Homeowners are being warned by economists at the country's largest bank that they shouldn't expect the Reserve Bank will intervene to stop house prices falling too much.
In their latest NZ Property Focus publication, ANZ chief economist Sharon Zollner, senior strategist David Croy and senior economist Miles Workman say that relative to the past few business cycles, "this time may be a little different" for housing market participants.
"In the past, a waning demand impulse (and softening housing market) was likely enough to halt inflation pressures and for the RBNZ to achieve its targets," they say.
"But this time inflation has so much strength and persistence that the RBNZ will likely need to continue hiking despite softening housing and demand.
"That is, if housing market participants think the RBNZ have their back and will act to prevent house prices from falling too much, they may be unpleasantly surprised (if inflation remains well in excess of the 1-3% target band for too long that is). It’s all very uncertain, but we think this is a risk well worth outlining."
Inflation hit an annual rate of 5.9% as of December and seems likely to get up around 7% in the first half of this year despite the Government's recent move to temporarily reduce petrol taxes.
The ANZ economists recently forecast that the RBNZ would hike the Official Cash Rate to 2% (from 1% now) by the end of May and see it reaching a peak of 3.5% in April next year. They now see house prices falling 10%.
They note in the latest publication that this would be a similar-sized contraction to the one following the Global Financial Crisis of 2008.
"But given the very strong starting point, we’d still call this a soft landing – something that’s quite evident when you look at the implied house price level (below). Indeed, our house price forecast would still leave house prices up a whopping 30% come December 2022 compared to December 2019 (ie pre-pandemic). In that light, our relatively pessimistic forecast seems rather optimistic."
The economists say that household incomes are "preventing" them from forecasting a much greater decline, say 20% or even 30%.
"We’re simply not forecasting a household income (employment) shock that would necessitate the forced sale of properties and exacerbate the downturn."
But they have a 'however'.
"However, it is entirely possible that our outlook regarding household incomes and broader economic momentum is on the optimistic side, and that the path towards taming inflation passes through a more marked economic slowdown than we are forecasting. This is where the RBNZ’s inflation-targeting grit may well be tested over the coming year or so."
Noting the recent slowing in the housing market, Zollner, Croy and Workman say "key indicators" of forward momentum suggest there’s more slowing to come.
"The number of days it is taking for houses to sell is lifting, sales are trending lower, and listings are on the rise. Some of it might be Omicron disruption, but we suspect the majority of it represents a fundamental shift in the market."
But they say that with CPI inflation intensifying, it’s their forecast that the RBNZ will continue lifting interest rates even as economic momentum (and housing) fade.
"That’s a dynamic that may surprise some kiwis, but central banks must defend their inflation targets (and credibility) at all costs. It may not take much for our expectation for a relatively soft landing in housing to surprise on the harder side."
In terms of mortgage borrowers the economists say they think borrowers ought to continue to "brace for higher rates".
"Fixing for longer now still costs more, but that may be preferable to fixing at the lowest rate now, only to roll on to a much higher rate later on. But no strategy is without its risks, given heightened global uncertainty."
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