Curder and welcome to Shared Lunch. My name's Laighton Roberts. I'm the co CEO and co founder here at Chasis. On the program today, we're talking about everyone's favorite topic, interest rates and the property market. This is ahead of the Reserve Bank meeting to decide if the official cash rate will be cut again, and of course this dictates what we will all pay on our mortgages for our loans. To chew this over, I'm joined by independent economists Tony Alexander.
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Hey, welcome, Tony. Thanks so much for joining us again.
You have no trouble laden good to be here.
He Oh, look, Tony, it's great to have you here. Very topical timing, I mean always is to have you here. And everyone loves talking about interestrates and property market in New Zealand, but specifically with some big changes in the central banks here and overseas and the last little bit. This one's going to be interesting, so I think let's get straight into it. How's it shaping up for the Reserve Bank announcement coming up?
Yes, well, for that next announcement our next week Wednesday, it is likely we're going to see the official cash rate cut again. It would be pretty rare for the Reserve Bank to cut by zero point twenty five percent of the start of an easing cycle and then just take a pause. If they're going to take a pause and see how things pan out, maybe after they've taken the rate down by one percent in a few months
time or so. My interest is mainly, of course, in not whether it's going to cut or not, but will it be point two five or zero point five percent? And I know a lot of people are thinking, well, because the Americans, the Federal Reserve just started their easing cycle and went for a big bang zero point five percent cut, maybe the Reserve Bank in New Zealand has some catching up to do as well, and they'll go
zero point five percent. Now they might, but I can't help think that they'll still decide to plod it along at point two five for maybe another two or three times and then like I say, pause and decide if they need to do a bit more of a rapid move. So yeah, lower rates are coming.
Yeah, No, I'm with you, and I also I mean my personal feeling is I think they should go fifty, but I don't know that's very much based on probably personal data. So interested in your view. What are the more macro pieces of data at the moment that mean that it looks like they're going to hit that twenty five as a post of the fifty.
Yes, yeah, Well, if we look at things like consumer confidence, we can see that that has improved, but it's still firmly negative. My own Monthly Spending Plans survey two and a half, almost three months ago, I had a net forty two percent of people saying they were going to cut back on their spending, so terrible news for retailers. Now, with interest rates going down, it's improved, but it's still minus thirteen percent, and the A and Z Roy Morgan
survey had a similar sort of movement improving. It's still firmly negative. So the Central Bank will look at that and think, okay, consumer spending makes up about sixty five percent of economic activity, and if people are still saying they're going to be cutting back, bad for retailers, bad
for the economy overall, therefore probably inflation going down. However, there's something I've been talking about for quite some time now, and that's the pricing intentions of people in the business sector,
and these had not yet been crushed. So the A and Z and their monthly business outlooks serve they actually have a measure of this week and track on a monthly basis, and we go back about three months ago, they had a net thirty five percent of businesses saying they were still going to increase their prices over the next twelve months, which is well above average. It's gone up to a net forty two percent of businesses planning
to increase their prices. So you know, things are not necessarily bucketing off with the inflation as much as the Reserve Bank would like. And that is why I'm not convinced it's going to be a half percent move from the very near future. They may just still want to take it cautiously.
Initially, yeah, because of course you have intent, but you also need the market to support that, right, So you can put your prices up as much as you like. But people stop buying it because of it, And obviously there's some things that we're just going to have to buy. But is there any data there to say how much capacity the market can really support still, because from where I'm sitting and hearing like it still seems like a lot of pain out there.
