New Zealand Raises Interest Rates as Inflation, Housing Pressures Build
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New Zealand Raises Interest Rates as Inflation, Housing Pressures Build

With the economy showing signs of overheating, the central bank signalled more increases over the next year.

By Stephen Wright
Thu, Oct 7, 2021 3:01pmGrey Clock 3 min

New Zealand largely kept out Covid-19 by closing to the outside world, a policy accompanied by stimulus to keep the economy moving. Now the resulting labour shortages and surging demand, notably for housing, have led it to become one of the first developed economies to raise interest rates since the pandemic began.

The Reserve Bank of New Zealand lifted its benchmark rate to 0.5% from a record-low 0.25% and signalled more increases over the next year, as it seeks to tame inflation stoked by higher oil prices, rising transport costs and supply-chain disruptions. It said the increase would also drive up mortgage rates and so help cool house prices, up about 30% over the past year.

The policy challenges are different than when the pandemic began, the central bank said.

“Demand shortfalls are less of an issue than the economy hitting capacity constraints given the effectiveness of government support and resilience of household and business balance sheets,” the RBNZ said. It also highlighted a risk that some capacity bottlenecks might persist now that the South Pacific nation is ending its effort to eliminate the coronavirus locally.

New Zealand offers a preview of the challenges that countries may face as they emerge from the pandemic. Rising household debt and inflation have become a bigger threat to some economies than any resurgence of Covid-19 driven by the Delta variant. South Korea and Norway have already tightened monetary policy, while interest rates in more-volatile emerging economies from Brazil to Turkey have also gone up.

At the east coast Port of Tauranga, a hub for container traffic, a lack of workers constrains capacity as demand recovers from the pandemic. Global shipping congestion has thrown schedules into disarray, adding to demands on port staff, spokeswoman Rochelle Lockley said.

The Bay of Plenty region, where the port is located, is known for its kiwifruit industry, which relies on a seasonal workforce from overseas. The closed border means competition for workers is fierce. In many cases, the port is duelling with its own customers for workers such as stevedores, cargo marshallers and drivers of the giant machines that move containers, Ms. Lockley said.

New Zealand’s unemployment rate fell to 4.0% in the three months through June.

Closing the border has also worsened a shortage of health workers. New Zealand has about 1,000 vacancies for trained nurses—a 20% shortfall.

Carolyn Cooper, managing director at Bupa New Zealand, which runs nursing homes and retirement villages, said that to retain staff it has raised pay at a faster rate than its funding has grown.

“It’s unviable to keep going in that way,” she said—but “otherwise we’d have no staff.”

Rising wages are adding to price pressures within New Zealand’s economy that include higher prices of gasoline and farm produce such as tomatoes and cucumbers.

Expectations for inflation are now above the top end of the Reserve Bank of New Zealand’s target range of 1.0% to 3.0%. On Tuesday, the benchmark price of Brent crude oil hit its highest level since October 2018, which for a country that relies on oil imports foreshadow further inflationary pressure ahead.

The RBNZ’s primary objectives are full employment and 2% annual inflation over the medium term. However, the country’s government earlier this year directed it to consider housing prices in monetary-policy decisions.

New Zealand’s response to the pandemic ignited a local housing boom. The cost of building a new home was the biggest contributor to inflation in the three months through June, with companies reporting shortages of construction materials and rising labour costs.

In March last year, the central bank lowered its cash rate by 0.75 percentage point to 0.25% to prop up activity. That made new home loans more attractive to owner-occupiers and speculators. New Zealand’s rise in median home prices over the past year is one of the fastest among the 38 member countries of the Organization for Economic Cooperation and Development.

The central bank has sought to cool the property market with lending curbs, while the government has reduced tax advantages for landlords, but home prices have continued to rise. Around the world, a rise in home values during the pandemic is triggering fresh debates about housing affordability. On Wednesday, Australia’s financial regulator raised the minimum interest-rate buffer it expects lenders to use when assessing the ability of new borrowers to meet home-loan repayments.

