A key indicator surges as New Zealand's major banks raise house price forecasts for 2024
The Reserve Bank of New Zealand announced on 16 August that it would hold the Official Cash Rate (OCR) at 5.5%, but its Monetary Policy Statement left open the possibility of further rises, suggesting another increase could come in November
The Reserve Bank of New Zealand announced on 16 August that it would hold the Official Cash Rate (OCR) at 5.5%, but its Monetary Policy Statement left open the possibility of further rises, suggesting another increase could come in November.
Although the outlook for mortgage interest rates remains uncertain, New Zealand economists appear more confident about the direction of house prices, with major banks revising their growth forecasts for 2024.
Forecasts for price growth in 2024 now range from 2.3% to 8%, a marked change from forecasts at the start of the year, which ranged from a 2.6% fall to 3.3% growth.
Forecasting the property market is highly complex, with economic conditions, interest rates, government policies and unforeseen events all playing a role. Economists at New Zealand's major banks—ANZ, ASB, BNZ, Kiwibank and Westpac—spoke to OneRoof about why they are more optimistic about the market and what led them to revise their house price and interest rate forecasts.
ANZ
At the start of this year, ANZ economists forecast house prices would fall 1.3% in 2024, but have now revised that to growth of 2.3%。
Senior economist Miles Workman said: “One of the biggest surprises we have seen over the past year has been the strength of net migration figures, which has ultimately boosted housing demand. That appears to be affecting prices.”
Post-pandemic policy changes at home and abroad have also affected New Zealand's property market.
“We have seen the Reserve Bank recently ease LVR restrictions,” Workman said.
“What we are hearing from the market is that demand for mortgages has increased slightly, particularly among first-home buyers。
“The CCCFA, the Credit Contracts and Consumer Finance Act, contributed to the housing downturn, but the Government subsequently reversed some of those changes—another round of quantitative easing, in relative terms.
“Then there is the greater-than-expected resilience of the household sector overall. Household balance sheet data provides some clear evidence that household incomes are still growing strongly. Households built up very substantial savings buffers during the pandemic.”
ANZ has also substantially revised its OCR forecast. This time last year, the bank expected the cash rate to peak at 4%. It now expects another increase before year-end, taking the rate to a peak of 5.75%. Workman said inflation was the main reason for the new forecast, with the bank believing further belt-tightening was needed to bring it under control.
ASB
ASB chief economist Nick Tuffley told OneRoof that ASB economists base their forecasts on the QV House Price Index. This can differ from the REINZ index used by other banks, although the two should follow broadly similar trends over time.
ASB has revised its 2024 house price forecast from a decline of 2.6% to growth of 7%. The major factor behind the change between the forecasts is an unexpected rise in net migration。
“We have changed our house price forecasts several times this year, particularly a few months ago, because of strong net migration growth. February and March were the peak months this year, but monthly net inflows are still running at 5000 to 7000 people. The trend is very clear,” Tuffley said.
For the year to October, net migration is forecast to total 92,000 people. This will affect the property market.
Tuffley said strong signals from the Reserve Bank in May and July that the cash rate had peaked also influenced market sentiment.
In August last year, ASB, like other institutions, expected the cash rate to peak at 4%. Although other banks now forecast a peak of 5.75%, ASB is sticking with its revised forecast of the cash rate remaining at 5.5% before falling in the second half of next year.
BNZ
BNZ expects 2024 house prices to grow by 7%, four percentage points higher than its forecast eight months ago.
BNZ senior economist Craig Ebert cited strong growth in net migration as the reason for revising its forecast.
On migration figures alone, the bank would have forecast stronger house price growth, but rising mortgage rates, a slowing economy and a loosening labour market tempered its expectations. “It is a constantly changing environment,” he said.
Kiwibank
In January this year, Kiwibank forecast 2024 house price growth of 4%, but subsequently raised that forecast to 5%, although the bank cited the interest rate environment as a key reason for expecting only modest house price growth. “The Reserve Bank of New Zealand's restrictive policy is dominating the outlook. The interest rate rises that began late last year have hit households hard,” said Kiwibank chief economist Jarrod Kerr.
Household spending patterns have changed, with New Zealanders spending more on essentials that have become more expensive through inflation, while cutting back on big-ticket purchases.
“[It] shows up in government revenue, or the lack of it. GST revenue has been weak, a clear sign of weak economic activity. Corporate tax revenue is well below Treasury forecasts. Businesses are generating less income, another clear sign of a slowing economy.”
Kerr said the OCR was much higher than expected a year ago, reflecting a global phenomenon. “Inflation around the world is unlike anything seen in recent years. Over the past thirty years, inflation had been falling and staying low.
“Demographics have had an enormous influence. Slowing population growth and ageing populations created a global savings glut. China's rise and remarkable technological advances also contributed. Since the global financial crisis in 2008, we had all expected inflation to remain low. But massive government spending and the experimental use of new monetary policy tools, such as money printing, stimulated demand in ways not seen for decades.
“Supply chain disruptions during the pandemic and the war in Ukraine constrained the supply of commodities and goods, just as demand was being fuelled by the strongest monetary steroids.
“Central banks' reaction functions are asymmetric. They are more inclined to stimulate because we do not want to face deflation. We know how to curb inflation—keep raising interest rates.
“So we are now in a difficult position, with inflation persisting. This is a situation the Reserve Bank of New Zealand would rather face than genuinely weak economic activity and low inflation, or even deflation.”
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Westpac
Westpac's January forecast for 2024 house prices was for growth of 1%, but this has now been revised to growth of 7.7%。
Senior economist Satish Ranchhod gave three main reasons for the changed outlook:
The property market bottomed out much earlier than the bank expected. “We had expected prices to continue falling slightly,” Ranchhod said.
Interest rates may have peaked. “The fact that the peak is approaching has given some buyers more confidence.”
Population growth has been stronger than anyone expected, boosting the housing market. “Historically, we have seen that when migration is relatively strong, the housing market also picks up。”
A year ago, Westpac expected a cash rate of 4%. Now, like ANZ, it expects the cash rate to rise to 5.75% in November.