Westpac economists say the boost to the economy from low interest rates is now "undeniable" and has been seen most clearly in the housing market, where they expect solid price gains to continue.
And they say in their first Weekly Commentary for the year that Westpac's longstanding prediction of 7% house price growth "may come good even sooner than we expected".
The Reserve Bank moved to stimulate the economy last year by reducing the Official Cash Rate to just 1% from 1.75% at the start of the year, with the most notable shift being the 'double-cut' drop of 50 basis points in the OCR in August.
"House prices have continued to push higher, with annual house price inflation rising to 6.6% in the year to December," the Westpac economists say.
"Gains in prices have been widespread, with prices in Auckland up 4% and other regions up an average of 8.9%.
"We think continued solid gains are on the cards in the early part of 2019."
The economists say the strength in the housing market is important for two reasons:
"First, New Zealander’s hold large amounts of their wealth in owner-occupied or investment properties, and the pick-up in house prices over the past year has seen households opening up their wallets again. With house price growth set to take another step higher over the coming months, we expect that their will be related strength in household spending.
"The second reason why the pick-up in the housing market is important is that the RBNZ is likely to be more circumspect about the need for further OCR reductions.
"Economic activity has already been a little hotter than the RBNZ had been assuming. And with signs that house prices and spending are heating up, they’re likely to feel comfortable staying pat for some time yet.
"Consistent with that, we made a change to our forecasts for the Official Cash Rate late last year. We no longer expect the RBNZ will cut the OCR in February, or at any point over the first half of 2020."
Despite that, however, the Westpac economists still think that the "longer-term risks" for the OCR are to the downside and they have pencilled in an expected rate cut for August this year.
"That’s because even with an extended period of solid economic growth, inflation is struggling to reach the 2% mid-point of the RBNZ’s target band (on this front, we expect that this week’s CPI report will show that headline inflation has risen to 1.8%, but core inflation is struggling to break higher). There’s also the risk of continued softness in the global economy. We will continue to update our OCR forecasts as and when required by new information," they say.
The Westpac economists say the other big factor that will boost demand over the coming year is fiscal policy.
"Large increases in fiscal spending have been announced in previous years, and late last year the Minister of Finance announced a further $12 billion of new investment spending focused mainly on transport projects.
"With the 2020 election coming into sight, we think that further sizeable spending increases will be coming. That’s likely to include increases in transfer payments, pay rises for public sector employees, and some boost to health and education services."
98 Comments
Solid gains for house owners .... more pain for renters and aspiring FHB's ...
... NZ now has the dubious honour of being the most expensive country in the English speaking world to buy a house ... ( Demographia ) ....
... are completey OTT house prices a good thing for us as an economy , as a society ?
There's no point moaning/whinging now........
Prospective house buyers should have got in during 2017-2019 when the housing market was as flat as a pancake - at least in Auckland.
Hint: Palmerston North remains excellent buying. Prices in Palmy are bound to soar higher this year.
TTP
So have you followed you're own advice Ttp, Bet you haven't bought a place have you? It's a bit like, you're advising someone on how to swim without ever having gotten your feet wet. Do you even comprehend that buying property based on falling mortgage interest rates is unsustainable and unlikely to yield much in terms of future capital gains.
Seen what the Economist wrote about house price rises being good for the economy in their latest publication? Basically it is a con....
Traditionally politicians like it when house prices rise. People feel richer and therefore borrow and spend more, giving the economy a nice boost, they think. When everyone is feeling good about their financial situation, incumbent politicians have a higher chance of re-election.
But there is another side. Costly housing is unambiguously bad for the rich world’s growing population of renters, forcing them to trim spending on other goods and services. And an economic policy which relies on homebuyers taking on large debts is not sustainable. In the short term, finds a study by the imf, rising household debt boosts economic growth and employment. But households then need to rein in spending to repay their loans, so in three to five years, those effects are reversed: growth becomes slower than it would have been otherwise, and the odds of a financial crisis increase....
https://www.economist.com/special-report/2020/01/16/housing-is-at-the-r…
Westpac economists say the boost to the economy from low interest rates is now "undeniable" and has been seen most clearly in the housing market, where they expect solid price gains to continue.
And they say in their first Weekly Commentary for the year that Westpac's longstanding prediction of 7% house price growth "may come good even sooner than we expected".
Lower interest rates are a bad thing, even if I am the only one saying it.
Low interest rates mean low investment yields become the norm. And that juices up asset prices. And that is very bad for society - for everyone except those holding assets.
