BNZ says a supply overhang is suppressing price rises. Photo / Fiona Goodall
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
Is the falling migration rate stalling the house price recovery?
There are high hopes that house prices might see a decent recovery this year as interest rates fall.
I don’t think anyone expects (or even wants) another boom and price spike of the kind we went through in 2021, but some growth would add some much-needed momentum to New Zealand’s economic recovery.
It seems intuitive that the market will rebound as interest rates fall but despite some big cuts to the Official Cash Rate (OCR) since August last year, there has been very little movement so far.
New data from Barfoot & Thompson yesterday showed little to get excited about in February.
Median prices were off by 2.1% on January, down by 5.8% on the previous three-month average and down by 4.1% on February last year.
The number of sales wasn’t especially flash either, down 2.1% on last month but up at least (by 8.2%) on February 2024.
What gives? Why is the housing market recovery still so sluggish?
BNZ chief economist Mike Jones had some thoughts in a research note last week.
Population growth is undershooting the growth of dwelling stock, he says.
“Over the past few months, we’ve seen net migration stabilise at annualised rates around 25-35k. It leaves us with a view of positive but below average expansion in the population over the next 18 months or so.”
“That adds to the list of factors likely to check the pace of recovery this year.”
Basically, the big increase in Kiwis departing over the past year and the fall in new migrant arrivals, means the population is growing much slower than expected.
“It partly explains rising rental, real estate listings,” Jones says.
He notes that while housing demand is “stirring” the starting position is one of ample supply which will blunt house price rises.
“Unsold housing inventory remains around 10-year highs, and 20% above year-ago levels,” he says.
“These shifts in the relative housing market balance have had the expected suppressing impact on price gains.”
In the rental market, prices for new tenancies have broadly flatlined since the start of 2024, having climbed about 10% from late 2022 to the start of 2024.
“Meanwhile, over in the housing market, the gentle uptrend in available inventory has helped entrench the now two-year-long sideways trend in national house prices.”
Despite this Jones and BNZ still see the lower interest rate doing the job to lift the market, perhaps just more slowly than might have been.
“Our expectation remains that we’ll see excess supply worn down producing a 5-7% bump in house prices through the year,” Jones says.
“But the supply side of the story is one of many areas of uncertainty surrounding our forecasts.”
Reserve Bank outlook
If anything the BNZ’s outlook is more upbeat than the Reserve Bank’s (RBNZ) housing market forecasts.
Westpac chief economist Kelly Eckhold has noted that the RBNZ made a significant downgrade to its house price forecasts in its February Monetary Policy Statement.
New forecasts dropped growth expectations from 7.1% to 3.8% for 2025.
Eckhold, like the BNZ, remains more upbeat than that picking growth of 7% across 2025 and 5% in 2026.
“While the recent strengthening (but still modest) momentum may justify the direction of [the RBNZ] adjustment, some forward indicators look positive,” Eckhold said.
“Mortgage approvals are now running at their highest levels since 2021 when house prices were rising very strongly. While we don’t think house prices will behave anything like they did in 2021, we see upside risks to the RBNZ’s assessment on this score.”
If the housing market picked up more than what was forecast, that could reduce “the Monetary Policy Committee’s ardour in cutting the OCR by mid-year,” he said.
Westpac is forecasting the RBNZ will cut the OCR by 25bp increments at the April and May meetings but then leave it at 3.25%.
Investors coming back
New data over the past week has offered up some other signs of hope for those hoping the property market can join the broader economic recovery.
The value of banks’ new mortgage lending to investors rose 90% between January 2024 and January 2025 to $1.2 billion, according to the latest RBNZ figures.
The Herald’s Wellington business editor, Jenée Tibshraeny, reports that there have only been two other occasions in the past decade that investors have borrowed more during the month of January – in 2021, when they borrowed $1.6b and in 2016, when they borrowed $1.3b.
At $5.1b, the total amount borrowed for housing in January was 50% above what it was in January 2024, when the market was stagnant, and above pre-Covid levels.
However, the property market isn’t expected to get away on itself again, like it did around the time of the pandemic, she says.
While the OCR is falling quickly, it’s still high enough to have a contractionary effect on the economy and isn’t expected to fall to a stimulatory level.
“I’m always wary of saying, ‘This time is different,’” CoreLogic New Zealand chief property economist Kelvin Davidson said about the impact falling interest rates would have on the housing market.
While confidence was improving, he noted it was still subdued, as people felt uncertain about the state of the economy and their job security.
“There is still a mood of caution, which can shift quickly,” he said.
He noted it was definitely still a buyer’s market, with new property listings in January seeing the total housing market inventory lift to its highest level in nearly a decade.
Davidson, along with many other economists, has warned borrowers that while interest rates had further to fall the drops could be slower or smaller than those seen to date.
