Happy New Year! Hope you had a great break and ready to rip into 2024 (even though we are at the end of January).
2023 was a difficult year for alot of households and businesses. High relative cost-of-living due to post-covid inflation and increased interest rates put strain on the economy. The RBNZ (Reserve Bank of New Zealand) ended 2023 with a hawkish outlook on interest rates. The OCR peaked at 5.5% in May 2023 and headline inflation decreased slowly through 2023. Median property prices across New Zealand fell by 0.7% overall. RBNZ has made it clear that they are intolerant if any upside surprises to inflation arise.
What will 2024 look like – will we hit target inflation? Will interest rates decrease? Will property prices increase? How will Debt-to-Income ratios and LVR easing affect the market?
These are my 2024 predictions:
CPI (Consumer Price Index)
I estimate that headline inflation will continue to fall and reach RBNZ’s 1%-3% CPI target by Q3 of 2024 (which will get announced on 17th October 2024). However, it’s not as simple as I have made it out to be. There are some concerns that the RBNZ have:
Firstly, is that non-tradable inflation is a bit high for RBNZ’s comfort (5.7% as of Q4 2023). The frustrating part for the RBNZ is that disinflation of non-tradable goods and services is occurring slowly. RBNZ would want to see non-tradable inflation also be within the 1%-3% target (not just headline inflation) before we see OCR cuts.
Secondly, there are wildcard events that can put upward pressure on inflation. Examples of this:
Geopolitical events causing increases in oil and shipping costs
Recent increase in net-migration can place upward pressure on housing costs.
Government fiscal policies i.e. how the government is going to balance cutting their spending while trying to give tax cuts to households.
Although RBNZ has concerns above – there are good signs of decent progress to bring core inflation and non-tradeable inflation down. If no wildcard events emerge, we should see headline inflation hit the 1% - 3% range by the Q3 2024 announcement.
OCR (Official Cash Rate)
OCR has been a massive talking point over the past two-years. I believe we have hit peak OCR in this current cycle. I estimate that OCR cuts will start in August 2024.
OCR cuts will be highly conditional and will not decrease until inflation is within the 1%-3% target. The non-tradable inflation portion will also need to be within the 1%-3% range (not just headline inflation) if the RBNZ are going to take a prudent stance.
A thorough stance will be necessary because if the RBNZ cut OCR too early, they will need to drag the market back with futher rounds of OCR hikes, which will make matters more difficult and cause the RBNZ to lose credibility. RBNZ will take the full course of antibiotics rather than ease conditions based on promising trends.
House Prices
I predict house prices to increase by 5%-7% across New Zealand in 2024. This is mostly fueled by interest rate cuts that are likely to happen in the second half of 2024 - making lending easier to obtain.
DTI (Debt-to-Income ratio) implementation
If DTI gets implemented mid-2024, it is unlikely to affect the property market in 2024. DTI is a macroprudential policy i.e. it’s put in place to reduce likelihood of a financial crisis, by preventing excessive lending during market booms and enabling banks and households to be more resillient during market downturns. Since we only expect a 5%-7% increase in property prices – DTI will not be binding during this time.
Property Investors - LVR (Loan-to-Value Ratio) easing, Brightline test relaxing and Interest deductability phasing out.
I expect borrowing demand from investors (including high DTIs) to increase as 2024 progresses.
This is because:
LVR increasing for investors (from 65% to 70%) - increasing usable equity.
Interest rates expected to drop in the second half of 2024.
Interest rate deductibility phasing out.
Brightline test decreasing to two-year on 1 July 2024.
Property prices increasing by 5%-7% across the board.
The above factors gives more incentive to be an investor again. The cost of owning an investment property will decrease (interest deductability and lower interest rates). As a result, unless an investor is really struggling financially, it may be worth continuing to hold their investment property.
Alot of people have predicted increased housing listings after the brightline test relaxes in July-2024. I agree that listings will increase, but not to the extent people people make it out to be due to the above factors.
Let's see how many of these predictions turn out to be true at the end of 2024!
Disclaimer
The contents of this article are for information-only and may express the opinion of the writer. This article is not be taken as personalised financial advice, as everyone’s situation is different. Please always seek advice from a financial adviser before making any decisions with your personal and/or business finances.
