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NZ Herald
2 days ago
- Politics
- NZ Herald
Election battle lines are slowly being drawn
It's one of a shrinking number of election issues on which National still currently outpolls Labour. So, it's no wonder they've pulled out all the stops after a few weeks of shaky results and a fair amount of time spent on defence. The problem for Labour with crime is simple: nobody trusts them. The facts are as follows: crime went nuts. Labour's policy? Cut the prison population. Sure, there's more to it than that, but this is clearly how voters feel. Which is what is making this such a hard week for Labour, not the Greens and TPM, who sing a different song on law and order, and for Chris Hipkins. How do you credibly stand up and argue against longer sentences for thugs who bash first responders? How do you oppose getting tough on coward punches? How do you oppose on-the-spot fines for people stealing booze from the supermarket? The answer for Labour so far has been to continue to oppose these things. They have come out against almost every single change. And that plays into the perception they're still weak on crime. That they haven't been to the gym to get stronger, tougher and meaner. They've been at the salon painting their nails, feeling sorry for all the misunderstood baddies who just need a big wraparound hug. Of course, this problem could be solved if we knew anything about what Labour is planning, policy-wise. But Chippy's strategy is going to be one of shock and awe – holding cards very close to the chest until the election. I asked Hipkins on my Herald NOW breakfast show this week about Labour's record on crime and he was adamant they were on the right track but Covid simply got in the way. The problem for Labour with crime is simple: nobody trusts them. Photo / Getty Images I wonder how this level of accountability will go down with voters? I asked Chloe Swarbrick this week whether it was okay to steal food if you're hungry. She refused to answer the question, instead saying that she would not give 'soundbites'. Meanwhile, her colleague Tamatha Paul, the MP singularly most likely to re-elect a coalition Government, was happy to dish out soundbites promoting food theft like it was some sort of God-given right. Put these pieces together and you can understand why National's picking this scab. It's fertile ground. Cost of living is proving a much harder dial to shift for the right. Not because the numbers haven't returned to more normal-looking levels – they have. Inflation is 2.5%. The Official Cash Rate is near neutral at 3.25%. But recent surveys show voters aren't feeling it yet. The onset delay is hurting National, with Labour overtaking the leaderboard on a king-hit issue. The battle lines are slowly being drawn and we can expect to hear a lot more from National on crime and a lot more from Labour on the cost of living.
Newsroom
25-06-2025
- Business
- Newsroom
Housing market stuck in second gear
The creaky recovery in the housing market has continued. Turnover volumes have floated back up to average levels, and the run of consecutive monthly house price increases has extended to seven (s.a.). Price gains remain glacial though. And stirring a shakier demand backdrop in with our existing concerns about elevated supply points to this dynamic continuing. We've shaded our 2025 annual house price inflation forecast down to a 2-4 percent range accordingly (5-7 percent previously). As usual there are risks in all directions, but we see them as roughly balanced around our central case. We haven't changed any of our interest rate views. The Official Cash Rate and short-term mortgage rates are expected to fall a little further. We nevertheless still see the value in the mortgage fixing decision as tilted more toward longer fixed terms. Impact of macro drivers on our house price view The table below summarises the various drivers of house price inflation and their directional impact on our view. Where are we at? Lower mortgage rates are continuing to thaw out the housing market. As we're seeing in other areas of the economy though, it's a recovery that's creaky and tentative. And the latest (May) set of housing data provided few signs of momentum picking up. Still, to say the overall market is 'flat', is an oversimplification. There is clearly evidence of an interest rate-related boost in the increased number of property transactions taking place, and the associated jump in lending to the sector. The pace of house sales is continuing to trend higher. At about 6800/month (seasonally adjusted), national house sales are now 15 percent ahead of levels this time last year. They're now more or less bang on the long-run average. Transactions in some regions, like Waikato and Canterbury, are well above average (10 percent and 30 percent above, respectively). Importantly, it looks as if mortgage rates have fallen to a level that is finally stirring more interest amongst the heavyweight owner-occupier segment of the market (60 percent of new lending). Investors remain active too, while first-home buyers have retreated a touch. The latter now account for 20 percent of new lending, down from the 25 percent peak. Housing supply – too much of a good thing The extra turnover is not producing the sort of upward jolt to house prices that we might have seen in the past. Prices are rising but they're doing so at a glacial pace. The REINZ house price index registered a 0.1 percent (seasonally-adjusted) increase in May. That was the seventh consecutive (s.a.) monthly gain. But the cumulative gain over that seven-month period amounts to just 1.4 percent. Annualised, that's house price inflation running just north of 2 percent. The now well-understood reason for the subdued price response is the fact there's plenty of supply about. Unsold inventory remains around 10-year highs. Buyers have both more time and more choice. Recent local council property (de)valuations in Wellington and now Auckland just reinforce this tilt in the balance of market power. We've regularly flagged the price suppressing implications of the supply response (see for example here and most recently here). To reiterate a couple of the conclusions from the latter note: The process of working off high inventory levels