Definitely, I think a lot of pain out there. Businesses generally have got cash flow problems and that's causing what I predicted about eighteen months ago would be a weeding out process across all business sectors this year. As the cash flows tighten up, customers aren't buying as much, the
ird is chasing up on tax obligations. Savings buffers that were built up during the pandemic have been used up as well, and so that means for businesses they definitely would like to increase their prices out there, because for
most of them, the costs are still going up. And this is why in my many talks, I've been noting to people that at some stage, like around about now eighteen to twenty four months down the track from the real tightening of monetary policy in November twenty twenty two, this is when you've got the greatest pressure on businesses on the cash flows, and this is when the businesses will be having meetings and saying, well, our costs have just gone up another eight percent. We've got to increase
our price is eight percent. It's worked before, so let's keep doing that. But then the marketing manager is going to jump up and say we can't do that because the customers are already shopping more and more online. They're pulling back on what they're buying. Generally, we've got unsold goods building up in the warehouses. We're not going to get away with an eight percent increase, maybe two percent if we are lucky. And that's the environment we are
in for the economy right at the moment. And that's why I wouldn't have cut the official cash rate back in the middle of August. I'd have kept the throat on the foot, on the throat of businesses just a bit longer to really get away those positive price intentions for businesses. Of course, I mean, you might have your cost go up eight percent and you can't increase your prices. Then you've got to make some hard decisions. You've got to start laying people off, you've got to cut back
to only your most profitable products. Processes, people locations. That's the disturbed part of the economy that we are in at the moment, and it says to me a lot of the economic indicators are still going to be fairly poor for the rest of this year through to maybe the middle of next year, and then I expect a more solid upturn in the economy.
Yeah.
Interesting, just for my own interests, is here much in the way of seasonality data point of one this weekend was absolutely humming and Wellington admittedly it had waw had at All Blacks tests, but it also had some good weather and it just seemed like there's more activity out in town. I'm just INSI how that might flow through into summer.
Yeah, I'd be pretty cautious about summer. I think people's behavior is changing quite a bit out there. Hey and all Blacks test on. Yeah, clearly a lot of people are going to be showing up. They may have put money aside from other things and decide that's where we're going to have a blowout. We're going to watch the game, and then if we're going to go to a bar or a restaurant afterwards or before, et cetera. But we saw data out recently showing that spending and takeaways has
gone up. And my own experience of going to cafes these days is I'm paying prices I used to pay, like I'm thinking only three or four years back going to a restaurant, and I'm thinking to myself, well, maybe if we are going to go out and have something to eat, frankly, it would be cheaper just to go to McDonald's any other sort of takeaways like that, and maybe the fish and chip shop rather than paying fifteen dollars for a little felo pastry, mushroom and chicken roll
out there. I'd walk at doing that. People are changing the way they spend money and so you might still get people out and about, but they won't necessarily be spending as much in the retail the hospitality outlets as before. And yet when the weather's good, you've got to get out in Wellington because you know what's just around the corner. It's going to revert to normal fairly quickly.
Let us talk a little bit about unemployment. You touched on you know some actions that business need to take in a weeding out process that's happening in the moment, But what's that training like at the moment.
Yeah, we've already seen the unemployment rate rise from an unsustainably low three point two percent a couple of years ago to four point six percent, and it's likely that the unemployment rate will keep rising towards five and a half percent, sort of best estimate for most of us out there, And that principally is because we're seeing businesses, as I say, across all sectors, not just you know, house building is falling away and so you're getting unemployed carpenters,
et cetera. Across all sectors. Businesses are having to sort of trimly at their sales there, find cost savings, change what they do and how they do it. And as we go through that, prices meaning businesses can handle costs still rising and not have to put their prices up up On the other side, yet the unemployment rate is
going to go up. And what interests me here is that for younger people out there who let's say even join the workforce, took your first job ten years ago, this is a totally new thing because all you would have known to date will have been a generous employment environment. The unemployment rate was four percent going into the pandemic. There were predictions that would go through the roof, and
that was pretty concerning. Well, it only briefly went to five point three percent, and then voom, with all the money thrown around the end of the economy, weent to three point two percent. Now we have a more sustained, cyclically normal increase in unemployment and a lot of people
have not seen this before. So job security has gone down out there, and I think that especially is hitting into the willingness to spend make big decisions of younger people as opposed to older people, middle aged baby boomers, et cetera, who've seen a lot worse in the past.
