House prices are broadly stabilizing from Auckland on down through the country, although there are still hot spots in the likes of Hawkes Bay and the Hutt Valley.
Mortgage rates are stable at or around four percent and are expected to stay that way for the rest of the year, with a slight chance of cuts later this year if the banks are able to (or want to pass on) any cut in the Official Cash Rate (more on that later).
Immigration and economic growth are settling at slightly lower levels, but GDP is still growing globally at over three percent. Growth here is somewhere between two and three percent, with very low unemployment and household incomes growing comfortably over five percent.
There is little in the economic weather to unnerve the banks or force landlords and homeowners to be worried about making their mortgage payments. Debt servicing as a percentage of household income is now just below eight percent, whereas it was over 14 percent in 2008. Even though total household debt is up by $100 billion in the last decade, the fall in interest rates from nearly ten percent to barely four percent calms a lot of nerves.
And there is little prospect of a spike higher in interest rates. All around the world, central banks are finding the inflation they keep predicting just never turns up, despite very solid economic growth. The launch of the smart phone age a decade ago and the lasting damage to investors’ risk appetites have combined to anaesthetize the sleeping dragons of inflation.
For example, the New Zealand 10 year bond government yield fell to a record low 2.08 percent last month and is solid around 2.20 percent early in March. That means the wisdom of the crowds in one of the more liquid financial markets is essentially saying they see wholesale interest rates around 2.0-2.5 percent for the foreseeable future.
But will retail mortgage interest rates stay around 4.0-4.5 percent?
There is now some debate around whether the banks will become a lot more cautious about lending and potentially lift their profit margins in the wake of a surprise Reserve Bank proposal in late December that banks essentially double the amount of capital they put aside for each loan.
The banks themselves are being cautious about what they say, but ratings agencies and analysts say it could add up to 150 basis points to bank capital costs. The banks could either choose to absorb that and accept lower profits, or choose to rein in their lending and tighten lending standards.
The Reserve Bank will not be finalizing its capital policy until after May and it could soften the plan. The banks could also choose to just eat the extra cost, but there’s also a risk the banks could effectively hold the Reserve Bank and the Government hostage by staging a type of lending strike.
The Reserve Bank remains determined to increase capital levels to reduce the risk of a bank going bust and argues that the effects of bank margins and the economy more broadly are minimal and will come out in the wash.
That’s very much a topic of live debate so watch this space.
Meanwhile, house building is in theory surging along at record highs, but a closer look reveals it is not making a dent in the shortage of homes created over the last two decades of under-building. KiwiBuild has gotten off to a slow start and the basic issues remain unresolved.
The prices are too high for most first home buyers and councils in growth cities such as Auckland, Hamilton, Tauranga and Queenstown remain unable or unwilling to build the necessary infrastructure to support a massive and fast increase in housing supply. Until the central Government stumps up with tens of billions of dollars for new roads, railways, pipes, schools, hospitals and playing fields, the shortage of homes will keep a strong floor under house prices.
That brings us back to the holding pattern. The Government cannot do the borrowing it needs to until it changes its underlying fiscal policy of keeping net debt around 20 percent of GDP. It will probably propose a higher net debt target before the 2020 election, but can do little to address the massive infrastructure deficits until after that election.
So we are in a holding pattern for 2019. Rates are on hold. House prices are holding, generally, and housing stock isn’t rising much to cope with still strong population growth. Economic growth is holding above two percent and household income growth is holding above five percent.
They all won’t be ready to come in to land until well into 2020.