earn their revenue):
1) that house prices will not go down by much - look at house prices over the last 50 years
2) house prices double every 10 years - look at house prices over the last 50 years
3) you can't lose buying residential property - have you ever met anyone who has regretted buying property? Look at house prices over the last 50 years
4) house prices rise with inflation
5) house prices will continue to increase due to rising construction costs
6) Auckland is a desirable place to live. There will always be demand
7) there is inward immigration so there will always be demand, as there is a housing shortage
8) there is a limited amount of land, and we have population growth. There will always be a shortage in housing.
9) housing bubbles in other countries are not applicable to NZ due to differences in housing market conditions
10) it is always better to own than to rent
11) the government will not let the house prices fall
Rapidly rising house prices, combined with the repeated messages in the media by property promoters / self labelled property market experts combined may have persuaded those to buy at peak prices.
Here are some of the repeated messages:
1) May 2021: Ashley Church: We're deluding a generation of Kiwis with talk of house price crashes
https://www.oneroof.co.nz/news/ashley-church-were-deluding-a-generation…
2) Nov 2021 - Here's why it might be fruitless to pin your hopes on a house price crash
https://www.stuff.co.nz/business/300449314/heres-why-it-might-be-fruitl…
3) Dec 2021 - Tony Alexander - 19 reasons why there's no crash
https://ndhadeliver.natlib.govt.nz/delivery/DeliveryManagerServlet?dps_…
4) Feb 2022 - Ashley Church: Don’t expect higher interest rates to crash the housing market
https://www.oneroof.co.nz/news/ashley-church-dont-expect-higher-interes…
5) April 2022 - Ashley Church: Four reasons the housing market won't crash
https://www.oneroof.co.nz/news/ashley-church-four-reasons-the-housing-m…
6) May 2022 - Ashley Church: Do we now have evidence of a housing market crash?
https://www.oneroof.co.nz/news/ashley-church-do-we-now-have-evidence-of…
7) July 2022 - Catherine Masters: Why the New Zealand housing market is nowhere near crash point
https://www.oneroof.co.nz/news/why-the-new-zealand-housing-market-is-no…
All good until people just don’t earn enough to pay mortgage payments and pay for basics, the chances of interest rates going low again is not very good without creating inflation and making NZD tumble. Many will just keep heads above water and some will be in huge financial difficulties watch and see defaults rise over coming years.
over coming years.
That's the crux of it.. the OCR won't and can't fall to protect prices of overinflated assets or jobs that depended on cheap debt. At best it would moves the unavoidable correction a year further into the future.
For a few years the economy will correct and balance back in favor of productive business. The boomjng housing market will return but that's a few years away after the jobs and businesses that depend on cheap credit are disestablished and we all revert to normality for a bit.
It's just the cycle of things.. in this case economics.
Firstly my comment was not about housing.
To answer your question though, house prices have certainly been more resilient than I expected. I previously said I expected house prices to drop from April (which will be reported in May). We shall see. If I'm wrong and house prices have not dropped by 31/12/24, I'll have to eat humble pie and I'll burn my DGM hat, lol.
Interest rates are not high compared with the past. The problem is a lot of New Zealanders have high levels debt compared with what I had. That was forced on them if they wanted their own home especially post Covid as people fought and paid too much for their homes, batches and investment properties. I have only had three home loans and the tightest one was the first at 3 times income. Paid off in three years by my wife’s income. Today in Auckland 10 times income. That is nuts. How do they survive in these days of high inflation. I hope mortgage rates begin to drop sometime this year.
David mentions an article from an economist that most have probably never heard of: Rodney Dickens. I recommend people read it. And focus carefully on a technique Rodney uses.
https://www.squirrel.co.nz/blogs/housing-market/rodneys-ravings-the-maj…
He shifts a graph line by 13 months and a correlation becomes obvious. (Note that 13 months fits with what Rodney is talking about but other economic factors use less or more. i.e. you can't use 13 months for everything.)
I do this a lot. And I take it further by splitting periods and then aligning segments of time over economic situations where similar conditions exist. Doing this provides insights into what might (or will) happen when multiple factors are at play and all of the factors can't be sensibly plotted on the same graph at the same time. It's easy to do using excel or a DB - simply create a 'derived' column using the date and add/subtract to the date giving a new date, then re-plot.
I remember using second, minute and hour day and week Technical Analysis coded for FX market, by shifting the access so you took 3 mins off the period you could make a conclusion how the models where probably going to trade in that last 1/20th of the period with stat significant bias... not now they are way way way smarter now....
Let's not forget the entire interest rate narrative is PR to detract from the true monetary policy, which is defined by the Quantity and allocation of credit creation. Prices & rates only matter in theory, in equilibrium - a fiction https://sciencedirect.com/science/article/pii/S0921800916307510 https://onlinelibrary.wiley.com/doi/full/10.10 Link
Economic conditions are brutal. Talk to any business owner to get the real picture. The middle class have been squeezed completely dry. I used to pull out $250K profit a year from one of my businesses. Now I'm not even drawing a salary at all. Granted we sell a completely discretionary purchase. The Reserve Bank is going to overcook it big time and in the process take down a tonne of skilled entrepreneurs and quality businesses that actually produce value and tax revenue. At this rate we are going end up a nation consisting of public service workers and beneficiaries. Madness.
Not so for export businesses or local businesses that sell either required products or value add products.