Unemployment rates around eleven percent or so and not quite so negatively affected by that particular dynamic, but certainly for younger people, this job in security is likely to be around until late twenty five more probably twenty twenty six, and there'll be a cap on some of their willingness to spend out there.
Yeah. That's a pretty grim listening, isn't it. But it's super interesting from a you know, someone who owns and run runs businesses as well. It's my first time through this sort of cycle two thousand and eight, which I
guess was the last major sort of economic crisis. I was in the army and pretty much oblivious, which still fascinates me given how interested and finance and money I was, but really learned about that when I started university in nine twenty ten, but haven't actually experienced the cycle play
out and how different things can turn so quickly. But on the other side of that, it gives me optimism they can turn the other way recently quick and maybe we'll talk about some of the things that could drive that soon, but let's just keep hitting with the key macro numbers at the moment. Got migration, where's that at the moment, and what sort of impacts that having, and any views on the brain drain that we're a lot about.
Okay, first point to note about migration. If it rarely drove the economy as much as people have traditionally thought, then we wouldn't have had a recession lasting almost two years because the net migration gain and it boomed from about eighteen twenty four months ago. We had a record net gain in the year to October last year of one hundred and thirty seven thousand people net. So that's those coming in lest those going out. There's one hundred
and thirty seven thousand in there. That's a strong boost to the population. In fact, our population has grown about two point one percent in the past year, and four point four percent from where we were three years ago, So lots of people slashing around, and yet still our economy has been phenomenally weak. Now the net migration numbers are falling away relatively strongly, and in the year too. August.
I think we're up to for the data there August or July, it's a net gain of about sixty seven thousand, but we're heading down to something who knows, maybe around twenty thousand as a net gain or so. And I can already see the impact in the rental market if we go back are we weighs a year year and a half ago, I had the likes of a net twenty four percent of landlords and one of my surveys saying it was easy to find good tenants, lots of people sloshing around in the middle of twenty twenty three.
Now I have a record net twenty two percent of landlords saying it is hard to get a good tenant. So that rental market is actually shifted on a dime. One thing Contributing to that has been some developers who have not been able to sell the let's say townhouses up in Auckland in particular. They've put them into the rental market for a while, waiting for the housing market to pick up, and then they'll go and sell them
to end buyers. But migration has an impact, certainly in the rental market, but for the overall economy, it's not the big driving force necessarily that people would be thinking. And so as we look now towards a week net migration period and more of a focus on Kiwis going to Australia particular, it doesn't leave me aggressively depressed about
the economy. It will be some restraint, for sure. It'll be something that people will focus on, but it won't stop the economy's pace of growth from turning positive, accelerating through twenty twenty five, twenty six, and probably twenty twenty seven as well, because there's a lot of other factors
in play. Increased infrastructure activity out there, probably more foreign students coming into New Zealand as well, the real estate activity picking up, and eventually that will lead to house building picking up in twenty twenty six, not twenty twenty five. But yeah, migration numbers turning around reasonably quickly at the moment.
Yeah, just if you have them off the top of your head. But how's that net number being made up at the moment? Is the is the sort of the number coming in and the is the number going out being more impactful or is it the number coming in is dropping off? Like what's making up that net number?
Yeah, the two numbers tend to move together to work in the situation. So we do have a few more people that are leaving the country. That's especially some Kiwis that are leave in the country and people who came in on short term working visas two years ago are now leaving the country as well. So there's quite a dynamic going on there the number coming into the country
while falling away at the same time. So you take the stack of those coming in falling, those leaving going up and form you can get a pretty quick change. Is the New Zealand historical experience in the net flow. And that's why actually forecasting population growth in New Zealand is a complete dog's breakfast because forecasting net migration flows. I remember first proving this back in about nineteen ninety two.
You can't do it. They can't do it in Australia either, because these flows are so strong on both sides of the ledger, doesn't take much of one or both of them moving, and the numbers can train change fairly quickly. So people should just be aware that when we get a bit more downward moment picked up in the media about the net migration falling away, there will be extrapolations
into negative numbers. And if a journalist comes through to me and say, is it realistic that we could have a net outflow again of minus twenty thousand people in a year's time, I'm going to have to say yes, because we don't know. You can't predict it.
