December 2020: Housing affordability – unlocking the solution (PDF 1.25MB)
Housing unaffordability is an enormous problem in New Zealand, with especially significant consequences for our young and most vulnerable – and trends continue to move in the wrong direction. Making meaningful progress is urgent, and change needs to be bold to reverse the tide. Broadly, we need to release land, build more houses and better align supply and demand settings. Even sustained stabilisation in house prices would require a monumental shift in the market, and would be a vast improvement from the rapid house price inflation we are seeing currently. But it’s not just policy that needs to change – we need to change our expectations too. Policymakers and the public both need to be willing to accept house price stabilisation or even gradual real house price declines. Not only would this help affordability, but a managed supply-induced decline in house prices is a much better outcome than a painful correction, which is a risk under the current market structure. Although policy change can take time, engineering this sort of response in an orderly way is certainly possible, as shown in Canterbury post-earthquakes. See Feature Article: Unlocking the solution for more.
November 2020: Bag of tricks (PDF 836KB)
With the OCR near zero, the RBNZ has had to work with a new bag of tricks since the COVID-19 crisis hit. This month we provide a simple explainer of how these tools work and affect the economy. The latest tool to be introduced is the bank Funding for Lending Programme (FLP), which is aimed at lowering interest rates on mortgages and other bank loans. It's hard to know what impact it will have, but it might lower interest rates by another 20-40bps. Looking forward, a test for the economy lies ahead. The outlook for policy is finely balanced though, and developments in the housing market are one of many possible factors that could tip the balance towards erring away from a negative OCR. A negative OCR is a mind-bending idea, and could have some negative consequences, but for most people on the street the implications would be the same as for a regular cut in the OCR. See Feature Article: Bag of tricks for more.
October 2020: Riding high (PDF 892KB)
The housing market is riding high, with income support having provided a significant cushion, alongside a boost from lower mortgage rates. The removal of loan to value ratio (LVR) restrictions has added to demand but has not been a significant driver of the market – and yet financial stability risks are increasing. A “frothy” speculative element appears to be emerging, with FOMO (fear of missing out) part of the equation. Buyers are of the view that it is a good time to buy despite being in the midst of an enormous economic downturn, and house prices appear to be moving against the tide of fundamentals from already very elevated levels. That could contribute to a more volatile cycle if a turn in the market comes – particularly if buyers entering the market have high debt to income, making them more vulnerable to income strains. Macro-prudential policy is likely to be increasingly in the spotlight if current trends continue. The fact is, the housing market does undergo downturns from time to time and homeowners need to be able to ride the wave knowing that sometimes it does get choppy. See Feature Article: Riding high for more.
September 2020: Lend me a hand (PDF 876KB)
The housing market and new mortgage lending are bright spots in an economy otherwise facing an enormous amount of uncertainty. Low mortgage rates are lending a hand, and monetary policy is expected to provide even more stimulus, with the OCR expected to go negative next year alongside a bank Funding for Lending Programme (FLP). We expect the OCR will be lowered by 50bps to -0.25% in April, and that the FLP will strengthen the pass-through to retail rates. The impact of the combined policies is uncertain, but short-term fixed mortgage rates could dip below 2% next year. Further declines in mortgage rates will help to shore up the housing market, spending and confidence. But that’s set to go up against a range of dampening factors that are likely to become more evident by year end. Because of this, we expect that lower mortgage rates will provide a cushion, but won’t propel the housing market significantly. That said, there are offsetting forces and a ‘muddle through’ is possible. More broadly, risks to the economic outlook are tilted to the downside and it is possible that the OCR moves even lower than we currently expect. See Feature Article: Lend me a hand for more.
August 2020: Locked out (PDF 1.05MB)
The long-term benefits of home ownership are significant, but buying a new home is expensive. Housing affordability has worsened in recent decades; it now costs more to purchase a house and longer to save for a deposit, putting home ownership further out of reach for many. This is true across most New Zealand regions. Recently, lower mortgage rates have made home ownership costs cheaper, benefiting existing homeowners and those who can enter the market. But those who are locked out of the market cannot reap the same benefits, and rising unemployment and income strains are eventually expected to put pressure on the debt-servicing capability of some households. The RBNZ is providing an important cushion to the economy through lower mortgage rates (and other channels), reducing the blow to both house prices and incomes. But it won't solve New Zealand's housing affordability problem; that requires a hard look at structural factors. See Feature Article: Locked out for more.