The issue in nz is that when house prices rose because the rates were low and demand high then everyone spent the virtual wealth that was created on stuff they didn't need... and some peeps convinced themselves that was a real economy... which they grew and started making, importing and selling nonsense to each other for higher and higher prices and paying people silly money to do so.
Now interest rates have gone back to a normal setting .. people have minimal excess money to spend and need to find ways to make their money go further for the basics...
So all that's happening is a shifting economy.. which is going back to what it should always have looked like and wiping out zombie entities (businesses and individuals whose economic status relied on the fake economy)
Those who didn't feast on cheap or fake money.. which I think is the majority.. will be fine. The rest will learn a lesson. History repeats.
Does everyone really see rates back to 4%?
It would just be another can kick down the road. We are in this mess because of low rates. Debt average is 7-9%. Money and debt has to have real value otherwise it gets used for stupid stuff like it has been. Aka bloated asset and to much debt.
The longer we keep avoiding the truth the greater a chance of a repeat of 1987. The lies and debt overran everyone and the hangover lasted for ten years.
"Squirrel obviously don’t understand the RBNZ’s remit. "
To make such a comment suggests your grasp of RBNZ’s remit is somewhat tenuous too.
Besides, Squirrel is simply pointing out that the RBNZ is implementing (or should that be executing?) their remit incorrectly. And many of us 100% agree.
Wait for the next inflation print ... And remember 2 points. 1) It will be 3 months out of date. 2) It covers the silly season.
And I'll add a third, 3) it may well be reporting prices for which consumers have a) found substitutions, b) are buying far less of, and c) simply can't afford to buy anymore.
RBNZ will keep rates steady unless they are forced to do otherwise. It's the politically safe option. Currently I see no reason compelling enough that will make them shift from the default position. I am sure they would prefer to wait for the economy to adapt to the current OCR than adjust the OCR to influence the economy. Like I said, they'll need a compelling reason to do the later over the former.
Yes, I think unemployment will be the big one (RBNZ independence or not). Writing is clearly on the wall there. I just don't think that will be taken into account as much as it possibly should be just yet. As another commentator said, they won't chicken out just yet. They raised rates and expect the economy to change in response. They won't back off because they think unemployment may happen. That is the expectation.
unemployment was taken out of major factors that they had to consider by the coalition, the mandate for the RB is get inflation back within target quickly, on top of the that tax cuts will be inflationary so don't expect to see any interest cuts this year.
"The new Government has passed its first bill, a law change that will revert the Reserve Bank to having a single mandate, which will be to maintain price stability - essentially to keep inflation low."
Where is our next job stats report being released. I suspect it will be grim. We advertised for a role 4 months ago and had two applicants, last week a business across town did the same and were slammed with 100 applicants.
The worm has turned, nobody is hiring except to replace a core role, and non-core roles are being cut.
Say what you will about brokers and banks having vested interests, but they are first in line to know exactly what the financial state of the people is.
Dear Mr. Cunningham. You should ask yourself why did we land in this situation of a very poor performance of the New Zealand economy. The reason is that New Zealand has too much unproductive debt. And....that is where you were knowingly a partner in with promoting everybody into homes they poorly could afford. There is not enough capacity in the real productive economy to service that unproductive debt. Countries where their GDP is not so influenced by selling houses to eachother like the Nordic Countries, the smaller EU countries; South Korea and Taiwan all have lower interest rates because their productive part of their economy is capable of servicing the their unproductive debt. Those countries have exports to GDP ratio's of more than 50% and that makes the New Zealand very pale with 24%. So grow New Zealand exports first before we think about lowering the OCR.
And herein lies the problem.
https://www.oneroof.co.nz/news/how-much-has-your-home-made-in-the-last-…
https://www.oneroof.co.nz/news/warning-to-first-home-buyers-as-anz-give…
When the ruling narrative and belief is "making money", we have what we have now.
No significant changes to our ways of being and doing will happen without a different perspective, without a different vision. Productivity, wealth, money, are all just means and without a real vision or clarity as to what ends, is plainly futile.
"According to Centrix:
- Almost half a million consumers are behind on their payments to lenders and suppliers (e.g. banks, telcos, utilities).
- Over 12,000 borrowers have been flagged by lenders as being in financial hardship, an increase of 32% over the last year.
- 22,000 borrowers are behind on their home loans, up 16% over the last year."
How to spin data in a positive light:
- Almost half a million consumers are behind on their payments to lenders and suppliers (e.g. banks, telcos, utilities). - that means the other 4.5 million consumers are up to date with their payments (that is 90% of the population)
- Over 12,000 borrowers have been flagged by lenders as being in financial hardship, an increase of 32% over the last year. - that is only 0.24% of the population. The other 99.76% of not flagged by lenders as being in financial hardship
- 22,000 borrowers are behind on their home loans, up 16% over the last year. (22,000 borrowers is only - that is a mere 1.2% of the number of households in NZ, the other 98.8% are not behind on their home loans.
Ignore those doom and gloomers.
LOL
Real life inflation for normal people is still high, rates, broadband, cell phone plane, insurance, car servicing and especially groceries are still increasing at very high rates, some of then 10-20%.
Wages still not keeping up.
I don't think lowering rates right now is a good idea, especially if the FED isn't yet, the NZ dollar would sink and import prices up = more inflation.
What a biased, self-serving article created by whinging vested interests.
On the other hand, higher interest rates appear to be working, and a balanced decision would probably be to start cutting, moderately and cautiously, towards the end of this year (depending also on what the Fed is actually going to do in the meanwhile, of course).
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