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Macro View - The road less travelled

When examining the response to one of the most disruptive years in recent history, independent economist Cameron Bagrie says perspective is in the eye of the beholder.

“The pandemic has seen everyone impacted differently and the spread is about the widest we have seen in an economic event,” he says.

On one hand, New Zealand’s COVID response is the toast of the world, but closer to home every individual has a different story, see-sawing between success, relief, dissatisfaction and worry.


“The events of 2020 can be examined through different lenses,” Bagrie says.

“For housing from a pure serviceability stand-point, record low interest rates, including deposit rates act as the perfect little lucifer,” he says referring to the astonishing effect cheaper borrowing costs have had on asset prices.

This, coupled with better-than-expected numbers for unemployment and New Zealand’s ability to keep the virus contained at the border has fed heightened interest across the property market that’s now at fever-pitch.

“No one could have imagined the government nor the Reserve Bank of New Zealand (RBNZ) would be so aggressive in their economic strategy,” Bagrie says.

“Falling interest rates, the $100 billion Large-Scale Asset Purchase (LSAP) programme, substantial relief packages and the Funding for Lending Programme (FLP) have evoked an extremely strong response from the housing market,” he adds.

While this is an excellent problem to have, too much of a good thing can create a mismatch between social and economic objectives.

“Lately there’s been a strong backlash against the RBNZ and LVRs have been tightened by banks before policy has formally changed,” Bagrie says.

Previously acknowledging the macroprudential tools employed to keep the economy moving have flowed through to have a stimulatory effect on asset prices, the RBNZ is unrepentant in suggestions financial policy is worsening the wealth divide.

“The RBNZ are correct in doing what they’re doing by going big against COVID.”

“Their mandate is to maintain inflation at two percent and target full employment, and by using a strategy of ‘least regret’ they have helped keep New Zealanders in jobs and the economy ticking along,” he explains.

“However, the risk profile remains high as we are equally as close to a vaccine as we are another community outbreak.”


Lower interest rates and a supply shortage are a powerful combination that Bagrie says we have underestimated.

“A historical undersupply of housing continues to push prices upward meaning debt-to-income levels keep rising and the market as a whole gets into more stretched territory,” he says.

“Personally, I am not convinced the housing deficit is as great as is being reported, however, I do think there is a large discrepancy in certain market segments.”

Bagrie says New Zealanders are demanding different sorts of housing and while we are seeing a response in construction and building activity, it is taking time to replenish supply.

The three months to March 2020 saw a rush of Kiwis coming home.

Annual net migration to August was around 80,000 as New Zealand experienced total population growth of around 110,000.

However, this is a changing landscape.

“Migration is now averaging less than 1,000 per month and looks as though New Zealand will see population growth of some 40,000 over the next year - a drastic comparison when set against the 90,000 recorded over the last few years.”


“The government’s COVID relief money is rolling out across the economy, construction is everywhere, employing Kiwis and offering an excellent indication that this money has pumped through the system and is coming out the other side.”

“Heading into this pandemic we anticipated unemployment to overwhelm the effect of record-low interest rates, however, rates have paired with the most substantial fiscal support package ever seen to keep asset prices up and stabilise the economy,” Bagrie says.

While the government is focussed on the COVID response, Bagrie says we need a stronger programme to deliver in the housing realm.

He says, while saving us from the worst depths of a recession the response from policy-makers is creating a worsening problem for housing inflation, as providing support for asset prices is just one channel of monetary policy.

“Monetary policy has worked a treat pushing prices upward but we’re now seeing backlash against the extent of this inflation with housing affordability being the key issue.”

“You’d prefer the housing market to be at a temperature that’s rather warm, not scorching hot,” Bagrie says.

“The risk is the social backlash forces the government into responding, and often these responses can be counterproductive,” he adds.

We have seen this highlighted recently when the Minister of Finance requested solutions for the issue of rapidly rising house prices from the RBNZ.

“This has been interpreted by the market that interest rates will not be pushed as low”, Bagrie says.

“The key, however, remains supply, and the RBNZ is not in control of that.”

Despite downside risks still present on the economic radar, indications look good for continued interest in the housing market over the summer months and into the second quarter 2021.

However, Bagrie is reticent to say New Zealand is clear of COVID’s negative effects.

“When taking a look at the past year’s events it’s clear the only certainty is uncertainty,” he says.

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