July 2020: Turn of the tide (PDF 0.98MB)
The COVID-19 crisis has seen trends in the housing market shift. There are offsetting forces, and the crosscurrents are highly uncertain. Currently, the market is supported – but this support may start to wane, particularly later this year. We are wary that a number of factors could weigh in time: a tip in the balance between demand and supply, rising unemployment, caution towards debt, and tighter credit conditions. We see house prices falling 5-10%, but the outlook is highly uncertain. It will hinge on the global COVID-19 situation, economic conditions, migration flows, policy choices, and household attitudes. See Feature Article: Turn of the tide for more.
June 2020: Where the rubber meets the road (PDF 908KB)
The reopening of the New Zealand economy has made the outlook a little bit brighter. Recently, there has been a bounce in spending and positive anecdotes about the housing market - but we do not expect this positivity to last. The period ahead is when people on the street will feel the recession in lasting ways. Unemployment is rising and businesses are cautious. It will be a slow economic recovery, which means mortgage rates will be low for a long time. For some households, this will make home buying and spending more attractive, while for others it presents an opportunity to improve their financial positions. Although low interest rates will cushion the economic blow to some extent, weaker incomes and reduced job security will weigh on the housing market. The shortage of housing will likely erode, particularly in tourist regions. We have nudged up our house price forecasts, but only a little. We see house prices down 12%, which will weigh on household spending, with risks now more balanced. See our heatmap for vulnerability to house price falls by region.
May 2020: In question (PDF 1.01MB)
The outlook for the property market has shifted abruptly. This has raised many questions and we could arguably write an ANZ Property Focus on each. This month we give short answers to some of those big questions.
April 2020: Collateral damage (PDF 832KB)
With the country under Level 4 lockdown, the property market is eerily quiet. It's a highly uncertain time. We can't predict exactly what will happen for the property market from here; it will depend crucially on how the COVID-19 outbreak evolves. But at this stage we expect the following: the economic impact will be enormous; property market data will be all over the place in the period ahead; financial pressures will increase with many people in limbo; construction firms and the like will incur significant delay costs; credit is likely to be constrained; reduced income prospects and a fundamental shift in the supply-demand balance will see rents under downward pressure; house prices will fall significantly; and commercial property could be even more affected than residential, given its clear links to business activity.
March 2020: Challenging the status quo (PDF 872KB)
A recession is now underway that may be quite deep. The global and domestic slowdown on the back of the COVID-19 outbreak will see new challenges emerge for the construction industry. Demand will moderate on weaker sentiment and incomes, particularly on the residential side. Projects could be delayed and costs increase, intensifying financial pressures that already exist for some as a result of squeezed profitability, credit constraints and low cash buffers. The lower OCR will ease financial pressure for construction-related firms by lowering debt-servicing costs, although the availability of credit will remain a constraint for some. Firms will need to actively manage risks in the difficult and uncertain period ahead that may be prolonged.
February 2020: Confidence trick (PDF 876KB)
Rising house prices are a mixed blessing. It tends to encourage increased spending in aggregate, with some households benefiting from wealth gains and easing collateral constraints. This boosts GDP, though usually debt as well. But for other households, higher house prices mean home ownership slips further out of reach. And the low interest rates than can be the driver of higher house prices can adversely affect older households, even if they own their own homes - they are typically savers rather than borrowers, so lose when rates fall. Currently, households are feeling pretty good on the back of the strong labour market and better economic news (at least up until recently). However, risks are looming. Deposit growth has not kept pace with strong credit demand, meaning banks' balance sheets are under pressure, and credit availability may become a headwind. And emerging global risks are in the spotlight. We expect economic impacts associated with the tragic COVID-19 outbreak to be sharp but short at this stage. However, a larger impact cannot be ruled out. Such risks could see household optimism slide. But for now, momentum is on the up
January 2020: What do you expect? (PDF 920KB)
House prices have rebounded a bit more rapidly than we - or the RBNZ - expected. Monetary policy is working, though rising house prices are most definitely a mixed blessing for the economy. We have upgraded our forecast, with house price inflation now expected to reach 8% y/y, supporting our revised call for the OCR to remain at 1% this year. There is some upside risk to that 8% number - the market is tight and house price expectations have increased - but we think a number of headwinds will keep the market in check. Given the current low interest rate environment, house prices could prove volatile. The RBNZ will be watching financial stability risks closely when setting macro-prudential policy to ensure a growth-positive pick-up in housing does not come with a risky speculative dynamic.