Paying for the economic hangover

ASB is predicting the country’s economy will tip deeper into recession as we pay for the central bank and government punchbowl’s unexpected potency at juicing up the economy.

The bank’s economists expect that, in total, the economy will contract by more than 2% early next year – more than half the size of the 2008/09 decline.

In its just released quarterly economic forecast, the ASB says the slowdown can be put down to the overheating of the economy in response to the pandemic kitchen-sink stimulus. High inflation and a stretched labour market are the clearest symptoms of this overheating.

ASB chief economist Nick Tuffley says the economy’s contraction will continue to be domestic-led. The squeeze continues to come on households, particularly through higher debt-servicing costs.

He says the weakness in the property markets is also a factor, particularly the sustained decline in house prices. The drop is starting to flow through to construction and even though disaster recovery will bolster construction, the underlying headwinds are likely to dominate. 

Consumer spending is also under pressure from rising living costs, which will add $150 per week to household costs this year.

On top of this, cyclone-related damages will underpin sizable rises for construction costs and for property maintenance services despite the cooler housing market backdrop, says Tuffley.

The full extent of the damage is unclear but could be in the range of $10-20 billion.

“Rising mortgage interest rates, strengthening population growth and some cyclone-related damage could also push rents higher.”

Tuffley says the bank doesn’t expect household income growth will keep pace with these increases, despite another year of strong wage growth. Home borrowers will feel the impacts disproportionately.

“We expect the housing market will continue to soften, with sales turnover subdued and a 25% peak-to-trough fall in values. Prices are already down about 16% and more than 20% in Wellington and Auckland.”

Housing market picks up slightly

March was a somewhat perkier month for the housing market, after a particularly weak February.

With mortgage rates now approaching their peaks, and even falling for some terms, it’s not surprising there are some signs of the market stabilising, says Westpac senior economist Michael Gordon.

Even so, Gordon thinks the downward adjustment in prices has a little further to run.

The latest REINZ data show the national median selling price was $775,000, down by $150,000 from its November 2021 peak.

In Auckland, the median selling price was just above $1 million, down by $299,400 from its all-time high of $1.3 million in November 2021.

Wellington was no different with its median selling price dropping to $750,000, down $250,000 from its peak.

The picture was mixed across the country though – outside of Auckland, prices were down 0.7% for the month, which points to a slowing rate of decline rather than a bottoming out, says Gordon.

Seasonally adjusted house sales rose 9% last month, although they remain close to the lowest levels seen since 2010. The pickup in sales was across almost every region.

However, the average time to sell fell to 49 days, unwinding a spike to 53 days in February. Turnover remains slow compared to the long-run average of about 40 days.

The REINZ House Price Index (HPI) was flat in seasonally adjusted terms – the first time there hasn’t been a monthly fall since November 2021.

REINZ chief executive Jen Baird, says there is no denying the economy is influencing market activity.

“While we have seen activity pick up in March, this year’s summer season has been muted. Prices have eased and properties are taking longer to sell. Buyers are taking their time, they are negotiating, and some are waiting to see if prices ease further.

“There are clear signs that we are in the lower phase of the cycle, but with nearly 6,000 properties sold, vendors who are motivated to sell are meeting the market with more realistic expectations on time frame and price. Those who need to sell are still selling.”

Near the end

Gordon says the Reserve Bank is nearing the end of its tightening cycle. Another 25 basis point hike in May is expected to be a peak OCR of 5.50%.

“Markets being forward-looking, this profile has been factored into fixed-term mortgage rates for some time. In the past few months there have been a few falls in mortgage rates for terms of two years and beyond, as the market looks ahead to the possibility of OCR cuts once inflation is brought under control.”

ASB’s Tuffley says the end of the Reserve Bank’s tightening cycle is near.

“There are tentative signs that inflation pressures are peaking. And there is still a considerable amount of lagged monetary tightening that will come through: we estimate the average mortgage rate households are paying is only halfway to the peak.”

He expects the RBNZ will be in a position to start gradually pulling interest rates down to a more neutral level in the first half of next year, the equivalent of monetary rehydration.

“But it is an ever-complicated environment to make decisions in. The weather disasters early in the year will add to inflation and have disrupted short-term activity, but will eventually lift activity as reconstruction gets underway,” he says. 

Gordon says  the dynamics of the market mean that the low in prices might not have been seen just yet.

“Owners by and large aren’t under pressure to sell at a loss, which slows the pace at which sale prices will adjust.” Westpac’s forecasts incorporate a further 5% fall in prices this year.

Sales slow

REINZ’s figures show at the end of March, the total number of properties for sale across New Zealand was 29,284, up 3,625 properties (+14.1%) year-on-year, and up 0.7% month-on-month. New Zealand excluding Auckland was also up from 14,923 to 18,742, an increase of 3,819 properties annually (+25.6%). Month-on-month, inventory increased 0.5%.

“Inventory levels are returning to the long-term average, which presents an opportunity for buyers looking to take advantage of the lower prices and less competition,” says Baird. Agents tell us first home buyers are actively returning in the regions with the advantage of choice as investors remain absent.

The total number of properties sold across New Zealand in March 2023 was 5,877, up from 4,113 in February 2023 (+42.9%), and down 15% year-on-year. New Zealand excluding Auckland sales counts decreased by 10% year-on-year but increased 34.3% month-on-month.

Nationally, new listings declined by 17.7%, from 11,224 listings in last year to 9,242 listings in March this year. Compared to February, listings increased by 13.5% from 8,143 to 9,242.

Across New Zealand, excluding Auckland, listings dropped 15.2% year-on-year from 7,191 to 6,099.

Auckland’s listings were down 22.1% from 4,033 to 3,143 year-on-year with the only regions increasing being Taranaki (+9.7%) and Marlborough (+18.6%).

Supply and demand

“The weather events of the beginning of year are still being felt in those regions heavily impacted,” says Baird.

“The market is likely to remain in this phase as New Zealanders wait for the peak of inflation, a settling in interest rates and some clarity around the possible outcome of the election. That said, with the number of listings continuing to ease, we may start to see the supply/demand balance change in some areas.”

The REINZ House Price Index (HPI) for New Zealand, which measures the changing value of residential property nationwide, showed an annual decrease of 13.1% for New Zealand and a 11.5% decrease for New Zealand, excluding Auckland.

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