Job And Wage Growth And A Drop In Headline Inflation Can Boost New Zealand’s Housing Sector

Saturday, 8 October 2022, 5:41 am
Press Release: Kalkine

Highlights

• CoreLogic’s house price index shows that the average price of houses has now dropped below the psychologically significant NZ$1 million mark.
• The central bank of the country has not yet given up on its hawkish stance, making mortgages costlier and thereby impacting the housing sector.
• If headline inflation drops back to manageable levels and there is uninterrupted job and wage growth, the market might recover a little next year.

Household expenses are nothing less than a pain right now, with food inflation in New Zealand at a multiyear high. Food is a primary need, and increased outlay on everything from dairy products to fruits to vegetables is pinching all shoppers. Raging inflation and the central bank’s rate hike moves to bring prices back to manageable levels dominated news headlines during the first nine months of the year. Any big respite is not expected in the fourth quarter, and even if we witness any modest fall in month-over-month inflation growth, relief in terms of absolute prices of goods and services is probably out of sight. So, will the Reserve Bank of New Zealand’s (RBNZ) attempt to curb inflation go wasted?

The NZ central bank has added 50 basis points to the official cash rate (OCR) on multiple occasions this year, and the OCR is now sitting at a multiyear high. It can be said that the raging inflation in the country had to be dealt with by resorting to tough measures. A high OCR makes all borrowings costlier, which the central bank indeed wants in order to calm demand levels. In theory, less money in the hands of people means reduced demand levels and thereby a drop in prices.

One could say it is too early to see any meaningful impact of rising interest rates on demand. However, at least one sector has demonstrated that the OCR hikes are working. The housing market of New Zealand, with cities like Auckland ranking among the most unaffordable property markets globally, has lost steam. How would the last quarter shape the market before it enters a fresh year? Let us explore.

The height of the crisis

Data by CoreLogic reveals that the average house price is now below NZ$1 million. This is indeed a psychological blow for buyers who purchased a housing asset when the market was enjoying an unprecedented rally last year. The average price breached the million dollar level during the fourth quarter of 2021. Recent data by Barfoot & Thompson, a prominent real estate company, confirms a whopping month-on-month drop of NZ$47,000 in median price in September. This fall is with respect to homes sold by the company in Auckland.

CoreLogic’s recent data reveals that the quarter through September was one of the worst for fall in the value of houses in the country. From July to September, the decline in value was a sharp 4.1%. Now, the focus has also shifted towards buyers who purchased housing assets last year to immediately trade them for capital gains. The market presents no opportunity for them, and a hike in mortgage repayments can add to the woes of such buyers. Aside from prices, the sales volume has also plummeted, which shows that there is not enough demand even when prices become a little attractive.

The concern is not confined to New Zealand alone. The housing markets in most other advanced economies, including Australia, Canada, and the United States, are also in a similar mess. The conditions were out of hand last year with respect to demand and prices, and today all these markets are facing pressure on both counts. In fact, the present macroeconomic landscape pertaining to inflation, interest rates, and employment in all these countries is also comparable. There seems to be a pretty widespread housing sector problem in advanced economies, with no respite likely in the near future.

Also read: Housing imbalances & inflation causes of worry in NZ, says IMF

Fourth quarter and high OCR

Will the fourth quarter set the stage for an optimistic new year for the housing market? What do the numbers suggest? The recent 50 bps hike by the RBNZ might not be the last considering the levels at which the headline inflation is at right now. The Reserve Bank of Australia (RBA) this month went for a lower hike of 25 bps in the benchmark interest rate, but even if the RBNZ takes a cue from the RBA, the pace of hikes can only slow down a little as industry experts do not expect the central bank to pause unless the OCR reaches at least 4.5%. This means that borrowing costs would continue to hover higher, not allowing the demand for houses, which are a big-ticket purchase, to revive much.

Now, what about another important data – GDP growth – that reflects the overall health of the economy? The GDP growth was 1.7% for the quarter ending June 2022. The GDP print was a relief from how New Zealand’s economy behaved over the preceding quarter. There was a 0.2% contraction in the GDP in the first quarter, and the June quarter expansion prevented the economy from plunging into recession, which is defined as two consecutive quarters of negative growth. The outlook for the remaining two quarters is not very optimistic either. In other countries as well, the overall economic activity is subdued, with one of the fastest growing economies, China, also showing clear signs of a slowdown.

As noted earlier, the first nine months were dominated by discussions around headline inflation and the RBNZ’s hawkish policy stance. The ongoing quarter could largely be the same; however, there are assumptions that inflation might peak soon, and the central bank’s policy manoeuvres could yield significant results. That said, the housing market would need a significant boost, particularly from renewed economic activity in the country, with consistent job and wage growth, to avert a plunge into a deep crash in terms of price and sales volumes.

If inflation cools down over this quarter and New Zealanders have money to engage in big-ticket expenses like a house purchase, 2023 could be a better year than this one, with at least prices not dropping as sharply as they have so far this year.

Also read: Is NZ’s Budget 2022 going to be a `Well-Being’ one?

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