All right as possible. Super interesting, So let's just get properly what most people want to talk about and property and the impact that it's going to have on that huge impact through to New Zealanders and across the economy. So firstly, what are you hearing out there at the moment, what's the anecdotal talk and what's the data showing us? And are they are they similar or are they are they quite different?
Yeah? No, the anecdotes and the data would be would be similar. And so if we look at some of the data in terms of price movements, and I use the ARII and Z's monthly nationwide house price Index measured there in the three months through to May, on average each month house pride this is foul one percent around New Zealand. But in the three months since then, was that Jurn July, three months to August, on average house prices have fallen only zero point three percent, so they've
still been falling. In the month of August they were flat. So I'm prepared to say right now at a September end of September start of October, now we are in the low point of the house price cycle on average, and from here the prices will start to rise, but not necessarily rapidly. And that's because of what's happening with
both demand and the supply of property. So if we look at the demand side, I can get a really good feel for what's happening in the coal face from my monthly survey of residential real estate agents, and about three months ago it was pretty dire. I had a net thirty five percent off the agent saying there are fewer people at open homes. No one's showing up. No one's drinking the coffee, even the donuts, et cetera. And in my most recent survey, I'll be sending a new
one out any day now. Four weeks ago and net forty two percent of agents were saying there are more people showing up at open homes. I've got similar strong movements towards the other positive territory. When I asked them, are there more first home buyers showing up? Are there more investors showing up? So I can show definitively from my survey there, yes, the buyers are out there, they're looking at property, they are going out to starting to
go to the auctions now as well. Now what about on the other side, what we can see is that there are more vendors who are coming forward as well. So at the end of August, the number of properties listed for sale was up about thirty percent from a year earlier, at the highest number nationwide about thirty four thousand, highest number since two thousand and fifteen. And again when I asked the agents, are you seeing more or fewer people come forward asking for property appraisals? I mean you
do that if you're thinking about selling. I think I had a net fifty percent, most recently saying, yeah, there are more people wanting to know what their property might get if they were put it in the market. So this is where it gets interesting for real estate agents. This is fantastic news. More buyers and more sellers coming through, so good real estate turnover is in the offing. You know, I expect seasonally adjusted improvements in sales, but what it
does to prices. As an economist, I've got to say, you can't really tell if both demand is rising and supply is rising. Nothing obvious pumps out in terms of the new equilibrium levels of prices. My expectation is, however, with the interest rates are falling out there, and they're having quite an impact on people's optimism, you will see
prices edging up. But we're not seeing anything in terms of my view of prices taking off for a long time, and even if we go back to previous cycles, it usually wasn't until about four years, four years after prices bottomed out that you really got things cranking along, with nationwide prices rising over fifteen percent for the year for instance, So prices rising really soon, but at a relatively mild pace. Initially, i'd suggest what I.
Am hearing is quite a few people in a bit of a rush now, which is not a massive case study of people, i'd say, but those anecdotes come in again sort of that I don't want to miss the bottom of this market for those who can afford to. So it is interesting just seeing that language change, and I wonder how much of that is deliberately, sorry, is specifically attributable to the interest rates environment changing.
Yeah, I think the interest rates. People have enough awareness of what that is like going to do to the housing market eventually to the economy overall. There have been a lot of people who have been sitting out of the housing market wanting to buy, but you know, not willing to make a move with so many uncertain times, low job security recently, and the interest rates being high, who are now looking at getting in because they know eventually there'll be greater momentum out there. They know more
investors will start looking again. Once the price of a thing gets up with momentum, it drags investors into that market, as we can see with the price of gold for instance, internationally at the moment rising and so it keeps rising for a while. And although I think the high job insecurity for a while will give reason for pores for
many people. A lot of young people have been building up a strong deposit for a number of years now, and not everybody is being laid off, and so we are definitely seeing first time buyers realized or making the decision of you know, if we move now, it's going to be better than if we wait. We're still going to be paying a higher interest rate than we really want,
but the rate is going to get better. So let's only fix for six or twelve months and then we'll get a more affordable interesstrate twelve, eighteen, twenty four months down the track.