“It’s also going to be really interesting to see whether the recent stampede towards borrowers taking floating and short-term fixed rates goes into reverse at some stage in 2025,” he said.
Building consents find a floor
Meanwhile, this week building consent data showed an annual 7.2% drop in new homes consented.
But looking at the monthly trend Westpac senior economist Satish Ranchhod felt confident enough to suggest “the downturn in residential building has now found a floor”.
“After falling sharply through 2022 and 2023, annual consent issuance has now been running at a level of around 34,000 for most of the past year,” he said.
“Consent issuance is likely to remain around current levels over the next few months.
“However, we expect that new housing development will begin turning higher in the latter part of the year as the housing market strengthens.”
While we await the next round of big economic numbers several second-tier data releases in the past week have been pointing in the right direction.
In a note on Monday, BNZ’s Doug Steel wrote: “The economic recovery we forecast for 2025 continues to take shape. Last week’s data printed mostly for the better.”
He noted that job ads and filled jobs rose in January (albeit from low levels); new lending to households was much higher than a year ago in the first month of the year; and businesses remained broadly upbeat about the prospects for the period ahead with positive confidence and intentions to employ and invest.
“Combined with a decent lift in [fourth quarter] retail sales, it all adds to signs of life and recovery getting under way. There’s even a hint of it being a touch firmer than we might have thought.”
The one “fly in the ointment” was consumer confidence, he said referring to ANZ’s survey on Friday.
“People are not feeling it yet. Confidence remains stuck in pessimistic territory, well below average, and, if that were to persist, it threatens at least the pace of recovery ahead.”
Structurally the direction of the economy has been improving too.
It’s more than three years since New Zealand’s current account deficit blew out past 8% of GDP sending a wave of panic through some segments of our economic community.
The current account is a measure of the money flowing into and out of the country.
A country with stable earnings and stored wealth can get away with running a deficit for an extended period – a bit like the way a bank will let you live on an overdraft as long as you’ve got a steady income and the mortgage is under control.
But when the gap between what the nation spends and what it earns reached 8.8% of GDP in the year to December 2022 alarm bells started going off.
There’s a point at which international bankers, and the ratings that judge our creditworthiness, start to change their outlook – and that’s generally when the current account deficit hits 10%.
The good news is that it has been correcting itself slowly since then. It was sitting at 6.4% of GDP in the year to September 2024.
Two new reports from international economists note that it is likely to improve at a faster rate in the year ahead.
A commentary by economists at BMI (which is part of the Fitch Solutions Group but is independent from the Fitch Ratings Agency) suggests the deficit will fall to 5.8% this year.
At Capital Economics they are more optimistic, picking it to average 5% in 2025 but to go as low as 4% in the fourth quarter.
The trend is good but, unfortunately, it’s not underpinned by stronger GDP growth.
Rather, it’s the falling dollar and reduced purchasing power that is doing the work for us.
Basically, imports are getting more expensive for Kiwi consumers, so we’re likely to import less over the coming year.
Meanwhile, we have had a strong run with agricultural export commodities that are being aided by the lower Kiwi dollar, making our goods more competitive in a world that prices things in US dollars.
In fact, the latest terms of trade data show a healthy improvement.
Export prices increased more than import prices in the December 2024 quarter, which led to a 3.1% rise in the terms of trade, Stats NZ said on Monday.
Terms of trade represent the ratio of export prices to import prices.
“They can be interpreted as a measure of New Zealand’s purchasing power on the international stage and as an indicator of the relative strength of the New Zealand economy,” Stats NZ said.
The total export price index rose 3.2% and the import price index rose 0.1% in the December 2024 quarter, compared with the September 2024 quarter.
Export prices for meat products, which are New Zealand’s second-largest export commodity by value, rose 6.8% in the December quarter.
Dairy was up 3.5%.
Long-term warning
As is so often the case with economics the good news comes with a warning of downside risk.
“New Zealand’s current account deficit will remain large as domestic demand rebounds and the Government is running a sizeable structural budget deficit,” says Marcus Thielient of Capital Economics.
“While the New Zealand dollar has recently been among the worst-performing G10 currencies, we expect it to keep weakening against the US dollar over the coming year. That should eventually make New Zealand’s external position more sustainable.”
He picks that the Kiwi dollar will weaken further – from US56c now to US53c by year-end.
“That in turn should help the external adjustment as it will make New Zealand’s exports more competitive and imports more expensive. It will also improve New Zealand’s net debt position as most of its liabilities are denominated in New Zealand dollars whereas most assets are in foreign currency.”
In short, the floating Kiwi currency provides a handy safety net for New Zealand’s balance of payments with the world.
But it should be fairly obvious to most people that a lower dollar doesn’t offer a long-term path to a wealthier nation.
We need GDP to grow in a sustainable fashion underpinned by higher productivity.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
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