For example, a 5% interest return on a million dollar asset is an annual cost (or return) of $50,000.
But if that $50,000 return is happening when interest rates fall to 2%, then the $1 million asset is revalued to $2,500,000. The extra $1.5 million just falls out of the sky and into private hands. ($2,500,000 at 2% = $50,000.)
Those that don't have $1 million to start with don't participate. Those that do get rich quick. Link
Where is the evidence that low interest rates have benefited the economy?
There is no evidence (that I'm aware of). However, what Westpac shows is the idelology steeped in the idea that asset bubbles juice consumer spending (and the obvious trickle effects). This is why the ruling elite see elevated asset prices (or bubbles if you wish) as a positive thing.
First, New Zealander’s hold large amounts of their wealth in owner-occupied or investment properties, and the pick-up in house prices over the past year has seen households opening up their wallets again. With house price growth set to take another step higher over the coming months, we expect that their will be related strength in household spending
There you have it. So if the mainstream economic beliefs hold, we should see robust consumer spending going forward.
.... pick up a calculator, and understand what’s likely to happen even if nominal GDP growth and corporate revenues continue to grow at the roughly 4% annual rate of recent decades, and valuations move from 3 times their historical norms to even 2 times their historical norms, a full 10 years from now. The arithmetic is fairly simple. The annual gain in the S&P 500 over those 10 years would average (1.04)*(2.0/3.0)^(1/10)-1 = -0.1% annually. That means that the S&P 500 Index is likely to be no higher than it is today, even if market valuations a decade from now still stand at twice their historical norms.
The same calculation, assuming valuations merely touch their historical norms a decade from now, would be (1.04)*(1.0/3.0)^(1/10)-1=-6.8% annually. A dividend yield of 2% annually will not be nearly enough to prevent a decade of negative S&P 500 total returns. Link
We’ve seen nothing yet.... wait for the USA Repo market to blow up! Very little narrative On here on the billions being pumped into the US debt market which is inflating the US stock market to even greater high’s! What will happen to the worlds financial system then?
We’ve seen nothing yet.... wait for the USA Repo market to blow up! Very little narrative On here on the billions being pumped into the US debt market which is inflating the US stock market to even greater high’s! What will happen to the worlds financial system then?
Westpac's forecasts February 2019. Everyone can change their outlook
https://www.westpac.co.nz/assets/Business/Economic-Updates/2019/Bulleti…
https://www.interest.co.nz/property/98057/westpac-economists-change-the….
RBNZ will cut OCR in 2020, as NZD reaches parity against its cousin, and GDP remains too low, with historically low housing turnover irrespective of any house price increases or OCR setting . Although inflation numbers may surprise this week given the rise in fuel and household prices , the RBNZ will look thru it .
I don't see it as anything other than inflation. Remember that CPI is only one gauge and focuses on a general increase in prices rather than the actual increase in costs felt by the typical household. It'd be nice if bank economists were more critical and rigorous rather than talking their own book.
Oliver Hartwich ( NZ Initiative ) says that high house prices are not a sign of success ... but are a failure by authorities ...
.... Hugh Pavletich ( Demographia co-author ) reiterates that land restriction is the problem , still not adequately being addressed , except around Christchurch . ... " affordable " homes cannot be built on expensive sections ...
cmat you are missing something! All our politicians have their wealth in property. Property is where wealth ends up in any society.
The ultimate goal of people with an accumulation of many properties is to ultimately sell them and put the proceeds into one big mansion in a top-notch suburb. This will then tell the world that they have made it and are thus entitled to a high status within that society. Read up on your evolutionary psychology and sociology.
Silly me.
I've only read up on behavioural finance (including investment behavioural biases) and every debt crisis in history.
And deduced that they are always, in essence, driven by the the belief that excess returns will continue into perpetuity.
Hubris sets in and ultimately SHTF.
This time is no different. SHTF is the inevitable, inescapable conclusion.
But anyway, what useless information to study.
Having just renewed a maturing one year BNZ TD at 3.55% for a new rate of 2.6% I'm hoping not too much more, but ask yourself, "How much political gain is there in protecting a financially comfortable Boomer as opposed to keeping the market bouyant and the mortgage belt solvent?". I reckon I'm stuffed.
Don't they go hand-in-hand?
You're(/your generation is) financially comfortable because the mortgage belt is solvent?
