Interest rates, employment and elections

In his 15 May newsletter BNZ economist Tony Alexander has some interesting comments about the government’s recent Budget, particularly in relation to housing.

He says, “The media have chosen to highlight the chances of LVR (loan-to-value ratio) rules disappearing but failed to outline the rather stringent conditions which will need to be met before this can happen. To all you first home buyers out there, best get on good terms with your parents and butter up those childless aunties and uncles if you are planning to make a home purchase in the near future.”

“Were I a borrower at the moment I would recognise the rising trend for interest rates and the high uncertainty about where rates will sit in the next five years by seeking a mixture of floating, short-term and long-term interest rates…Also if I were a borrower I’d look to cut expenses to accelerate debt repayment by avoiding eating out and going to cafes.”

“The unemployment rate is calculated as the ratio of those in work and actively looking for it against the working age population. The rate is 6% which was unchanged in the quarter but down from 6.2% a year earlier. That is not much of an annual decline and that is because a lot more people have entered the workforce looking for work…So what can one do to get a really good feel for the health of the labour market? Look at the proportion of the working age population which is actually in work and see how it is changing. This is known as the employment rate and it rose to 65.1% in the March quarter from 64.7% in the December quarter, 63.7% a year earlier, and a ten year average of 64.6%. More people about, but more jobs. Great outcome basically.”

In other words, the employment rate is a better indicator of economic activity than the unemployment rate because migrations flows may be growing at a faster rate than the economy.

Strong migration inflows are a positive for property prices. Interest rates have not risen enough to deter investment and on balance are still at historical lows.

On the negative side, there is an election coming up on the 20th of September and the uncertainty that goes with it. ipredict has the odds of a National lead government at 73% but expect a flat property market as the campaign comes into focus.

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