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Weekly Economic Commentary 6 June 2023

Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.

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Checking the housing pulse.

In our recent Economic Overview we revised up our assessment of the New Zealand housing market. We now think that house prices have bottomed out, as interest rates near their peaks and the resurgence in migration provides a fresh source of demand. We’re forecasting only a modest lift in prices from here on, but we’ll watch the data carefully – history shows that it’s difficult to predict how far the housing market will go once it starts to gain some momentum. 

The last few years have seen perhaps the most dramatic rise and fall in house prices in New Zealand’s history. The sharp drop in interest rates in response to the Covid-19 pandemic, on top of the significant rate reductions in 2019, added new fuel to the fire. House prices fell slightly during the lockdown period, but then shot up by 43% over the following year and a half. Rising mortgage rates put paid to this rally by late 2021, and since then prices have fallen by almost 17% from their peaks. That’s still only taken them back to where they were at the start of 2021. 

There are now some signs of life returning to the market. House sales appear to have bottomed out in December last year, and have since risen by about 20% – though that still puts them at very low levels compared to history. The number of listed properties also appears to have peaked and turned lower in that same time. 

The REINZ House Price Index, released a few weeks ago, showed a 0.2% rise in prices in seasonally adjusted terms in April. That was the first monthly rise that we’ve seen since November 2021. We wouldn’t read too much into that number on its own – it’s a tiny increase, and seasonal adjustment is not an exact science. But it’s in keeping with the trend of smaller price declines in previous months. 

The REINZ index is our preferred measure of house prices, as we think it provides the best trade-off between quality and timeliness. The other major measure is from CoreLogic, whose figures released last week pointed to a 0.7% drop in prices in May. However, the CoreLogic measure tends to lag REINZ for two reasons: it’s a rolling three-month average, and sales are recorded at the date of settlement, which puts them about a month behind the REINZ figures (which are recorded on the date that a sale goes unconditional). On a like-for-like basis, the CoreLogic figures were much in line with the REINZ series. 

The forces that have been weighing against the housing market over the last couple of years are now starting to turn. Firstly, the end of the Reserve Bank’s monetary policy tightening cycle is in sight. Indeed, the RBNZ has signalled that it now expects to keep the cash rate on hold for an extended period, although we see the risks tilted to at least one more hike this year, and financial markets are pricing in some chance of a further hike. In any case, the fixed-term interest rates that New Zealand borrowers tend to favour are now being priced for the prospect of OCR cuts in 2024 and beyond. 

On top of this, the balance of migration has turned from a modest net outflow to a strong net inflow over the last year, as New Zealand has reopened its international border. This reflects a pent-up demand to live and work in New Zealand, and it will eventually run its course. But it’s hugely uncertain how strong this flow could become in the meantime. We’re forecasting a net inflow of 100,000 people for this year, but it could be substantially either side of that. 

Migrant arrivals provide a fresh source of demand on the housing stock. While many of them won’t be positioned to buy a house when they arrive, they will still need a roof over their heads. In that case, the pressure is likely to manifest through upward pressure on rents, which in turn will increase what buyers are willing to pay for a house as a rental property. 

Our previous forecast was for a further 7% fall in house prices over 2024. In inflation-adjusted terms, this would have meant a complete reversal of the surge in prices that we saw over 2020-21. However, the recent data suggests that the housing market is stabilising earlier than we expected. And with the developing trends in interest rates and migration, we now think it’s likely that prices have reached their bottom. 

We’re only forecasting a modest lift in prices from here – just 0.5% over the second half of this year, and another 2.5% over next year. But we acknowledge that there are substantial upside risks to this view. 

Previous upswings in net migration in New Zealand have been associated with a strong rise in house prices. However, the driver of the migration upturn is different this time. People tend to move to opportunity, and New Zealand has typically seen net inflows when our economy is performing relatively well – and often that’s been because it was being fuelled by cyclically low interest rates. This time, however, the migration boom reflects a period of catch-up, and interest rates are already at or near their peak for the cycle. 

But that doesn’t rule out the possibility of a stronger upturn in house prices. We only need to look to Australia for a warning of what may be coming here. Australia is also seeing a sharp surge in net migration (they reopened their border earlier than we did). Rents are now rising sharply, especially in Sydney, and house prices have risen by 3% in the last few months – unwinding about a third of the decline that they saw in 2022. 

A resurgent housing market would be a risk to the Reserve Bank’s economic forecasts, which assumed a further 3.5% fall in house prices over the next year. Rising house prices are not a direct concern for monetary policy, but they can add to inflation pressures via households’ willingness to spend.

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