Half full or half empty? - It all depends on your lens...

So, where are we at? Let’s quickly bullet point what’s being reported in the media (print/news/social):

A snapshot of the media articles/themes might be:

o   An expected slowdown (in the wider economy) is coming and potentially we have been in recession but didn’t realise it – with more to come…

o   Prices are continuing to fall – fast.  Reported drop/easing in prices (and suggestions of much more to come)

o   Government policy and interest rates are causing much of the slow down and difficulty with obtaining credit

• RBNZ – speed limits, LVR’s, TDTI (Debt to Income restrictions)

• Interest Rate Rises and Prediction of Continued increases

• CCCFA (Consumer Credit Act) – had a major impact on the way in which lenders had to assess borrowers.

• RTA (Residential Tenancy Act) changes and general anti-landlord sentiment has certainly impacted the level of interest in residential investment

• Threats, and Risk, of rent controls being introduced/legislated

o   We have a well reported cost of living “crisis”

o   It is reported that we have had the lowest level of mortgage/lending applications and approvals for more than a decade

o   Building supply chain issues and construction cost issues are not really supporting this governments desired outcome (of incentivising new build purchases)

o   Inflationary Pressures are impacting available income/disposable income

o   Net Migration – i.e. more leaving than arriving

But there is a less popular, alternative perspective – factual and anecdotal – it’s potentially as a result of seeing things through a different lens:

Wage inflation is keeping up with Underlying Inflation (or close to)…

Ok, so we have a cost of living crisis – there is no doubt everyone notices the increase in the cost of everything currently, however,

·         Wage Inflation is keeping pace with inflation (and is ahead of inflation in many sectors/jobs) – so in reality, the impact is considerably less than the media might have us believe (although don’t get me wrong, I feel the pinch as much as the next person).

·         With a tight job market/very low unemployment – the employee has the power and, to a large degree, the stability of regular income.  With this comes the power to negotiate and negotiate they have – be it via unions (increased power under Labour) or individually, the power to obtain a pay rise is currently in the hands of the worker.

Interest Rates – they have recently dropped from their high (have they reached their peak?)

·         Economists have a more common sentiment that core Inflation may have peaked – the question now is at what rate it will start to fall back to be within the target range.

·         In Late July and August, swap rates reduced – the longer term 3-5 year terms more than the shorter ones – but then in recent weeks have increased again.  It will be interesting to see how this plays out in the coming weeks - but there is general consensus (and per point below) that much of the recent interest rate increases have already been factored in.

·         With this, interest rates are more stable than they have been for over nearly 12 months.  There have been no increases to any fixed rates following the last 2 OCR announcements (further suggesting a more stable interest rate environment is eventuating)

·         The counter to this is however that, as at 2/9/22 and for the 2-3 weeks prior, the longer term swap rates have been increasing again so, potentially there comes a point when banks will want to increase rates (above what was already factored in so far)

Government Policy and a Political Lens

Easing of the CCCFA

·         This had an initial major impact but now the government is ducking for cover given they have hurt and impacted those they intended to help.  Their challenge is how to unwind the ill-conceived legislation and stop it overly impacting the wrong people and save face at the same time. The big issue was payday lenders – aka “loan sharks” but instead, they were relatively untouched… The application of the CCCFA and it’s wording/policy is slowly being watered down and the lenders are increasing in confidence that they can make the practical, sensible, risk-based decisions they were making before interference from the over-reaching, unqualified, policy makers.  In summary, lending is becoming more available.

·         Further, with a General Election upon us in around 12 months – this Government will want to limit the damage they have done.  In line with CCCFA backtracking, there will be more and more effort to be seen as a rational political party with policies that win as many votes as possible – but importantly negate any of National/Act’s stated policies.

·         There is a growing focus on immigration – which although in a Net Migration position currently wouldn’t take much to grow again – particularly with the expectation of a change of government on the horizon and pressure on the current government to open our boarders to crucial/in-demand skills/labour asap.

So, with an increased (but by no means notable) number of listings and a slow easing in access to borrowing – be it with main banks or with non-bank/2nd tier lenders (who are filling the void) and a very tight and secure job market, there are very definite green shoots and an underlying desire by this government to prove that the available policy instruments (LVR/Speed Limits/Debt to Income/Monetary Policy) and the way they have utilised these policies have had their desired result and prevented a boom/bust cycle and indeed one that has stability and confidence.

Alongside this, it seems we are settling into a more stable fixed interest rate environment and the rates seem to be settling into the 5-6% range – few, if any, main banks have increased their Fixed Interest Rates since the latest OCR announcement on 17th August and indeed, there were reductions in several fixed rate terms following the previous OCR announcement in early July. However, as mentioned, swap rates have been trending back up in recent weeks so potentially there may be a few rises to come.

This, coupled with an easing in the interpretation and literal application of the CCCFA policy changes and strong and clear commitment to a reversal of the treatment of interest as an expense if, and when, a National/ACT Government is formed (which is certainly looking more and more likely), the environment certainly appears to be changing.

The more likely scenario is that we have continued strong employment, stabilising inflation and wage growth keeping up or marginally behind (or potentially even slightly ahead) with more relaxed policies around lending and a manageable supply of land/build projects to stabilise labour and materials demand to match supply more closely.

Given the ever more likely scenario of a change of government (and interest deductibility rules reversed along with other anti-landlord/property investor policies), coupled with the general easing in lending restrictions and returning confidence in the market, we are seeing more and more first home buyers and investors looking more to existing and established properties than the un-predictability of new build/construction despite the government’s effort to push new builds…..

Many of my clients (existing and new) have pre-approvals or facilities in place or are making offers – more and more often in multi-offer scenarios.  The confidence amongst investors and first home buyers – particularly in the Bay of Plenty region – seems to be back in force.

Get in touch for a chat – we are always happy to talk through your situation and help plan the next move.

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