New Zealand’s largest economic sector – residential real estate – had a banner year in 2021. Our extension of the RBNZ M10 series suggests the value of all housing in the country could have reached $1.675 tln by the end of 2021, or 4.8 times larger than our annual economic activity as measured by GDP. (In 2020 it was payday loans Oxford Ohio 4.3x, in 2019 it was 3.7x.)
For more than a decade since the availability of the data starting in 1990, housing was valued at about 2x annual economic activity. It got its first spurt higher as a consequence of the Clark/Cullen 39% top tax rate, then settling in to about 3x GDP. A new frenzy started about a decade later which took it to about 4x GDP. And now we look to be in yet another push higher, pushing on towards 5x annual economic activity. Another 39% tax rate is now in place, and the shelter real estate gains provide is clearly attractive.
And the funding of all this and its growth didn’t miss a beat during all the pandemic hurdles of the past year, even the past two years.
Over the past year, this mortgage debt owed to banks has grown by +10.7%. In 2020, that growth was +8.2%. In 2019 it was +6.9%. Momentum built in 2021. Prices rose at a faster rate, +24% in 2021 vs +19% in 2020 and +12% in 2019. Further, house-selling transaction volumes are increasing – the churn – and were +9.4% higher in 2021, compared with +6.4% in 2020 and actually a -1% .
The concentration of the New Zealand economy around a single sector has intensified. We collectively owe 93.1% of all annual economic activity to banks in the form of mortgages; 94.5% if you include the housing debt owed to non-bank lenders.
The official responses to the pandemic emergency drove down interest rates. There was a monetary response from the RBNZ, but it did have a remarkable fiscal benefit. Governments borrowed and spent to hold back the inevitable pressures on the jobs market. Fewer jobs were lost in this pandemic recession than any other recession, ever. In fact, that policy of protecting employment has allowed income tax revenues to stay healthy through a difficult time. The certainty of employment in turn bolstered the housing market.
But then, the RBNZ started signaling that it was now time to normalise these emergency rates. The verbal signals resulted in an OCR rise of October 6 and another on November 24, taking the 0.25% OCR up to 0.75% by year’s end.
More rises, possibly more than +1.5%, are on their way in 2022 and 2023. Much will depend on the health of the labour markets, but they are in good shape now at a time inflation threats are rising. An early 2022 +50 bps OCR jump has to be possible, if only tp signal that containing inflation remains a core policy goal.
They had the overall lowest carded rate offers for the fixed one, two and three year terms for 28 of 52 weeks. They were closely matched by BNZ and Kiwibank who managed that for 27 weeks. ANZ managed it for 23 weeks, while Westpac was consistently the least rate-competitive, having the lowest rate for just 12 weeks in 2021.
If we just focus in on what are the two traditional core real estate selling ‘seasons’ which are also when most of the fixed rate contracts roll over – late January until Easter, and mid September until early December – then the positions are a little different. ANZ had the most weeks with the lowest carded rates, 17, closely followed by ASB at 16. BNZ was lowest for 11 weeks, Kiwibank for 10 weeks and Westpac for only six of these 27 high-impact weeks.
Of course, most challenger banks operate with rate cards below main bank levels, and through much of 2021 Heartland Bank’s offers were the most competitive of any bank.
We are in an historically usual situation where our policy rates are higher than those for both the US and Australia. That will no doubt be the case for the foreseeable future, but the magnitude of the difference might swell, especially compared with Australia as they seem to be in no hurry to normalise.
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We track which banks had the lowest home loan carded rate offers through 2021 and saw how low rates juiced up a housing market where values now threaten to exceed five times our annual economic activity
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67 Comments
What will the impact of the CCFA and the significant reduction in volume lending by the banks be on rates by March/April? If banks won’t/can’t lend then the rates will need to drop. BNZ & others are now offering a special 2.99% rates unadvertised apparently to new borrowers to re-attract business.