ASB economists expect a "modest" household spending and housing market recovery in 2025 and hope that households "have learnt a thing or two" in recent years.
In an ASB Household Outlook publication for July, ASB senior economist Mark Smith says the hope is that households are now basing their future decisions "on a more realistic outlook" for household incomes, house prices and borrowing costs.
He said many of the current difficulties that have been faced by NZ households are "a hangover of the consumer spending and housing market binge" that occurred from late 2020 to early 2022 which artificially inflated the sector. This binge was a contributing factor behind the escalation in NZ inflation and the eventual 525 basis-points of hikes to the Official Cash Rate (OCR) by the Reserve Bank (RBNZ).
"Covid-related border closures reduced overseas spending options and contributed to an exceptionally tight labour market. Falling interest rates encouraged households to bring spending forward. The housing market surged, with house prices rising 45% from late 2019 to the end of 2021. Households had also built-up a large amount of savings during Covid-19 lockdowns," Smith said.
'The housing market is in the doldrums'
"The music had to stop sometime, and we are now in the midst of the post Covid-19 adjustment. Higher interest rates provided the circuit-breaker and have sharply cooled housing market momentum, house prices and household spending. In inflation adjusted terms, house prices are more than 20% below their late 2021 peak. Household saving buffers have been progressively run down as households struggle to stay afloat. Household spending volumes are 5% off their peaks on a per-capita basis and look set to fall further over 2024. Durable spending has seen much larger per-capita falls.
"The household sector has gone into hibernation. The housing market is in the doldrums. Consumers remain extremely cautious and are unwilling to extend themselves financially. Cost increases facing households are waning, but the sources of pressures are rotating. Firms have likely held on to labour in anticipation of a lift in demand but hiring plans are being reassessed as economic prospects sour and pressures on profitability grow," Smith said.
"The 2025 recovery in household spending and the housing market is unlikely to repeat the 2021 Covid-19 related surge but should prove to be more durable," Smith said.
He said while the household sector and the housing market were recovering from "the Covid-19 related excesses", there is still "some short-term pain ahead".
"We expect the household sector to stay in hibernation for the remainder of the year, with household sector activity and the housing market on ice. The NZ unemployment rate could hit 6% by mid-2025," Smith said.
"A retrenching household sector will mean there is more room for other parts of the economy to grow, without putting additional pressure on NZ inflation. The cooling labour market will help to further lower NZ core inflation. Annual CPI inflation is on track to fall below 3% in the second half of 2024, with core inflation rates set to shortly follow. Cost pressures should remain acute in pockets – insurance and local authority rates – but the flow through into wider wage and prices should be modest," Smith said.
The ASB economists officially changed their call on the OCR last week and now believe now believe the RBNZ will begin to cut interest rates in November, from an earlier forecast of February 2025, as the risk of damaging the economy and employment grows.
Smith said OCR cuts should help support consumer sentiment and overall household spending.
"The RBNZ will naturally be cautious but will want to move the 5.5% OCR closer to circa 3.5% neutral levels to avoid unduly scarring the labour market and broader economy. Nonetheless, we do not expect a conventional easing cycle to unfold after the OCR is cut."
Housing market fails to fire
Smith said household consumption looks set to "remain anaemic" over 2024, with spending volumes contracting on a per-capita basis. This should cool economy wide inflation pressures and enable the RBNZ to cut the OCR. This should help support consumer sentiment and overall household spending.
He notes that the housing market "has failed to fire" over 2024 despite a number of "tailwinds". Strong (but slowing) population growth, the prospect of growing dwelling shortfalls, tweaks to government policy towards residential housing investors, the prospect of lower borrowing costs and cheaper house prices compared to late 2021 peaks have failed to stir the market.
"Headwinds appear to be dominating. Housing affordability remains stretched despite the drop in house prices, with rental yields below the cost of funding. Higher debt servicing costs, plenty of unsold inventory, the cooling labour market backdrop (the unemployment rate looks set to top 5.5% by mid 2025) and slowing (but high) net immigration should cap a potential housing market upswing. A number of households who have bought at the peak may now be flirting with negative equity," Smith says.