Yeah, there's a few things that play there, isn't there because what the specific person I was talking to about this has savings balances and at the same time as starting to see those deposit rates, you know, they're not really in that six six and a half percent range that we're getting not so long ago, so they're seeing that role on to different amounts. Most of them recognized
key Wei saver is at a pretty good level. You know, I've got the S ANDP back record levels and can we save as a well used tool in that world? So yeah, super interesting. See how that plays out for first home buyers. Over the things a little bit. I just want to get into Chris Bishop is very vocal at the moment the starts on loosening regulation to bring house prices down. What's your thoughts on that? And you know, is it a slam dunk?
Do you think not a slam dunk in terms of getting house prices down? Everybody talks about that until they think about hang on, there are more of us with houses wanting prices to go up than there are people who don't have houses and one house prices to go down. And this is where the boats lie with the homeowners.
So I don't expect the government will have such strong policies that there's a massive flood of new house construction out there where house prices will be falling and expected to fall in New Zealand over a number of years. Generally people associate that with bad economic times and it generally doesn't go down too well for a for a
government getting re elected when that happens. So I don't believe that they're going to have slam dunk huge policies that cause house prices to fall on a sustained basis, But what the changes that they are looking at making will be one of the strong factors suppressing the pace of price increase the cycle. And if we have a look at the learnings we've got from our two biggest
cities over the past well decade. From christ Church Canterbry twenty fifteen we saw a freeing up of huge quantities of land zoned as residential and following that we saw the increase in section prices around christ Church be much much less than in the rest of the country over that period to fifteen through two twenty or so. Make more land available, you control the land prices, they don't rise so much as people are out there looking to
buy and build. And the example from Aucklands with the unitary plan coming in from twenty sixteen is if you allow greater densification, you will get greater intensification of the land, more units being built. And this is one important dynamic out there. So if we go back to the global
financial crisis, things got bad. House building fel away and at its low point in two thousand and eleven, so two years after the crisis, there the number of consents issued for new dwellings to be built in New Zealand was below fourteen one four thousand. Now we've seen the number of consents fall away from two years ago a record high level of fifty one thousand. We're at thirty four thousand now, but we're probably only going to go down to maybe thirty thousand or so. A decrease in
the production of townhouses. That underlying house supply dynamic is structurally changed now. Already there are more places being built and the supply dynamic structurally is different from what it was before, and more moves are going to be made by the government to improve supply, especially if they move on the building consent area there. It can only be positive quite frankly going forward.
Yeah. Nice. So you predicted trouble a foot for developers not so long ago, and there's now has been a few high profile instances where that's played out. What's your sense of how many more might be on shaky ground in the property development space.
Yeah, hard to know, but I do think there is more negative news to come along there in that it is very difficult for these developers to get pre sales and if you can't get pre sales, then you can't get the financing from the from the banks there, so not so much for group home builders or even individual builders, but for the multi unit developers out there, that's where I think there's still some negative news over the next twelve,
maybe fifteen months or so. There's a bit of a lag in the cycle in that you gets standalone house building doing a certain thing, and then the multi unit developments then may be twelve months behind in their cycle. So I'll have a view on multi unit development going up once I can see individual house construction going up. Going to be a story from some point in twenty twenty five, probably in the second half of the year. But with the IRD certainly chasing unpaid tax bills, that's
been a new dynamic this year in New Zealand. Exactly the same across the ditch in Australia as well, the ATO, the Australian Tax Officer are getting in touch with businesses and saying, you know, palling me my money. We've got a similar, even if slightly less strident thing happening in
New Zealand as well. The cash flows. That's what puts businesses under and like I say, for all sectors, there are some cash flow problems, but I do think there's a few more adjustments to happen in the property development sector as well.
