The house price increase is just beginning – Westpac

Home prices are skyrocketing and this is just the beginning, Westpac economists say in a new report on the economy.

“By mid-2021, we expect home price inflation to be 15 percent, about the same as in 2016,” says Westpac chief economist Dominick Stephens.

“The political and social consequences will be as intense as back then.”

The rise in house prices was an unintended consequence of interest rate cuts from the Reserve Bank, he said.

“But that doesn’t mean the RBNZ is going to change course – if it did, deflation and high unemployment would attract it.”

“We still expect the RBNZ to reduce the OCR below zero next year, while simultaneously slowing the quantitative easing program that will run out of fuel.”

Economists at ASB and ANZ released reports yesterday that suggested that the odds of interest rates falling into negative territory are less likely.

“We now expect a more gradual relaxation in OCR to -0.25 percent, and it seems less clear that negative OCR will occur,” wrote ANZ chief economist Sharon Zollner.

“Weighing all the possibilities, we still believe a negative OCR is more likely to be negative, but there are a number of risks that could change the landscape.”

At ASB, senior economist Mike Jones now believes that the RBNZ will avoid cutting OCR into negative territory.

But he agrees with Stephens that the housing boom will not stop.

“Having initially praised the housing boom for helping rescue recovery, it has quickly become a headache for the RBNZ, regardless of whether it believes it is responsible,” Jones said.

“We think it will get worse. We have been calling for the LVR restrictions to be returned and now they will be, in March. But we suspect this will slow rather than slow the house price acceleration.”

Westpac also revised our forecast for the unemployment rate, which we now expect to peak at 6.2 percent early next year.

“That would be similar to the peak seen during the financial crisis and much lower than we initially feared when Covid-19 first hit our shores,” Stephens said.

Outside of the travel and tourism sectors, much of the ground lost earlier in the year had already recovered, and many parts of the national economy rebounded faster than expected after the shutdown, he said.

At the head of the group, companies linked to the construction industry reported strong demand. There have also been increases in manufacturing activity (including exports) and gains in the retail sector.

“In this context, we are now seeing an increase in the number of companies
they are planning to hire new staff, “Stephens said.

Supporting this resistance in national activity has been New Zealand’s success in curbing the spread of Covid-19, he said.

“That means that most of the restrictions on activity have been lifted ahead of schedule and has left New Zealand in a much better position than many other countries.”

Globally, the economic gap between countries that have controlled the virus and countries that have not is wider than ever.

“New Zealand is lucky to find itself in a relatively Covid-free part of the world. Long lasting, because the resilient economies of Asia have supported our agricultural exporters in an otherwise difficult situation.”

On top of that, an enormous amount of monetary and fiscal stimulus had been implemented since the beginning of the year.

“That has given demand in some key parts of the economy (including the housing market) a powerful blow to the arm.”