The Reserve Bank of New Zealand’s rhetoric typically plays down the role of housing in its monetary-policy decisions, though with inflation, employment and house prices are all heading in the same direction it may be expedient to include it now, said Gareth Kiernan, chief forecaster at Infometrics, an economics consulting firm.

That would “help deflect any political criticism that might otherwise come their way for not doing enough to slow the housing market,” he said.

The central bank in August projected the cash rate would reach 1.6% by the end of 2022 and 2.0% in the second half of 2023, though some economists doubt it will exceed 1.5%. New projections aren’t due until late November.

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: October 6, 2021



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Stronger demand in some areas is pushing unit rents up faster than houses

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Renters are returning to the apartment market, leading to higher growth in weekly rents for units than houses over the past year, according to REA data. As workers return to their corporate offices, tenants are coming back to the inner city and choosing apartment living for its affordability.

This is a reversal of the pandemic trend which saw many renters leave their inner city units to rent affordable houses on the outskirts. Working from home meant they did not have to commute to the CBD, so they moved into large houses in outer areas where they could enjoy more space and privacy.

REA Group economic analyst Megan Lieu said the return to apartment living among tenants began in late 2021, when most lockdown restrictions were lifted, and accelerated in 2022 after Australia’s international border reopened.

Following the reopening of offices and in-person work, living within close proximity to CBDs has regained importance,” Ms Lieu said.Units not only tend to be located closer to public transport and in inner city areas, but are also cheaper to rent compared to houses in similar areas. For these reasons, it is unsurprising that units, particularly those in inner city areas, are growing in popularity among renters.

But the return to work in the CBD is not the only factor driving demand for apartment rentals. Rapidly rising weekly rents for all types of property, coupled with a cost-of-living crisis created by high inflation, has forced tenants to look for cheaper accommodation. This typically means compromising on space, with many families embracing apartment living again. At the same time, a huge wave of migration led by international students has turbocharged demand for unit rentals in inner city areas, in particular, because this is where many universities are located.

But it’s not simply a demand-side equation. Lockdowns put a pause on building activity, which reduced the supply of new rental homes to the market. People had to wait longer for their new houses to be built, which meant many of them were forced to remain in rental homes longer than expected. On top of that, a chronic shortage of social housing continued to push more people into the private rental market. After the world reopened, disrupted supply chains meant the cost of building increased, the supply of materials was strained, and a shortage of labour delayed projects.

All of this has driven up rents for all types of property, and the strength of demand has allowed landlords to raise rents more than usual to help them recover the increased costs of servicing their mortgages following 13 interest rate rises since May 2022. Many applicants for rentals are also offering more rent than advertised just to secure a home, which is pushing rental values even higher.

Tenants’ reversion to preferring apartments over houses is a nationwide trend that has led to stronger rental growth for units than houses, especially in the capital cities, says Ms Lieu. “Year-on-year, national weekly house rents have increased by 10.5 percent, an increase of $55 per week,” she said.However, unit rents have increased by 17 percent, which equates to an $80 weekly increase.

The variance is greatest in the capital cities where unit rents have risen twice as fast as house rents. Sydney is the most expensive city to rent in today, according to REA data. The house rent median is $720 per week, up 10.8 percent over the past year. The apartment rental median is $650 per week, up 18.2 percent. In Brisbane, the median house rent is $600 per week, up 9.1 percent over the past year, while the median rent for units is $535 per week, up 18.9 percent. In Melbourne, the median house rent is $540 per week, up 13.7 percent, while the apartment median is $500 per week, up 16.3 percent.

In regional markets, Queensland is the most expensive place to rent either a house or an apartment. The house median rent in regional Queensland is $600 per week, up 9.1 percent year-onyear, while the apartment median rent is $525, up 16.7 percent.

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