Without the mortgage belt being solvent:
- house prices collapse;
- credit liquidity completely dries up so no one is able to buy your(/your generation's) big old houses for the prices you've come to *expect*; and
- your(/your generation's) relatively comfortable retirement plans go up in smoke.
You're only able to be relatively apathetic about low interest rates *because*:
a. the mortgage belt is solvent; so
b. you feel financially comfortable given the (tenuous) "value" of your assets.
And, not to mention, Boomers are the largest voting demographic... so there is much, *so* much, political capital at stake in maintaining the status quo.
They do go hand-in-hand but lets not forget the Boomers' children also have a stake in this as they will inherit our property. It will take a brave government to take on our voting block. BTW we renewed the TD as there is nothing available in our local market to buy. The paucity of listings is very noticeable. I'm not sure when it will change.
What an amazingly Kiwi state-of-affairs to be adamant about maintaining.
Kids, don't worry about getting ahead through intellect, endeavour and work-ethic... your future is all predicated on ensuring you preserve your parents' property-based wealth. Which you can be sure:
a) They will definitely not p*ss away in retirement, because they will definitely be able to live solely on the ~2% yield (before tax) they are getting on TDs... and for longer given their increasing lifespans... and it will cover any care they almost certainly will require at the end; and
b) Will definitely be a sufficient wind-fall to maintain your lifestyle after it gets divvied between you and your siblings.
And then you'll be in the privileged position to sink all of it, every-last-dollar, back into a deposit on property and leverage yourself up as much as possible.
Don't worry about needing any other investments.
Just keep this same system going for the next generation to pick up the pieces.
...
That's exactly the spirit that this country was founded on.
Just training home on the eastern line, it's ridiculous how few apartment towers there are through the inner suburbs.
A mid sized city aspiring to global city status needs to be freeing up central high density housing much more than it is!
I'm thinking of comparable population sizes in Kobe and Fukuoka in Japan when you mention this. High-density everywhere but not as dystopic as older NZers tend to think it is. In the case of Kobe, you can even have the rural lifestyle and still be 30 mins from the city center by train. Also, the nearby Ashiya is supposedly one of the highest net worth neighborhoods in Japan and I'm sure you could find a lovely "house" for under NZD1 mio.
Ah the planners lament.
Why doesn't everyone live in an apartment by a railway station. Why doesn't this utopia exist? Why won't the private sector do what the council planners 'know' to be right?
I'll tell you:
1) Building up is HUGELY expensive. Once you get above about 4 levels, the engineering required is prohibitively expensive.
2) Councils make these sorts of developments a nightmare to complete. Jumping through all the various regulatory hoops is just too risky, too expensive and too exhausting for most.
Ask yourself this: If building highrise apartment blocks was a profitable activity, why are very few of these going up?
If there was money to be made doing this, it would be done all over the place.
Only Economy in NZ is housing economy and as house prices are jumping by 10% to 20% above CV again = Rockstar economy.
For the same reason FHB if not already, will be out of Auckland market -earlier also were struggling but had some hope but now NO HOPE to FHB. Sad but true as cannot even dream of owning their own home in Auckland.
Many FHB voted for Labour NOW whom will they vote - may be a new party is creared to exploit the vacuumcreated, as is proved that National and Labour are two side of the same coin. Status Quo to broken but what is the alternate.
You are not wrong. But this is due to actual and serious lack of economic potential in NZ. Primary Industries is were NZ has historically (up to the very moment) been competitive economically on a global scale (e.g. NZ can produce milk, wool, meat, some fruits etc far cheaper than most other places). Primary industries are fully mature (if not declining due to the serious and adverse environmental impacts they had, specially to NZ fresh water).
With so much global competition on primary products, ever increasing production costs and most importantly loss of protected markets (like the UK), the added value of primary industries for NZ as whole has been declining. No other industries have come even close to off setting this lost prosperity, let alone surpassing it. Yet all of us expect better times than before.
Even if all properties were at half the price that they are today, we would have had the exact same arguments. New Zealand is on the path of economic decline and all these are just symptoms of this illness. You can never heal this illness by focusing on the symptoms.
You are bang on - Correct.
The only reason now everyone is feeling that economy is sound is because of rising house price and everyone forgets that the very reason that the interest are at near to zero level and fed pumping money like crazy in itself indicates how bad the economy is and everyone is trying to delay the Inevitable quarter by quarter.
Can we say that the economy is sound by artificially raising the stock market and housing sector with cheap and easy money.
