Westpac predicts no short-term relief from inflation, interest rates
Households finances across New Zealand are being squeezed and for many people these pressures are going to become more intense this year.
Westpac New Zealand has released its first Economic Bulletin for the year, finding mounting financial pressure is approaching from several fronts.
Westpac New Zealand senior economist Satish Ranchhod (pictured above) said the sharp rise in consumer prices had been eating away at households’ spending power for months now.
“The past year has seen particularly large increases in housing costs (up 9%) and petrol prices (up 19%), while food price inflation hit a 14-year high of 11% in November,” Ranchhod said.
“Those price increases are being felt by every family across the country. They’ve been particularly tough on those families on lower incomes who tend to spend a larger share of their earnings on necessities.”
Inflation pressures are ongoing
Referring to the January 2023 Economic Bulletin, Ranchhod said Westpac New Zealand did not expect to see inflation to be back inside the RBNZ’s 1% to 3% target band until mid-2024.
“The Reserve Bank has been hiking the official cash rate at a rapid pace, with the cash rate rising by a total of 400 basis points since October 2021,” he said.
“That includes a jumbo-sized 75-basis point increase at the November policy meeting – the largest single increase on record. The RBNZ has signalled that further large increases in borrowing costs are on the cards in the coming months and we’re forecasting that the RBNZ will deliver another 75-basis point hike in February and expect that will be followed by a 50-basis point rise in April.”
Property update
Ranchhod said the dampening impact of interest rate hikes was already being felt in the housing market.
“Since the RBNZ’s tightening cycle began in 2021, median house prices have fallen by an average of $112,000 across the country, a drop of 12%,” he said. “We’ve also seen house sales dropping to their lowest level in more than a decade (barring the lockdown period in 2020).”
Ranchhod said the weakening in the housing market had been widespread and had been especially stark in larger centres.
“Prices in Auckland have fallen around $230,000 from their peak, while prices in Wellington are down $201,000,” he said.
“With interest rates continuing to push higher, we’re forecasting that nationwide house prices will fall by a further 10% over 2023 and 2024 combined. Coming on the back of the falls we’ve already seen, that will leave prices down 21% from their peak in 2021.”
On Friday, Century 21 New Zealand owner Tim Kearins said C21 offices were reporting some stabilisation as well as pockets of positive results.
“If you’re a prospective vendor, don’t write off selling this summer,” Kearins said. “Plenty of good properties are still making good money, Kiwis always need to shift, and buyers are busy trying to lock in a mortgage rate before the Reserve Bank has another review in late February.”
There is some positivity
Ranchhod said despite the doom and gloom, there is positive news.
“Employment levels are up 5% on pre-pandemic levels, with unemployment sitting at 3.3%. Meanwhile, average hourly earnings are up 7.4% in the 12 months to September.”
Looking ahead at interest rates
Ranchhod said financial pressure would be a lot tougher in 2023 as conditions for borrowers get a lot tougher over the coming year.
“Close to half of all fixed-term mortgages will come up for repricing over the next 12 months and in many cases, those borrowers will face refixing at substantially higher interest rates,” he said.
“For example, borrowers who fixed for two years in 2020 may have secured a rate in the 2.5% to 3% range. Those same borrowers are now looking at a two-year rate that’s more than three percentage points above what it was back then.”
In December, Westpac announced its new chief economist, welcoming Kelly Eckhold who will begin with the bank in March.
Westpac NZ chief executive Catherine McGrath said Eckhold brings a wealth of crucial expertise from across the financial sector.
“The New Zealand and global economies are finding their way through a period of heightened volatility,” McGrath said. “It’s never been more important to understand the incoming trends and challenges, and what it means for our customers. I look forward to working closely with Kelly and drawing on his insights.”
