It Would Pay To Keep An Eye On China
Kris Pedersen reminds us of the saying, “When China sneezes the rest of the world catches a cold,” and warns it might be time to check the hanky drawer.
1 October 2023
If we look just at New Zealand, it appears we could be in for further interest rate increases.
Immigration is continuing to be stronger than expected, although a lot of Kiwis are also leaving these shores. Most economists are now picking house prices to rise gently over the remainder of this year and then have a larger increase over the 2024 calendar year.
A change in government, which looks very likely at the time of writing, is set to bring some confidence back into the market, especially for property investors.
First home buyers are already showing this confidence as revealed in a recent survey by Tony Alexander, which reported that after being locked out by the Reserve Bank for a while they are now back in force.
While wage growth has slowed, and unemployment rises, it is not really rising at any significant pace and rhetorically I can say from speaking to many mortgage lenders across the bank and non-bank arenas, they are not seeing much pain either.
We have seen mortgage rates nudge up over the last few weeks with ASB taking the lead (who must be starting to lose market share with how far out of market they are with pricing and banks offering cashback incentives to move) even though the Reserve Bank is sticking with its line that they believe their work on lifting the cash rate is done.
One key factor, which may mean we don’t see rates go up further and may drive the Reserve Bank to reduce the official cash rate sooner than they had planned, is China. The Reserve Bank mentioned China no fewer than 37 times in their most recent Monetary Policy Statement.
Catching A Cold
There is a saying “When China sneezes the rest of the world catches a cold.”
There is talk of 70 million unfinished apartments in China with in excess of $10 trillion of work in progress. Fonterra and Synlait have cut their forecast on milk solids after disappointing prices at global dairy auction, which is considered lower than break even. This cut is expected to remove about $5 billion from New Zealand’s economy and may get worse.
Often if we live in our cities we forget the backbone of our country’s economy is our farmers and the rural economy. And in this respect the regions are likely to take a hit as spending is pulled back.
As a final point I read an interesting point in CoreLogic’s Pain and Gain report. They looked back at the property market and the general economy after the global financial crisis. It took the best part of a year for the economy to start turning around after property prices had actually hit bottom and started to increase.
I think we are likely to see a similar story this time.