Summary.   Recently Statistics New Zealand released data showing that our economy went back into recession over the second half of 2023. In fact activity levels have shrunk in four of the last five quarters and when we consider that our population has just grown at the fastest pace since 1947 this means per capita measures have suffered tremendously. 

Weak economy is a housing constraint for the moment

Tony Alexander

Wednesday 17 April ‘24

Why the weakness in our economy which is also evident in measures such as falling exports, falling imports of capital equipment, and rapidly declining house construction? We can’t blame a soaring NZ dollar hitting exporters, a collapse in our commodity prices offshore, net migration outflows, fiscal austerity, or a shock event. 

Instead the blame lies at the feet of the Reserve Bank which delivered much too much stimulus to the economy over 2020-22 and pushed the inflation rate to 7.3%. Their resulting rapid increase in the official cash rate from 0.25% to 5.5% has caught out a lot of people who over-expanded during the unsustainable boom and this includes in the construction sector. 

Each week we seem to learn of another business closing down as a result of falling demand for new homes. Developers are selling off partly-completed bulk numbers of units, presales needed to get bank finance are proving insufficient, and special incentives are being offered to try and get buyers through the door. 

Apart from high interest rates causing buyers to step back because they can’t meet bank debt servicing rules with stress test rates near 9%, we also have a surge in property listings to consider.

Since the middle of last year so many vendors have stepped forward to take advantage of the real estate upturn in prices which started in the middle of 2023 that the stock of property available for purchase has risen 16%. This is certainly not what I expected to see happen, but it does mean that for those buyers who can raise the finance the range of properties to choose amongst is impressive. 

For these buyers the need to buy off the plan or arrange for a new standalone house to be built is not strong – though it isn’t zero either.  

House construction moves in cycles and because the upward leg of the most recent cycle was so strong there is a risk that the downward leg surprises us with its intensity. That is a problem because with a population boom underway the growing imbalance between demand and supply will eventually elicit a period of rapid house price increases. 

This won’t happen however until we see a sizeable easing of monetary policy with the cash rate perhaps falling 1%. The Reserve Bank continue to predict that they won’t cut interest rates until the middle of next year. But the continuing string of negative economic news firmly suggests that they will start cutting their key interest rate before the end of this year.  

Does this mean house price growth will strongly accelerate from late this year?

I don’t think the acceleration initially will be strong because the unemployment rate will rise higher than the current 4% and it will take some time for consumer sentiment to improve as interest rates fall. It pays to remember that interest rates generally come down in a negative economic environment and people take some time to come out of their shells and start spending again. 

For the residential real estate markets around New Zealand this year I expect slow improvements in turnover with prices generally creeping higher. But through 2025 I expect the fundamentals I am keeping an eye on of falling new house supply, strong population growth, changes in investor tax rules, and falling interest rates, will combine to produce stronger average price growth than this year.  

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