Inflation Expectations Up, Net Migration Down, Housing Staggers Sideways

• We may have an annoying complication on the horizon. The RBNZ’s survey of inflation expectations lifted away from their 2% sweet spot. It should pose no threat to the RBNZ cutting 50bps next week. But further moves in inflation expectations away from 2% could temper the size of cuts to come.
• Net migration has cooled considerably in the last year. From a peak net inflow of 136k last October to a little under 45k. And it is the rise in departures that explains the quick descent.
• REINZ data last week showed the Kiwi housing market continues to stagger sideways. Over the last 18 months, house prices have gone nowhere. But we’re betting that will change, next year. See our special topic for more.

Here’s our take on current events

We’ve had a bit of an awkward development. After finally hitting the 2% sweet spot last quarter, the RBNZ’s latest survey of inflation expectations lifted slightly. The one-year-ahead measure managed to fall 35bps to 2.05%. No doubt thanks to the large fall in actual inflation over the September quarter. But the medium- to longer-term measures we’re all up between 9 and 16bps. Where forecasters expect inflation to be two years from now has risen from 2.03% to 2.12%. And further out, expectations have returned to where they were earlier in June this year. It’s an unhelpful move. The return of inflation expectations to 2% in the third quarter was, we believe, a major catalyst in getting the RBNZ over the line and cut in August. In the same way, a drift higher in expectations may impact future rate reductions.

But don’t panic yet. We still think the RBNZ will deliver a 50bp cut at their meeting next week. Yes, the lift in the longer-term inflation expectations is frustrating, and somewhat confusing. But broadly speaking, expectations are still well contained, not too far from the 2% midpoint.

However, we must flag the risk that any further moves in inflation expectations away from 2% may put a dampener on the magnitude of rate cuts in 2025. As a result, we’ll be marking our calendars and keeping a close eye on the next release of inflation expectations in February.

For now, we’ll cross our fingers and focus on the present. And we are still confident in our call that the RBNZ will deliver a 50bps cut next week. With the 2% target inflation rate well within reach, we believe the RBNZ needs to get the cash rate below 4% ASAP. And from there, the RBNZ should return the cash rate to neutral – about 2.5% to 3%.

The RBNZ has kept the Kiwi economy in a chokehold over the past couple of years to kill inflation. But now, the inflation beast has been slayed! And we need the RBNZ to loosen its grip fast – before doing any more unnecessary damage to the economy. Inflation pressures are coming off faster than we expected – and we were more optimistic than most about the return to 2%. Meanwhile, activity has continued to frost over. We need rapid rate relief. And without them risk 1. Undershooting inflation. And 2. more avoidable damage to kiwi businesses and households.

Chart of the Week: Packing up and shipping out

Net migration has cooled considerably compared to last year. 2023 was the year of migration, when monthly net inflows averaged over 10k. The annual net inflow peaked at 136k (revised down from 142K). Today, monthly net migration remains positive but has slowed to an average pace of under 3k in 2024. According to Stats NZ’s latest account, a net 2,310 permanent and long-term migrants arrived in September, taking the annual total to a little under 45k. That’s a steep drop in short amount of time. On a rolling 3month basis, net inflows have fallen to below pre-covid levels – again, highlighting the slowdown in 2024.

Annual migrant arrivals have stabilised, albeit at levels still sitting above pre-covid. Despite this, it is the record rise in departures that explains the sharp slowing in net migration. In the year to September 2024, 133k migrant departures were recorded with Kiwi making up the bulk (60%). Around 25k Kiwi have returned to the nest, but the net outflow of 54.7k is a record high. The rise in departures is a mix of covid catch-up as well as the pull of better job prospects abroad. The latter likely explains the recent lift in the number of non-NZ citizens leaving the country as well.

And Stats NZ estimates that most are packing up and shipping out to Australia, no doubt pulled by a stronger jobs market. However, we may be nearing the peak. On a monthly basis, Kiwi departures have slowed - from the highs of over 7k at the start of the year, to around 6k in the last three months. We may see the annual total continue to print record highs, but the large outflows earlier this year will soon drop out of the calculations.

Special Topic: House prices stagger sideways. But we’re optimistic.

Last week, we published an update on the housing market, titled: House prices stagger sideways. But we’re looking to 2025, with a strong sense of optimism. It’s important to note that Greenday fans will enjoy the quotes, like: “Peel me off this Velcro seat and get me moving”
Here's our main points:

• The Kiwi housing market is stumbling sideways. Yes, there was an unsustainable 46% surge out of Covid. Yes, the RBNZ orchestrated an 18% correction back to more sustainable levels. But over the last 18 months, house prices have gone nowhere. That will change, next year. Interest rate cuts will fuel confidence. And confidence will generate activity.
• Investors have been hunted by policymakers, both from the last Government and RBNZ. Interest rate deductibility, Brightline tests, and laser focussed LVR restrictions have all targeted investors. Precisely what we don’t need with a chronic housing shortage. But now, the hunted will become the hunters.
• We have put a stake in the ground, claiming the two recessions (the RBNZ said we had to have) have ended. And it’s the RBNZ’s policy tack that has ended it. Interest rates are the biggest driver of house prices. Swift interest rate cuts are feeding through fast. Mortgages rates have been fixed for shorter periods. And investors no longer need to worry about the Brightline test or interest deductibility. With the rise in rental yields, investors should return to the market.
• Hunters will seek opportunities in a ‘buyers’ market. The true test will come now, over the warmer months.

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