Normally, heading into Xmas I ask if you have plans to sell, buy or renovate in the coming year. But this year I will simply try to provide value and say thank you. We wrap up 2022 and head into an uncertain 2023 thanks to a reserve bank engineered recession, stubborn inflation pressure, and forecasted interest rate increases. I will do my best here to provide a “prediction” of what I think the outlook shall be.
Keep in mind when I did my annual wrap-up last year I expected rates to hit mid 5% range as the top and we have sailed past that. Though for 2023 there are some telling data to lean on that leads me to believe that, although we will see rates rise in the early part of the year, I feel like we will also see declines.
A quick check of RBNZ data shows there is a rough figure of about $150 billion of home loans rolling off an average rate of 3% in the coming 12 months that will endure a rate hike up to 6% or higher. So we know that interest costs are doubling for about half of all the mortgages in NZ. Meaning, about a $4.5 billion expense hits the private sector only in mortgage servicing costs. You can say “but wages are rising too”. This is true but the RBNZ wants to avoid a wage price spiral at all costs and needs to get inflation under control to restore price stability. (And credibility). So, when we think of this logically, the wage increases will likely stop as part of the economic contraction but we know that the mortgage costs coming are unavoidable and will be marked to market throughout the year.
Simply put, the RBNZ will continue to raise rates while the pain of inflation is greater than the pain of the economy. Right now inflation is winning that race dramatically. So up they go. Where this comes unstuck I believe, is the natural lagging effect of these rate hikes and I feel like we will have an “All at once” moment at some stage in ‘23. When that is, really hard to guess, I would say pre election. My guess is that the “pain” that will initiate the RBNZ to consider dropping rates.
Summary? Rates increase through to early/mid next year, plateau then we get some easing end of ‘23 or early ‘24. So we could be back in the mid 5% home loan rate range around that time. Watch out for the “inverted yield curve” in home loan rates when the 1yr rate is higher than the 4 and 5yr rates. A good indication you want to be on the 1yr rate and enjoy the drop that follows that. But first we have to suck eggs. This time would also likely indicate a “bottom” in the housing market. Though I don’t expect it to bounce quickly, my guess is quite flat for a period following this so called bottom through to mid 2024 start of 2025. (Remember trying to time this is a fools game) It can be a great time to add value to homes and pick up deals if you have the means or remember what it is like to save again. Good term deposit rates around right now.
As I said, this is all a guess. We will look back at the end of ‘23 and see how wrong I could be. All of this can be skewed by something like bringing in 100,000 immigrants, although very unlikely, not a non-zero chance.
From us here at Guardian Smith, I would like to say thank you to all clients, our network and to our team. It has not been an easy year for some. Clients and the team have endured the fastest rate hikes in history. Increased LVR rules. Introduction to new regulation like the CCCFA and endless new paperwork requirements. You all put up with me trying to explain these challenges as basically as I can and kept pushing forward. So good on you all. Among all of this, clients have recommended me to others more than ever before. Massive thank you for that, it is very appreciated and is what keeps the wheels moving over here.
To finish this up. Regardless of how I think the economy will go next year. We are aggressively trying to recruit new brokers and plan to double the size of the team in ‘23. So, if you do know someone who would like to chat about joining, I am all ears.
Additionally, It’s important to know that our office will close this year which is a bit new for me. Our last day will be the 20th of December and I will be returning in full force on the 16th of January. (Just in time for the Jan 25th Inflation release).
Have a lovely Xmas and New Year. Enjoy time with your families, eat and drink far too much and I look forward to being of service in 2023.
Mikey Smith – Managing Director, Guardian Smith