The Reserve Bank has trimmed its forecast for house price growth, and says the fact that house prices aren’t rising as fast as expected is weighing on the economy.
The central bank now expects house prices will fall 0.3% this calendar year. At the end of last year, it had expected 7% growth.
Its monetary policy statement seemed to lament the fact that the market had not responded as quickly as expected to interest rate cuts. It said housing was a key component of household wealth and influenced household spending.
“Annual house price growth has been lower than annual [Consumer Price Index] inflation since mid-2022,” it noted.
“As a result, real household wealth has been declining over the same period. Growth in wealth from other sources is also currently low.
“Household wealth can be an important determinant of household spending. Households tend to spend more and save less when their net wealth increases.
“House prices are also an important determinant of residential investment. When house prices rise relative to the cost of building houses, it encourages the construction of new houses.
“Residential investment has declined more than expected since 2022, but now appears to be stabilising.
“Residential investment is expected to begin increasing from late 2025 because of lower interest rates, increasing population growth, and increasing real house prices.
“Historically, consumption and residential investment in New Zealand have been tightly linked to house price cycles.
“House price inflation has been lower than previously assumed over the past year.”
But some economists say it is unwise to assume that weak house prices are bad economic news — or to pin hopes of economic recovery on the price trend turning around. Both former prime minister John Key and Prime Minister Christopher Luxon have said they think house prices should rise, while Housing Minister Chris Bishop disagrees.
Haves and have-nots
Chief economist at Westpac Kelly Eckhold said house prices rising were generally an indication that there was nominal growth in the economy.
Usually, rising house prices would improve private consumption. “When house prices are rising, people who have houses generally feel a bit richer, so they spend a bit more than they otherwise would, that’s obviously positive for the economy in a cyclical sense.
“The crux of the matter, though, is by how much do they go up, in particular how much do they go up relative to things like incomes?”
He said as long as house prices rose in tandem with incomes, it should not change affordability.
If they rose faster than incomes, there could be a “have and have not” situation where people with houses were positive and those who were priced out were not.
“One of the challenges we’ve had in New Zealand in the last 20 or 30 years is that house prices have risen substantially in excess of incomes.
“If we look at, say, the period since about 1995-ish, the period where inflation finally got back down to the target range….real house price growth has probably been running at about 4% per annum.
“And that’s a higher amount than wage growth or incomes growth has been running at, and that’s one of the reasons why there is a concern about affordability in the housing market.
“The biggest changes were probably through the 1990s and the 2000s, where prices are rising quite quickly.
“Then obviously through the Covid period, prices really did take off relative to incomes, and we’ve sort of seen what I would describe as a bubble open up through that 2020 and 2021 period in particular.
“Now it’s really popped and we’ve seen those house prices come back.”
He said a big problem of recent years was the volatility in house prices.
“We want a happy medium… we would like house prices to be rising because nominal incomes are rising. If that sort of thing is going on that’s probably consistent with a growing economy, but it’s not going to generate an undue amount of inflation.
“That will tend to be a fairly predictable environment as well…people that are looking to get into the housing market have a good idea of where they stand, suppliers of housing will also have a good idea of where they stand.”
Housing affordability ‘awful’
Infometrics chief forecaster Gareth Kiernan said often the factors driving the housing market up would drive up spending activity in general.
“If interest rates are low, that’s positive for the housing market, that’s positive for people spending if the labour market is tight… so they’ve kind of moved together whether it’s driven by the housing market or not.”
He said the problem was that housing affordability was still “awful”.
“Worse than any time prior to 2020. You know, if we look at things and go ‘the only way to get our economy going and growing again is pushing up house prices’, that’s going to perpetuate that cycle with more and more people priced out of the market. It’s short-sighted.”
That could drive people to move out of the country, he said.
He said the experience of the past 35 years had been that the economic cycle was tied to he housing market, with limited improvement in productivity.
“I often think that people have very short memories, and can’t remember anything beyond about three to five years. So we’re talking about sort of 35 years here. It’s almost been the same every time.”
Chief economist at Kiwibank Jarrod Kerr said it would be preferable for house prices to come down through the addition of more affordable housing.
“We need to build a lot more in the $500,000 to $700,000 zone, I’d love to see builders gearing up to build higher-density, affordable homes that first-home buyers are crying out for. If I could wave a magic wand I would have a whole lot more affordable homes hitting the market, I don’t care what it means for the median price.”
He said in that scenario, people who had more expensive homes would not be particularly affected.
Kiernan’s colleague Brad Olsen said the Reserve Bank should be rejoicing that it was taking longer than expected for interest rates to affect house prices.
“The fact we’re not trying to drive the economic recovery by pumping up the housing market is a good thing.
“It might be tough to decouple house prices from economic growth but it’s a good thing if we can achieve it. It makes me wary that there are parts of the country, institutions, hoping house prices pick up pace for New Zealand’s economic miracle. That’s short sighted.
“I’m genuinely worried people think if we can rev up the housing market all out problems will be solved. Then in a couple of years we’ll say why is affordability so bad?”
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