may be slowed by some of the excess inventory in the rental market ultimately being listed for sale as conditions improve; Supply relativities are likely to produce a multi-speed property market response to lower interest rates. The relatively higher inventories in the townhouse market, in Auckland, and Wellington, suggests those markets may underperform the broader upturn. Recent inventory data from does hint at the supply wave starting to stabilise. The pace of new listings has flattened off in the past few months meaning overall inventory levels have held steady rather than push higher. Demand wobbles The big question confronting housing market forecasters is how long this heightened inventory might take to work through. We suspect it might take little longer than many are expecting now that, as flagged in some of our other publications, we're seeing some wobbles in the demand-side of the economy. High frequency data point to a concerning sag in demand through the middle part of the year. Some of this might be temporary owing to the April and May gyrations in US tariff policy. But at least part of it is expected to stick around. We've downgraded our growth forecasts to just 0.8 percent for this calendar year (annual average GDP growth). Weak labour market conditions drag on. Positive employment intentions have not yet been reflected in actual hiring – job ads are still crawling along 11-year lows. Surplus labour supply is being reflected in falling participation, slowing wage growth, and elevated job insecurity. Net migration has proved to be slow in turning meaning population growth is likely to remain sub-par (<1 percent) this year. There's been a tendency for Stats NZ to revise down initially firmer-looking net migration estimates. Net inflows have thus continued to shuffle along at annualised pace of about 20k. We think these weights on housing demand will continue to lean against the strong support coming through from falling mortgage rates. And combined with our existing concerns about heightened supply, the shakier demand backdrop has us forecasting a continuation of the current slow pace of house price gains. Ongoing small monthly gains tote to an annual lift of 2-4 percent for 2025. We continue to assume a marginal pick-up to 5 percent annual house price inflation through calendar 2026. If all of this proves close to the truth, always a big 'if' given the vagaries of house price forecasting, inflation-adjusted house prices would end this year around the same level as mid-2020, 24 below the 2021 peaks. It highlights the reduced role for housing and the associated 'wealth effect' in this economic recovery. Our assessment is that the risks around these forecasts are roughly balanced, at least as far as the 'known unknowns' go. As we have seen, 'unknown unknowns' continue to come through thick and fast. Mortgage rate outlook Our view at a glance* Floating rates – home stretch Further falls in floating mortgage rates are likely based on our forecasts for additional cash rate cuts from the Reserve Bank. It should be noted though that, with the end of the easing cycle coming into view, the extent of these expected falls is now more limited. A total of 225bps of cash rate cuts have been delivered to date. There's debate about how many more cuts the RBNZ will deliver given heightened global uncertainty and inflationary embers that refuse to die off. The Bank may choose to pause the easing cycle in July to buy more time to assess these developments. Our (unchanged) forecast is still for two further 25bps cash rate cuts in July and August, delivering a 2.75 percent low point in the cash rate cycle. Market consensus is closer to a 3.00 percent end-point. Putting it all together, our best guess is that carded floating rates bottom out in the low 6's in coming months. Fixed rates – falls in shorter terms Fixed mortgage rates have continued to ease since our last report. As expected, these falls have been concentrated at terms of less than two years. Indeed, the two-year rate of just under 5 percent remains the key pivot point for the mortgage curve (chart below). More of the same is expected. The final stages of the Reserve Bank's easing cycle are baked into most term mortgage rates already. There's still room for tinkering here and there should the offshore picture or local data flow spring any surprises. Downside risks predominate in this regard. But our core view remains unchanged in that it's just short-end mortgage rates that can be expected to fall meaningfully from here. Our forecasts have six-month and one-year fixed mortgage rates easing further into a 4.50-5.00 percent range by the end of the year. Absent a new shock turning up, there's limited potential for declines in longer-term rates. It's essentially the final stages of adjustment back to a more 'normal' upward-sloping mortgage curve (see 'forecast' line above). Mortgage strategy Before diving into the rate fixing debate, it's worth reiterating that getting a mortgage strategy 'right' is primarily about meeting a borrower's financial needs and requirements for certainty. Trying to pick the timing of interest rate movements is fraught with difficulty. Given where we are in the interest rate cycle, the broad nature of the fixing decision facing the average borrower could be framed as either: terming out some borrowings now at a rate near 5 percent (for any of one, two or three years); or holding out a little longer by fixing for six months a few more times. Of course, there's also the option to just 'float through the cycle' and stick to floating and six-month terms. But the two options above seem to be where the calculus is at for most mortgage borrowers. There is almost no appetite to fix for four years or longer (see chart below). What have people been doing? 