"We have shaded down our house price view and expect NZ house prices to broadly flat-line over 2024 and modestly grow over 2025. Lower mortgage interest rates will help, but the modest growth in house prices will be because house price rises will be underpinned by rising incomes rather than being borrowing related. Ultimately, this is more sustainable. It will take until late 2025 to surpass 2021 record nominal house peaks, and much longer for new inflation adjusted peaks to be reached."
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"The RBNZ will naturally be cautious but will want to move the 5.5% OCR closer to circa 3.5% neutral levels to avoid unduly scarring the labour market and broader economy. Nonetheless, we do not expect a conventional easing cycle to unfold after the OCR is cut."
Interesting call, I wonder what they think it will look like
And EVERYONE knew it!! But they let it happen anyway. NZ's working class now pay the price for Robertson's and Orr's incompetence while they, and all other wealthy folk made MORE money during that time, and continue to live the dream while everyone below them struggles to make ends meet. What is the point of house prices dropping if no one can afford them due to reduced hours/less work/etc, or worse, they don't have a job?
Nobody forced people to borrow cheap money.
I do agree RBNZ (and Labour to an extent by overhiring and overspending not saving) created a massive bubble because people borrowed cheaply and then had to cause a recession to solve the inflation caused.
But ultimately people decided to borrow and splurge. And those leveraged people and businesses will be the worst hit
This is great coming from ASB and other bankers the controllers siting right at the top of the biggest Ponzi scheme this country's ever seen.
The biggest lesson here for Kiwis is bankers are only fair-weather friends and not to be trusted.
Affectively there are a lot of New Zealanders that are just salves to the banks now.
The other untrustworthy partner is this Ponzi is the realestate industry once again not people you would trust.
Those homes they paid way too much for where never worth what they paid.
No fun for anyone when a Ponzi scheme falls apart.
Isnt it just capitalism.
The priority for banks and REAs is their bonuses and returns to their shareholders. As per any private business.
Also people need to note that the speeches and advice given by RBNZ will match how they want the economy to behave at a given moment in time..not necessarily correct or good advice for an individual.
And lastly that government also have their own agendas.. to pay back party donors, friends and personal benefits (7 house luxon owns 7 houses). So best not to trust them either.
The game is that everyone has an agenda and is giving advice based on their own needs. So best advice for Jim the citizen is to do their own research, manage their own risk and not to believe anyone has their interests at heart.
Running your Housing market like a Ponzi is not Capitalism it is more like stupidity.
I am all for capitalism in business or investment but the residential housing market is not capitalism.
The housing market needs to be left alone for people to have a goal and a dream to own their own home.
This has been the big undoing of New Zealand.
the residential housing market is not capitalism.
We can't have capitalism and then choose what is and isn't included. (In reality we try of do that and that is a big part of hat causes the problem).
What parts of the economy do we fence off from capitalism to control house prices and how do we do that? Do we fix prices for... Building materials, land, tradies salaries, REA bonuses.... or do we let the owners of that stuff set high prices and taxpayers subsidize lower prices.
At the same time we need to consider infrastructure costs for new houses and who pays that. And immigration levels and settings.
Then we have to consider why NZ won't implement a CGT.. which is because of big business donors to our political parties, and that the MPs, their rich mates and prob RBNZ board and mates all own investment properties. Not to mention a lot of swing voters.
In fact the policies our parties paint as solutions to house pricing are typically driven by other capitalist agendas for someone or other to make money.
Capitalism actually has serious issues... but it's the closest we get to freedom. The alternative is some form of socialism .. but that tends to lead to dictatorships and whatnot.
In my view capitalism is actually good... it tends to reward those that work harder at heir career and also to am extent by gaming the system best (kinda like darwinsim).
"The housing market needs to be left alone for people to have a goal and a dream to own their own home."
If that is a high priority for the voting public, then they should elect governments with policies that prioritise owner occupier buyers over non owner occupier buyers.
Look at Singapore government policies which prioritise owner occupier buyers over other buyers
https://www.propertyguru.com.sg/property-guides/additional-buyers-stamp…
> It will take until late 2025 to surpass 2021 record nominal house peaks, and much longer for new inflation adjusted peaks to be reached.
