Inflation really weighs on returns

By Michael Kenealy, Senior Equities Analyst, Mint Asset Management

Over the 25 years pre-Covid19, average hourly earnings rose by 3.2%, while consumer prices eroded that by 1.9% on average each year. So, in real terms hourly earnings have grown at a compound rate of 1.2% (Dec 1994 – Dec 2019). Whilst it’s pretty hard to imagine or recall a floating mortgage interest rate of 10% and term deposits of 8% for many, that was the deal back in 1994. Add a labour force growing by ~1 million people (population grew by ~1.5m) at a rate of 1.7% per year to a long-term trend of falling mortgage rates and house prices have inflated by 6.3% each year on average. So in real terms house prices have gained 4.4% at a compounded rate.

During the last two bizarre pandemic years, wage growth has lifted to around 4% per year but inflation (4.6%) is consuming all of it and then some, meaning real wages have fallen 0.6% over 2020 and 2021. We have all seen how property prices have started rolling and if the RBNZ want to achieve its ‘sustainable’ house price level, they’ve got further to go. Given mortgage rates are rising, people are feeling the pinch and the cries for the Government to allow talent to immigrate are falling on deaf ears.  Our view is the factors that drove house prices sharply up are in reverse for the time being, and the RBNZ sooner or later will prove successful in crimping economic growth and punching house prices lower.

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