Bloodbath is inevitable and will be worse that anyone has ever experienced just like zero and negative interest ( no one could have imagined it earlier) though cannot say when but anyone who follows economy knows that healthy and strong economy can never be without it cycle - up and down.
It is a ticking time bomb.
Well remember the flow of dodgy overseas Chinese money got switched off rather abruptly by their Government and NZ, Oz and Canada have had serious withdraw symptoms ever since 2017, hence why mortgage rates are falling to keep property prices a float. A similar thing could happen to main stream credit when rates get too low.
Yes the smurfing has receded in the last few year since their government cracked down on money transfers. I've included a link for those who don't know what this is (Not just happy little blue men in bobble hats). What is 'smurfing'? BBC News: https://www.youtube.com/watch?v=IFwlK3uv3Pg
This from an economist whose bank got caught laundering money. They have the satisfaction of saying things like house prices will go up and they of course will benefit from the fear of missing out, which will boost their profits to be able to pay for their fines .
Oh Westpac are trying some high risk moves at the moment, this is why I moved all my funds away from them. Apparently Westpac are now getting in to what looks to be "shadow banking", via a new outfit called CFML a non-bank lender which is "targeting borrowers turned away by the major banks as traditional lenders maintain tight credit conditions".
What could go wrong???
Westpac March 2018 " In our view the “good times” for the market are going to
end very soon. We are forecasting "
August 2018 "We expect mortgage rates will rise in the 2020s, and when that happens house prices will take a hit. We are forecasting a house price decline of almost 3% for 2020."
Westpac 2018 – "Mortgage rates are more likely to rise than fall"
Yvil , show any occasion that I have ridiculed Westpac's forecast of 7 percent house price growth in 2020. I would add that I was the only commentator to forecast in December of 2018 that the RBNZ and RBA would cut their respective OCRs in 2019, from which I have profited greatly , something our Westpac experts did not.
To remind you of ridicule
by Yvil | Fri, 04/05/2018 - 13:36
"So be brave and let the great depression happen, it's the purge the whole system needed. It's much better than the long slow downward spiral we're on now, which will still lead to a depression"
It is funny how the grumpy old boomers who have owned rentals for 25 years or so are telling people to get in the market now. That’s as bad as the Members of Parliament doing nothing to help slow down housing inflation as many of them have multiple properties themselves.
The bubble is getting bigger and now one only hopes that fed keeps on throwing free and easy money in the system for IF anytime the bubble burst will be bloodbath. Hopefully never happens in one's lifetime from here on.
Question is can economy be one way street with no ups and down. How long ?
Auckland price rise 2019? About 2%
Sales down - 5.7%
3m sales up 13.3%
I really see no reason for median in Auckland to rise in 2020. But above $1.5m it probably will looking at Dec splurge above CV in NSC and AC. Affordability In lower brackets has no where to go but worse
I see plenty of reason for the median to increase in 2020.
It's a thing called 'confidence'. It's starting to ride higher and can't be underestimated in any market.
I think FOMO has returned in the last few months too.
For the record- I don't think this will be a long sustained boom, I think it will die out within a year
I see the nationwide affordability number is getting up there, to severely unaffordable:
"Research group Demographia's annual housing affordability survey shows that New Zealand has a 'median multiple' of 7, or seven times the median income for a median house – up from 6.5 the year before."
https://www.stuff.co.nz/business/118831756/rising-regions-make-nzs-hous…
Christchurch is the best housing market in NZ, I have been saying this for years.
When you can invest in a great home that will return you a positive return and returns continue to get better.
When you can get a great positive income of 6 figures and great capital gain from buying right in ChCh p, why wouldn’t you?
Prices won’t always be as reasonable as ChCh is going to be the city of choice in Australasia in the next few years and percentage wise is faster growing than Auckland!!!
Is housing really considered a boast to the economy, as house prices are artificially high due to some unique circumstances, largely low interest rates and a lack of supply due to record immigration.
So this article says to be that because peoples house prices are increasing so much, they feel richer, and will therefore spend more. That maybe true, but the country shouldn't be happy about that as it just creates problems further down the track as house prices get too high for anyone to buy, and they will then have to drop. We should be avoiding the risk of them dropping, because that will likely create major problems. The lack of a capital gain tax and taxing people for owning multiple properties, when investors are buying 1 in 4 houses, just shows how good property investment has had it.
The ironic thing is that the house someone is living in, is making more money per year, than what the owner is making per year. This is also unproductive money it is making out of thin air.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.