Just such large numbers, aren't they and can be quite fickle, move quickly, just a couple of quick fires. So capital gains tax for me, I've always felt like it's more of a when, not an if. But again it's topical and both political parties business lea there speaking about it. What's your view on capital gains tax?
I expect it will be introduced at some stage in New Zealand. It's a question of what will be the context of the debate and if the debate for introducing it is revolving around envy and not wanting people to make a capital gain from property and a belief that, oh, if people don't invest in property, they're going to invest in other productive activities. I don't know if it gets
across the line from my point of view. To get it across the line, it has to be in the context of the country needs to generate more tax revenue in the future because of the aging population, the increased demands on the health system, for instance, just to modernize what's already sitting out there, we do need to raise more revenue. New Zealand has already highly dependent upon the income tax and GST rate is already fifteen percent. Put it in that context and I can see myself probably
voting in favor of it coming in. But as long as it is couched in terms of some people have made money and we don't think they should have made that much money, I would struggle. Then I think to go and support it. It has to be part of a broader fiscal debate. But it's going to come. But I think it's impossible to predict what parliamentary term it's going to appear.
It'll be. If someone can nail that story of you know, it'll help me more growth over time and stuff, I think that would be amazing as well. So for our listeners, what should they as investors be thinking or bearing in mind over the next six to twelve months.
Yeah, expect a lot of uncertainty out there. We're at a turning point in a number of cycles. And my experience of having been in this business back in New Zealand since nineteen eighty seven is that we're volatile economy. We get hit by shops all the time, domestic ones and offshore, and when cycles turn sometimes they don't keep going in the direction that you expect. This happened a year ago. The housing market was picking up quite strongly.
Prices on average in New Zealand increased zero point nine percent a month for a five month period July through to November, and then they started falling away. It was a false start. I don't think it's a false start this time around in terms of the residential property market picking up, but there are a number of things out there that are going to occupy people's minds and so obviously keep an eye on what's happening in the Middle East and the potential for greater discord over there that
may cause an impact in the oil market. It hasn't so far, but that is always a risk that's sitting out there. We've got the American presidential election in about a month's time coming along, and if mister Trump gets back in then we're looking at higher tariffs for the thirteen percent of New Zealand exports that go to the United States, and then other countries may be looking at
putting tariffs in place as well. So that's a risk for New Zealand because vulnerable to these things that we need access overseas keep an eye on the Chinese economy. At its peak three years ago, thirty three percent of our export receipts came from China, including Hong Kong. Now we're down to twenty seven point three percent falling away.
China's economic outlook is not particularly good, and that means still low demand for forestry products and it's going to be suppressing prices for the likes of red meat, and i'd suggest also a bit on the dairy product side as well, So keep an eye on that one. And outside of that, it's simply the usual things. You know, at some stage we're going to get another decent earthquake,
a big earthquake. Unfortunately in New Zealand, I don't tend to buy into there's another pandemic just around the around the corner, one in every seventy years in terms of
you know, COVID et cetera. Maybe that's so that that is more my underlying assumption with that regard, But people need to remember diversification in your portfolio and watch for over extrapolation of cycles once they start, because I can assure you from you know, three and a half or so decades in this business, there isn't a tendency to over extrapolate the up and the down. Things move in cycles, and watch out you don't get overly optimistic mystic the other way around.
It's one of my favorite quotes actually from one of the Chaza's shareholders told me early days of the pandemic when we didn't know what was going to happen. But as words of advice to me maybe I was looking at stressed was it was nothing as ever as good as it seems, and nothing as ever as bad as it seems. It's always just somewhere in the middle.
Yeah.
So that's a great summary. Thank you, Tony, and very much appreciate you joining us on Shared Lunch again today, and thank you also everyone for tuning in. You can watch Shared Lunch wherever you get your podcasts and leave us a rating and a comment about what you'd like to hear about next.
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