PHOTO: Tony Alexander. FILE
ANALYSIS: This is my last column on the NZ economy and housing market for 2024 so Merry Christmas. And here’s hoping more people see their finances improve in 2025 rather than worsen, as was probably the case these past two to three years.
Falling interest rates will help more people via lower mortgage rates than the number affected by lower rates on their savings accounts so that is a good start. But the extent to which interest rates fall is probably going to disappoint a lot of the former group.
From where things sit now, borrowers will be lucky if more than another 0.5% comes off fixed mortgage rates for periods of two years and beyond. A tad more will come off floating and 6-18 month fixed rates but given the inflation risks further out even these declines will be relatively limited.
One of those inflation risks is the need many businesses feel to boost their selling prices and rebuild margins once customer flows can bear the likes of 5%-plus price increases. To figure out when that might happen we need to have a view on when retail spending will become a lot more solid.
My monthly Spending Plans Survey shows that household intentions of buying things over the next 3-6 months have reached a three-year high. But as Treasury just indicated in their fiscal numbers, the unemployment rate is expected to rise from the current 4.8% to about 5.5% come the middle of the year.
Worries about job security will likely encourage many people to remain cautious in their spending and that suggests that the margin rebuilding phase of the inflation cycle probably won’t start until late in the year. But before then we will hopefully have some insight into how the trade war which might be initiated by the incoming US President may affect our inflation outlook.
There will be some upward pressure on inflation from reduced global productivity growth. But there will also be downward pressure from China in particular looking for other markets outside the US to sell its goods into.
Continuing fiscal restraint will tend to act as a drag on our country’s growth rate as will falling levels of multi-unit (townhouse) construction through all of 2025. But there will be some offset from rising infrastructure spending and signs that standalone house construction levels could surprise on the upside by the middle of the year.
Because of the lack of job security, eventual disappointment at an early end to the period of falling interest rates, and global trade risks, the extent of improvement in the residential real estate market is likely to be mild. Prices look like they could rise just north of 5% through the year while sales volumes climb higher.
But it is very unlikely that the lift in FOMO (fear of missing out) which I anticipate next year will be all that great. Buyers face the highest number of property listings since 2015, the new debt-to-income rules will act as a brake to a small degree, and debt servicing costs will continue to be a bugbear for most home buyers.
All up, 2025 is likely to be a year of mild economic recovery, mild declines in interest rates, and mild upward movement in prices and turnover in the real estate market.
– Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz