When’s My House Price Going to Start Rising Again?
Ah, the age-old question that’s been on the lips of every Kiwi homeowner and potential buyer for decades. If you’ve been living under a rock, here’s a quick recap: inflation is the rate at which the general level of prices for goods and services rises, causing purchasing power to fall. Another way to think of it is that the value your dollar can hold today, is less than it was yesterday.
Inflation happens when there’s too much money, chasing too few items.
The typical cure for higher inflation? Higher costs. Specifically, higher interest rates. So the treatment central banks [like the RBNZ] prescribe for the cancer of inflation, is a higher OCR [official cash rate] which helps influence the rate you pay on debt (including your mortgage). So while higher interest rates might be good for destroying inflation, much like chemotherapy, it can destroy the body (in this case the ‘body’ is anyone with debt that needs to be serviced). On a macro-economic level (thinking big picture) it changes the flow of capital or resource within an economy by altering incentives. Money flows towards savings accounts, instead of spending (or investing) for example.
Now, let’s talk about the Philips curve. In simple terms, it suggests there’s an inverse relationship between the unemployment rate and inflation. When unemployment is low, inflation tends to be high and vice versa. But here’s the kicker: our unemployment data might not be capturing the full picture. While New Zealand’s employment data paints a picture of a thriving economy, many households are struggling. The dollar doesn’t stretch as far as it used to, and many are finding it challenging to make ends meet.
Moving on from the basics…
What’s causing this inflation? Some argue that fiscal [government] spending might have gone a tad too far, and it’s quickly becoming the true culprit of continuing inflation. What started it however, was too much new credit creation due to the central banks response to the pandemic. They lowered interest raters too far and engaged in quantitative easing (money printing) more than what was required. And let’s not even get started on how rising and falling interest rates seem to exacerbate wealth gaps. The question of ‘When House Price Go Up’ is therefore somewhat of a complex puzzle to solve, where every piece affects the other.
Now, onto the property market. My opinion is that we’re going to see a ‘dead cat bounce’ in the housing market. This refers to a temporary recovery from a prolonged decline in prices, which is then followed by a continuation of the downtrend.
House prices declined, primarily due to an extreme increase in interest rates from October ’21 to May ’23.
You can make it more complex than that, but you don’t need to. I believe that due to suppressed demand, a premature expectation of falling interest rates, an uptick in immigration, and the hope of changes in government, we’ll see a reversal in house prices. A dead cat looks alive when it bounces off the ground from a great height. Soaked in recency bias, the collective enthusiasm of the market may be high on hopium . With interest rates peaked or otherwise, we’re still way beyond a ‘neutral’ rate (est 2.5% OCR) setting.
Historically, interest rate rises take about 12-18 months to impact the real economy. If we look back to March 2020, the Official Cash Rate (OCR) was at 0.25%, and the average house price was around $750k. Fast forward 20 months, and that price peaked at just over $1,050m. By October 2021, we saw the first hike from 0.25% to 5.5%, and only 18 months later, in May 2023, house prices could potentially hit a trough.
But here’s where it gets interesting. The relationship between monetary policy and the broader economy isn’t linear. The great economists Milton Friedman and Anna J. Schwartz noted that changes in money supply precede changes in the general business cycle by about 12-16 months. So, if we’re trying to predict the future, house prices might really just hit a trough around May 2024. 12-18 months later, perhaps only then do they start increasing again. But hey, that’s just a theory.
Lastly, let’s touch on the speed versus acceleration debate. Policymakers often look at how fast indicators like unemployment, inflation, and immigration change. Are they considering the rate of change? And with advancements technology (AI and robotics specifically) potentially exerting deflationary pressures, coupled with a slowdown in global economic growth, where does that leave the RBNZ’s current monetary policy trajectory? Me thinks they went way too hard, way too fast.
Unless there’s an ‘event’ (and let’s be honest, we have plenty of those to consider). This dead cat bounce could make even the perma-bulls turn into pussies.
To dive deeper into these topics, check out the podcast episode where I chat with Kiwibank chief economist Jarrod Kerr.