House prices in New Zealand have risen more than 40% since COVID first hit – and they were considered problematically high to start with. While rising asset prices have been a global theme, given the massive stimulus that has been unleashed everywhere, in comparisons of house prices to incomes, or house prices to rents, New Zealand stands out like a sore thumb. And that’s a vulnerability, there’s no getting around it, particularly now that central banks have realised they now have a big job to do to rein in inflation.
CPI inflation in NZ is running at roughly twice the top of the RBNZ’s target band (1-3%) and triple its midpoint. If it were just one or two one-off things pushing it around that would soon dissipate that would be fine, but it’s looking really broad-based, and all the measures of “core” inflation that try to strip out noise are all above the top of the target band too. That means it won’t go away on its own, and we are forecasting the Official Cash Rate to be raised steadily over this year and into next, taking it to 3% by April next year. Mortgage rates have already moved up a lot with the RBNZ already having raised the OCR twice and signalled more to come, but if our forecast proves correct, they’ll rise further yet.
Can the housing market handle it? We are forecasting house prices to drop around 7%. No one’s house price forecast should be taken as gospel – it’s really hard to forecast – but right now, the risks are looking skewed towards a harder/faster landing potentially, with recent policy changes impacting the availability of credit, as well as monetary policy impacting how much it costs to borrow.
But in the big picture, as long as the labour market remains tight, this will put a floor under any correction in the housing market, so a nasty correction remains in the risk basket should the overall economic picture change abruptly (a la 2008) but not a particularly likely scenario.
Overall, looking at the year ahead, the theme is likely to be volatility (not least from the imminent Omicron wave), rising interest rates, a higher cost of living hurting household budgets, and a slowdown in the housing market. Eyeing that list, it’s clearly likely to entail a less happy-go-lucky economic mood than much of 2021 featured. With stimulus being wound back, the economic signals will be to live within our means again, and those means are somewhat straitened, despite the strong labour market. But the year will also bring us closer to the rest of the world again, closer to the end of the pandemic, and hopefully, a calmer housing market that has stopped galloping ahead of income growth.
It might feel like tougher going, but when it comes down to it, it’s a more sustainable mix than the headiness brought about by the biggest housing boom New Zealand has ever seen. It’s looking like a year of normalisation on a range of fronts – not a bad thing when the past two years have been anything but.