Latest unemployment figures released as the Government moves to ease CCCFA lending rules again. What does this mean for the housing market?

CoreLogic’s latest House Price Index report shows that the national average house price rose 0.4% over the first month of 2024. Although prices continued to trend upwards overall, growth slowed considerably from 0.7% in November and 1% in December last year.

This suggests that with mortgage rates unchanged, the housing market recovery remains uneven, a pattern also evident across different parts of the country.

Notably, Tauranga and Dunedin recorded the strongest housing market performances in January, while the Hamilton and Wellington markets levelled off.

 

This Wednesday morning, Stats NZ released a particularly important set of economic survey results: labour market data for the final quarter of last year. Earlier expectations were that unemployment would probably rise from 3.9% to 4.3%. However, the actual rate released today was 4%, well below market expectations. The Reserve Bank of New Zealand may interpret this as evidence that the economy is performing better than expected, increasing the likelihood of interest rates remaining at their current high levels.

 

Kiwibank chief economist Jarrod Kerr said the rise in unemployment would take longer to become apparent. At face value, today’s unemployment figures reduce the likelihood of a Reserve Bank rate cut in the near term. He said he had previously expected cuts in May and August, but these might now be delayed until November.

 

Notably, within minutes of the release, the New Zealand dollar rose from 60.79 US cents to 60.91 US cents. In interest rate markets, the two-year swap rate jumped from 4.89% to 4.93%. In the year to December 2023, salary and wage rates, including overtime, measured by the labour cost index (LCI) rose 4.3%. The Quarterly Employment Survey (QES) showed average ordinary-time hourly earnings rose 6.9% over the year to NZ$40.84, while average weekly earnings increased 6.1% year on year to NZ$1588.

CoreLogic chief economist Kelvin Davidson said he believed rising unemployment had a negative effect on the property market. However, he also noted that even at 4%, unemployment remained relatively low. More importantly, the increase reflected a larger available workforce resulting from higher net migration, rather than a loss of jobs. This suggests rising unemployment is less of a threat to the property market than some might fear.

 

 

Although the housing market outlook remains uncertain, the introduction of government stimulus measures gives us reason to believe house prices could continue to rise to some degree.

Just last week, the Commerce Minister announced that the controversial Credit Contracts and Consumer Finance Act (CCCFA) would be eased again in the coming months. This is seen as an important step towards further strengthening confidence in the housing market’s future.

 

The proposed amendments will ease the strict requirements around mortgage applicants’ income and spending, making loans easier to obtain. Spending on supermarket shopping, weekly restaurant takeaways and coffee will reportedly still be scrutinised, but less strictly than before, and commercial banks will have greater discretion to approve loans. Let us look forward to the implementation of the new amendments.

 

Reserve Bank of New Zealand chief economist Paul Conway

Last Tuesday, the Reserve Bank of New Zealand appeared to extinguish the last hopes of investors expecting fixed mortgage rates to fall in the near term. In a recent closely watched public address, chief economist Paul Conway stressed that non-tradables inflation remained a difficult problem, including rapidly rising rents and council rates, and that there was no obvious sign of substantial spare capacity in the economy.

All signs suggest that the Reserve Bank of New Zealand is reluctant to lower the Official Cash Rate in the near term, and we may have to wait until later in 2024 for a glimmer of hope。In other words, short-term fixed mortgage rates will remain at their current high levels for longer.

 

High interest rates have also considerably slowed growth in mortgage lending by banks and commercial institutions. Figures for December last year, released last week, showed total mortgage lending, including new loans, top-ups and refinancing between banks, reached NZ$5,300,000,000. This was about NZ$200,000,000 higher than in the same period of 2022, marking the fifth consecutive month of growth.

Unfortunately, relative to the overall total, an increase of NZ$200,000,000 is hardly exciting. This may indirectly reflect the considerable caution banks and borrowers continue to exercise over mortgage applications and approvals.

 

 

Loan-to-value ratio (LVR) restrictions were eased from 1 June 2023, allowing banks to allocate 15% of their lending, up from 10%, to owner-occupiers with deposits below 20%. Banks may also allocate 5% of lending to property investors with deposits below 35%, down from the previous threshold of 40%.

However, recent figures show that only around 7–8% of borrowers obtained loans with deposits below 20%. Similarly, fewer than 1% of investors obtained loans with deposits below 35%. These figures suggest the current low LVR limits constrain investors more than owner-occupiers. We can therefore venture to predict that if mortgage rates begin edging down around the middle of the year, investors may respond more actively and strongly.