“Prices are set to drop in the short term but should edge higher over the second part of the year as demand in key export markets recovers and global supply remains relatively tight.”
Otago has been one of the most improved regions in the country this year, though Clark noted it was coming off a low base.
“Card spending by foreign visitors in this big tourist region is now back to pre-Covid levels,” Clark said.
“The region’s meat farmers have remained profitable … farmgate incomes have also benefited from a supportive NZD exchange rate.”
Regions with high exposure to export markets generally fare better, Clark said.
“Worst affected are likely to be regions that have a higher proportion of interest-rate-sensitive investors or who might have previously recorded big house price gains off small volumes,” he said.
“Auckland tops that list followed by the Manawatū. Wellington also features because it has already experienced a significant loss of household wealth due to falling house prices.”
Economic activity in Auckland this year was mixed, the report said, with signs of a slowdown becoming increasingly evident.
“The region’s weakening housing market looms large in this regard,” Clark said.
Real Estate Institute numbers released yesterday revealed Auckland house prices fell by just over 18 per cent or $235,000 from the end of November 2021 to the end of last month.
That was a big turnaround from the 24 per cent increase between November 2020 and November 2021.
Nationally house prices fell by $115,000.
Clark also noted that a weaker housing market had undermined the incentive to build.
On a positive note, retail spending in Auckland continued to rise this year.
“Although much of that reflects rising prices,” Clark said. “By contrast, retail sales volumes have effectively moved sideways over the past year.
“The level of retail spending has been supported by the return of foreign tourists to the region, with accommodation providers, restaurants, bars, and cafes, particularly in the city, reporting higher sales following the opening of the borders and the relaxation of social distancing requirements.
“Spending by foreign visitors in New Zealand’s largest tourism region is now within touching distance of where it was pre-Covid.”
Looking forward to 2023, household spending will come under pressure from higher debt servicing and ongoing increases in living costs will further squeeze household spending power.
“A high proportion of mortgage holders [are] due to refix at much higher interest rates in the year ahead,” Clark said.
Reserve Bank figures show the average fixed rate mortgage was still just 3.68 per cent as of August.
However, continued hikes to the Official Cash Rate have seen some of New Zealand’s big banks bump up their mortgage rates to over 7 per cent.
“The effect on households will be exacerbated by falling house prices,” Clark said.
“We continue to expect that Auckland’s housing market will underperform the national average, largely because of relative price differentials and the fact that interest-rate-sensitive investors make up a larger proportion of property purchasers in this region.
“Over time the slowdown in spending is expected to result in a softening of the region’s labour market, as businesses pull back on hiring and unemployment edges higher from near record lows.”
Growing tourism numbers, particularly over summer, will continue to boost hospitality’s comeback.
The outlook for the Wellington region was also murky, dragged lower by expected household spending and a softening of the region’s labour market.
“The big negative has been the performance of the region’s housing market. House prices in Wellington have dropped further than in any other region in the country and are now back to where they were in late 2020,” Clark said.
“Sales volumes have also fallen but may have bottomed-out in recent months.”
Clark said activity should continue to be supported by the Government’s ongoing legislative/regulatory programme.
“That will continue to drive employment in public administration services as well as supporting industries,” he said.
“The return of foreign visitor arrivals should also provide a timely boost.”
Meanwhile, economic activity in Canterbury remains buoyant and is expected to “outperform the other big metropolitan centres”, while still slowing overall.
“A key point of difference for this region has been the performance of agriculture,” Clark said.
“Meat and dairy farming should support activity in the region.
“An expected increase in foreign tourists who use Christchurch as an entry point into other South Island regions should provide some cheer to local retailers and hospitality providers. That, though, will not be enough to offset the drop in spending elsewhere in the region.”
Dairy and meat farming should remain a key support for Waikato’s economy.
“Similarly, building activity should remain elevated for a while yet given the large amount of work in the pipeline. Thereafter, as financial conditions continue to deteriorate, we think that consent issuance will decline and that should eventually lead to a slowdown in building activity,” Clark said.
In the Bay of Plenty, Clark said economic growth had weakened this year as traditional drivers have underperformed.
“Nowhere is that more evident than in the region’s big kiwifruit sector. Many growers in the region have experienced lower returns due to fruit quality issues caused by labour shortages,” he said.
Economic activity is expected to continue to ease in the region.
“On a more positive note, forestry owners in this big logging region should see some modest price gains over the coming year as the Chinese economic recovery gathers strength. Still elevated demand for sawn timber from builders across the country should also support harvest volumes,” Clark said.
Clark also said returning backpackers and Recognised Seasonal Employer (RSE) workers should mean a better kiwifruit harvest.
