Bayleys investigates how recent events contributing to unease across the global economic environment are poised to impact our residential sales market.

Following rapid interest rate rises, the early March closure of California-based Silicon Valley Bank (SVB) sparked a crisis of confidence across the global banking sector.

With the economic environment already changing following a hot run of record-low interest rates as central banks worldwide worked harder to stimulate growth during the pandemic, a period of tightening has predictably led to a thinning of ill-performing businesses.

In the recent instance of SVB and global giant Credit Suisse, ineffective management and a history of bad banking practices meant they were the first to falter, prompting regulators to step in to ease depositor stress and fortify economic sentiment worldwide.

For Kiwis, it brought questions about the integrity of our own banking system into play. Moreover, with the United States a significant player in the global economy, instability could have broad implications for foreign trade and investment, and flow-on effects for borrowers and our domestic residential market.

INVESTOR CONCERNS

The most immediate concern for New Zealand is the hit to investor activity, given our country’s heavy reliance on international trade and investment. Global players could redirect their flow of capital away from projects here and back into strengthening their own positions at home.

While global turmoil could see reduced investor appetites, lessons from the Global Financial Crisis (GFC) of 2008-2009 have prompted efforts to fortify New Zealand’s financial system, and lenders are now required to hold a vast majority of capital from local sources to meet regulatory requirements.

Stipulations set out under the Reserve Bank of New Zealand’s (RBNZ) Capital Adequacy Framework mean the financial environment here is much more conservative than our international counterparts, which provides a buffer for consumers when global volatility hits.

A health crisis, global pandemic and international border closures have characterised a difficult three years. Though, the overarching factor is that Kiwis still need to adjust spending to account for the variety of shocks that have hit us, including loss of earnings, global supply chain disruption, and sharply rising interest rates.

Should global investors turn away from New Zealand markets, exacerbating the account deficit, there are several economic scenarios, including a negative impact on investor’s appetite for risk leading to a drop in the New Zealand Dollar which could increase the value of exports, making them less attractive on a global scale.

On the other side of the coin, a diminished pipeline of international investment could see New Zealand’s banks compete harder for local businesses, feeding through to lower lending rates.

BIGGER FISH

The recent announcement by United States Treasury Secretary Janet Yellen, which sought to reassure depositors in other regional banks that their money is safe, saw American markets and bank stocks rise recently, prompting a lift in consumer sentiment the world over.

With the regulator’s influence helping the system to avert disaster, RBNZ chief economist Paul Conway has reiterated that the central bank’s focus remains on inflation at home.

Speaking recently at a financial conference, he highlighted the resiliency of New Zealand’s financial system, extolling the virtues of strengthening initiatives post-GFC, which have made our country’s banking system more robust.

However, he noted that the threat posed by a persistently high inflation rate remains advanced and recommitted the RBNZ’s resources to bring inflation and employment back to within the sustainable target threshold.

While the global financial environment looks to have averted catastrophe, for Kiwi homeowners’ financial instability abroad could further ease the economic growth rate, negating the requirement for interest rates to rise as high as previously thought.

Early indications paired with recent international events show demand across New Zealand’s economy could be waning, a sentiment echoed recently by the decline in wholesale interest rates, which we may see passed on to mortgage holders through reduced fixed borrowing rates.

New Zealand certainly has exposure to the set of global bank failures. However, the global financial system is significantly more robust than it was circa GFC, and New Zealand is in a stronger position than larger markets more vulnerable to risk. While events in the United States could provide an extra serving of tightening monetary policy, effects have been contained for now, with homeowners gaining greater clarity that we are at or near the peak of the rate hiking cycle.