'Peak short' was hit in November when 94 percent of all new mortgage borrowings were fixed for terms of a year or less. As of April, that had reduced to 68 percent as longer fixed terms gained in popularity. That fits with the message we've been running since the start of the year that there may be a less favourable risk/reward in shorter-term mortgage fixes. We maintain that view. Fixing for a short-term like six-months has the advantage of providing the optionality to get a longer-term fix at lower term rates than currently, should they transpire. And a few extra bps off can make a lot of difference to cash flow over a two- or three-year loan period. The rub is that 6-month fixed rates are 30-40bps higher than one-to-three-year fixed rates. Term mortgage rates thus need to be lower when you go to refix just to recoup this extra upfront cost. Breakeven analysis can provide a sense of how much lower. Suppose you are tossing up between a) fixing for six-months ahead of locking in for longer, or b) just locking in now for either one or two years. If you fix for six months at 5.30 percent (all mortgage rates quoted are average of four major banks' 'special' rates, sourced from to break-even you need the one-year rate to fall from 4.95 percent now to 4.70 percent by the time you go to fix in six months' time. The break-even equivalent for the two-year mortgage rate is a fall from the current 4.95 percent to 4.90 percent. Both of these scenarios are entirely plausible, and in a world of heightened risk – most of it negative – a short-term fix has the advantage of full optionality to the downside. But to reiterate the obvious, those are break-evens, so you need slightly larger falls to be better off. For many borrowers, the potential payoff involved in going short, giving where we are in the interest rate cycle, may not be worth the reduced certainty over future cash flows and additional up-front cost. If you're not convinced by either option and want a bob each way, spreading your risk across several terms is also an option. Disclaimer: This publication has been produced by Bank of New Zealand. This publication accurately reflects the personal views of the author about the subject matters discussed, and is based upon sources reasonably believed to be reliable and accurate. The views of the author do not necessarily reflect the views of BNZ. No part of the compensation of the author was, is, or will be, directly or indirectly, related to any specific recommendations or views expressed. The information in this publication is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser. Any statements as to past performance do not represent future performance, and no statements as to future matters are guaranteed to be accurate or reliable. To the maximum extent permissible by law, neither BNZ nor any person involved in this publication accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.
Scoop
30-04-2025
- Business
- Scoop
RBNZ Research Investigates Why The ‘Natural Interest Rate' Has Fallen In New Zealand Over Recent Decades
The fall in New Zealand's natural interest rate has been driven mainly by declining labour productivity growth and a lower natural interest rate globally, a Reserve Bank of New Zealand Discussion Paper finds. Pushing in the other direction, high population growth and increasing labour force participation among older households have kept the natural interest rate higher than otherwise. This 'natural rate of interest' is closely related to the 'neutral rate of interest' and is an important benchmark for monetary policymakers when considering the level of the Official Cash Rate. The decline in the natural interest rate among advanced economies has been widely studied. New research from the RBNZ explores the factors that have contributed to this decline in New Zealand over time. To better understand the natural interest rate, the authors build a model capturing how households' savings decisions change over their lifetimes. The model also accounts for the impact of changes in New Zealand demographics and government debt levels, as well as global trends. A key driver of the decline in New Zealand's natural interest rate is labour productivity growth, which fell in New Zealand after the Global Financial Crisis. As captured in the model, people tend to save more as productivity growth falls, because they don't expect incomes to rise as much in future. In turn, more savings in New Zealand flow through to a lower natural interest rate. The natural interest rate across many advanced economies has fallen in recent decades, with the world natural rate falling about 1.5 percentage points in the post-GFC period. With New Zealand integrated into global financial markets, this lower world natural interest rate has flowed through into a lower natural interest rate in New Zealand. The impact of these drivers has been partially offset by higher population growth and increasing labour force participation among older households. This is because households who expect to work for longer tend to save less for retirement. Higher population growth means more younger households in the population, who tend to save less than older households. Lower domestic savings means a higher natural rate of interest. Understanding the drivers of changes in the natural interest rate is important for central banks and helps inform expectations on where the natural rate will move in future. 'If the natural and neutral rates of interest remain low, this would suggest an ongoing need for alternative monetary policy tools when encountering the effective lower bound (close to zero interest rates) on central bank policy rates,' the authors say. The model developed in this research has a wide range of potential extensions which future work may explore. These extensions could include modelling different types of households in more detail or introducing a risk premium between the return to safe and risky assets. More information Authors: Robert Kirkby, Trent Lockyer, Andrew Coleman Definition of natural rate of interest: The long-run return to capital. The level of the natural rate of interest reflects the underlying balance between the amount of savings (from households or overseas investors) and demand for capital (from businesses and the government). Definition of neutral interest rate: The nominal neutral interest rate is the level of the Official Cash Rate consistent with inflation being sustainably at target and the economy running at its potential output. When the OCR is above neutral, monetary policy restrains demand and inflation pressures. Below neutral, it is stimulatory. The level of neutral interest rates shapes expectations of where the OCR is likely to settle in the long run, in the absence of future shocks.
