NZ: Housing market on ice doesn’t mean economy on the rocks - ANZ

Analysts at ANZ suggest that although activity has shown more signs of life of late, and the risk profile does appear less negatively skewed than it did, they have not changed their overall views about the NZ economy.

Key Quotes

“We see prices effectively staying ‘on ice’ for the foreseeable future, with modest growth overall. But what does that imply for the broader economic outlook? History has taught us that the housing market has a critical bearing on the economic cycle. All else being equal, we expect softer house price growth to be a headwind for consumption growth going forward, although perhaps to a lesser extent than history would suggest, given that the softer housing market has not been driven by a turn in the interest rate cycle, but rather by a more restrictive credit landscape, including macro-prudential policy. Nevertheless, with the household saving rate having deteriorated over recent years (to an unsustainable level in our view), weaker house price performance is expected to see households look to rebuild precautionary saving, and this will be a headwind for overall activity growth.”

“Property Gauges

Housing market activity has shown more signs of life of late, bouncing off low levels, perhaps on the back of recent mortgage rate falls. However, our overall views have not changed. There are clear opposing forces. On the one hand, strong population growth coupled with a challenged supply backdrop argues that a fundamental supply-demand imbalance will continue to drive prices higher. Yet this is going head-to-head with tighter lending standards, LVR restrictions (although these are gradually being eased), affordability constraints and possibly more restrictive government policy changes. We continue to see price growth remaining modest.”

“Economic Overview

We retain a broadly constructive view of the medium-term growth picture, with support from stimulatory fiscal policy, accommodative financial conditions and elevated terms of trade. That said, while risks are arguably not as negatively skewed as they were, we remain a little more circumspect towards the near-term growth picture as the economy transitions in terms of its growth drivers and grapples with a softer housing market. We are still biased towards OCR hikes in time. However, with a lack of clear evidence of a lift in domestic price pressures, the OCR looks to be on hold for some time yet.”

“Mortgage Borrowing Strategy

With average 1-year fixed mortgage rates falling in the past month, and the 1-year rate now clearly the low point on the mortgage curve, it offers the most value in our eyes. While the gap to the 2-year rate is not large and may be attractive for those concerned about the possibility of the OCR moving up within the next year, that is not our expectation. In fact, we don’t see the first OCR hike until August next year, and it could be even later than this. Indeed, the RBNZ sees the risks of the next move being a hike or a cut as balanced. But ultimately, borrowers may wish to spread risk by borrowing over a number of fixed terms.”