See full article from Interest.co.nz below:
By David Hargreaves
Kiwibank economists say all three key drivers of the housing market point to a stronger market and house price gains; Westpac economists say housing market one of the key things they will be watching.
Kiwibank economists say they are expecting to see “some healthy green shoots” emerging in the Spring housing sales season.
In Kiwibank’s weekly First View publication, chief economist Jarrod Kerr and senior economist Mary Jo Vergara House say house prices are still falling, “but at a reduced rate”.
“And sales activity is building upward momentum. There are signs of stabilisation.”
They note that the REINZ data for the month of May showed further falls in house prices across the country.
“Wellington has seen the sharpest contraction in prices, falling 1.5% on the month to be down 25% from the November 2021 peak. Auckland is close behind, with house prices off 23% from the peak. The regions are playing some catch up, with broad-based declines deepening in May. The South Island continues to outperform the North. And that will continue,” they say.
“The good news in the data, is the reduction in the pace of declines. And activity has picked up, in a sign of confidence returning to the market.”
They say they expect buyers and sellers to go into hibernation over winter. “And the true litmus test for the housing market will be in spring. We expect to see an uplift in confidence and activity over the warmer months.”
Kerr and Vergara say there are three drivers of the housing market.
“Firstly, the peak in interest rates should mark the bottom in the housing market correction. Falling mortgage rates will support confidence and activity.
“Secondly, the demand/supply imbalance will worsen. The surge in migration and the loss of dwellings at high risk in climate change will only exacerbate the housing shortage.
“And finally, the residential construction boom is coming to an end. The number of dwellings coming to market will fall back from very high levels. The growth in demand, with a migration boom, will once again outstrip supply in coming years.
“All three drivers point to a strengthening housing market, and price gains,” Kerr and Vergara said.
In Westpac’s Weekly Commentary, senior economist Michael Gordon says the key things the Westpac economists are watching in the economy looking ahead are:
the state of the labour market,
the degree to which the inflation rate slows over the course of this year, and
the potential for a rebound in the housing market.
“The May REINZ figures showed that house sales have picked up from their lows and that prices have stabilised after a cumulative decline of around 17% since late 2021,” Gordon said.
“The rise in house prices and a surge in rents in Australia, following a similar rebound in net migration [to that seen in NZ], may be a warning as to what could happen here,” he said.
Gordon said the latest update from REINZ signalled that the downturn in New Zealand’s housing market has come to an end. While the level of sales remains low, they have risen in each of the past three months including a 2.5% increase in May (based on Westpac’s adjustment for normal seasonal patterns). Similarly, there have been modest house price gains in each of the past three months.
“But while the housing market has found a base, interest rates are set to remain at contractionary levels for some time yet. That’s likely to limit any material uplift in the housing market, at least in the near term.”
GDP figures for the March quarter released last week saw NZ (just) entering a ‘technical’ recession, as defined by two quarters of contraction.
Gordon said the Westpac economists do expect the economy to continue to cool off, “as a growing number of borrowers face the bite of higher interest rates”.
“That won’t necessarily result in an outright fall in GDP, as stronger migration-led population growth is likely to mask some of the decline. But it’s likely to be a long period of adjustment before we can be confident that the inflation pressures in the economy have been tamed – neither we nor the RBNZ [Reserve Bank] are forecasting inflation to be back within the 1-3% target range until the second half of next year.
“Any scope for OCR [Official Cash Rate] cuts looks to be some time away, and we still need to see tangible signs of a significant fall in non-tradables inflation in the quarters ahead.”
The RBNZ has pushed interest rates up aggressively as it attempts to control inflation, with the OCR having risen from just 0.25% as at the start of October 2021 to 5.5% now.
Kiwibank’s Kerr and Vergara said it’s important to note that the full force of the RBNZ’s rapid rate rises is still working its way through the economy.
“The last rate rise, to 5.5%, was delivered in May. And rate hikes can take up to two years to work through the economy. We said it at the time, and we’ll say it again: the RBNZ should have paused at 5%.
“We think we’ll find that the RBNZ’s heavy hand did too much. It’s less about where we have been, and more about where we are going. And the outlook remains awkward, to put it politely,” they said.
“We expect further contractions in economic activity into 2024.
“Demand is being weighted down by rising interest rates. If households spend less, which is what we are seeing, then the economy will contract. If businesses pull back on hiring and investment, which is what we’re hearing, then the economy will contract harder.”