International research consultancy Capital Economics says a New Zealand housing downturn will see the Reserve Bank cutting its official cash rate in 2023.
The central bank lifted its official cash rate (OCR) by 25 basis points to 0.75 per cent last November and noted that further removal of stimulus was expected over time.
Capital's Singapore-based economist Ben Udy said the strength in New Zealand's economy will cause the Reserve Bank to hike rates further this year but that the central bank would end its hiking cycle earlier than the financial markets anticipate.
"What's more, we think a housing downturn in 2022 will weigh on the economy at the same time as inflation is easing and the labour market is loosening. On that basis we expect the Reserve Bank to cut rates in 2023," Udy said in a report.
Prior to the outbreak of the Delta variant in New Zealand, activity was rebounding strongly.
While the restrictions to curb the latest outbreak weighed on activity in the third quarter, inflation was surging and the unemployment rate was the lowest on record.
The Reserve Bank has already hiked rates by 50 basis points so far and Capital Economics expects the bank to hike by a further 125 basis points this year.
Such a move would lift household debt servicing costs by more than 3 percentage points.
"And it happens at a time when real wages are falling, the household savings rate is around its lowest rate since the Global Financial Crisis, and housing credit is growing at a double-digit rate.
"As such, consumption growth is set to slow in the years ahead," he said.
"What's more, the surge in house prices over the last two years means that housing is now less affordable than at any point in recent history.
"And that is set to be exacerbated by the Reserve Bank which is raising interest rates and tightening lending standards," he said.
"We expect those influences to cause house prices to fall this year."
Capital Economics has pencilled in a 10 per cent "peak-to-trough" fall in prices, with prices bottoming out by the middle of 2023.
Udy expects the Reserve Bank to end its hiking cycle with the OCR at 2 per cent rather than 2.6 per cent as it has signalled, or 2.75 per cent as is priced into financial markets.
The housing downturn would weigh on activity in a number of ways.
First, lower sales volumes would directly result in weaker growth in housing services activity - important because housing-related activity makes up around 13 per cent of total production GDP.
"And while residential investment isn't extraordinarily high by past standards, lower demand should result in a slowdown in homebuilding.
"Finally, falling house prices will reduce household wealth and provide an additional headwind to consumption growth," Udy said.
Capital Economics expects GDP growth to soften to 3.5 per cent this year and to just 1.7 per cent next year.
Weaker activity would cause employment growth to slow in the years ahead.
Employment in the construction sector has expanded from 7 per cent of total employment in 2012 to more than 10 per cent this year.
As house prices fall, Udy expects that employment trend to reverse.
The national average house price rose nearly 30 per cent last year.
Data from QV show the average house price went up 28.2 per cent in 2021, with the new national average hitting $1,053,315.