The interesting part of that sentence is the "inflation-adjusted peaks". Especially when rising prices is predicated on rising incomes. If those rising incomes aren't due to productivity gains, they will probably be inflationary. Which could mean all sorts of things.
Also worth remembering that exceeding nominal house peaks doesn't matter that much if incomes are increasing much faster. Because the relative value of the housing is still far more affordable and the investment performance of housing will have been much subdued.
The housing market surged, with house prices rising 45% from late 2019 to the end of 2021. Households had also built-up a large amount of savings during Covid-19 lockdowns
This lazy analysis drives me crazy. Economists' models ignore private credit creation so they get things wrong over and over again. It is really simple. When the housing market is going nuts, banks pump billions and billions of new dollars into the economy. Borrowers gratefully receive those new dollars and hand them over to house vendors. At the end of every house selling chain is someone who cashes out. What do they do with the money? They stick it in a term deposit.
So, increases in bank lending drive savings.
Similarly, Govt deficit spending adds dollars to private sector bank accounts. Households and businesses spend the money and it works its way through our economy to the people who own rent-generating assets like houses and bloody new world franchises. What do people with lots of money do with more money? They either buy more rent-generating assets or they save it.
What we have seen over the last two years is bank and Govt stimulus money flowing quickly through the economy to people who don't need to spend it. That cash gets saved.
Now look at which sectors are still building up their savings. Don't hear the bank economists talk about that much do we?
Addendum: The reason so many economists get this so wrong is that they assume banks lend out other peoples' money.
They do not have the cash, same issue in succession planning for Dairy farms....
My view is that many will inherit wealth, but where there are multiple siblings it will get interesting.
JFOE - some of the cash out will have found its way to Jardens, Fisher, Milford etc, and be invested in conservative type funds.
Real wealth does not normally hide in term deposits imho.
So, when the builder takes payments for the asset, do they set the money on fire?
Forgive me being glib, but Govt-backed NZ dollars are only destroyed when taxes are paid or loans are repaid. Until then, they bounce between bank transactions accounts before getting stashed in a savings account or locked away in a term deposit or Govt Bond.
"He said many of the current difficulties that have been faced by NZ households are "a hangover of the consumer spending and housing market binge" that occurred from late 2020 to early 2022 which artificially inflated the sector. This binge was the direct consequence, and intended effect of monetary policy actions, leading to the escalation in NZ inflation and the eventual 525 basis-points of hikes to the Official Cash Rate (OCR) by the Reserve Bank (RBNZ) when they finally realised their mistake."
Fixed it for you with the bolded text.
To make decisions based upon the suggested logic ('a more realistic outlook...') of the bank economists now would require listening to the views of doom gloom merchants - who would possibly want to do such a thing? Why weren't they suggesting this in 2020-2021? ie. 'everyone be extremely cautious at taking on excessive debt right now because who knows what is just around the corner? Ie you should plan your decisiosns upon interest rates normalising and not staying at 2% for the 30 years of your mortgage term). Which was the argument of the DGMs on this site- but only to be ridiculed by vested interests who benefit from the property price gains within the REA industry (property investors, banks, agents).
ie lending was happening at stress test rates, not at rates that represent real world risk (ie historically normal interest rates over a 30 year period). For me, stress test rates should never have been anywhere near as low as what they were - they weren't really 'stress test rates' more representative of 'all goes well rates'.
I know a young couple who just got a prepaid debit card to pay for Netflix, takeaways etc for the 3-6months before applying for finance to make there accounts look squeaky clean. Look its not as bad as donkeys owning houses in the USA pre GFC, but moving from 2.9% to 7% is just like the Adjustable Rate Mortgages and look how that's ending for us now, and ended in the USA
ASB economists expect a "modest" household spending and housing market recovery in 2025 and hope that households "have learnt a thing or two" in recent years.
A patronizing attitude. Remember the Funding for Lending program when the ASB CEO said it wasn't about 'cheap funding' for banks but an 'investment in NZ'?
ASB economists say they hope that households will base their future decisions 'on a more realistic outlook'
Perhaps ASB did the moral thing and didn't take the FLP money and shove as much credit out there to the public as humanly possibly to clip the ticket and bolster record profit levels...oh wait.
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