Westpac economists see the net inflow of migrants into the country hitting 33,000 by the second half of next year

New Zealand's "wildly varying" net immigration rate is likely to peak with an annualised net growth of 33,000 by the second half of next year, Westpac economists believe.

The country saw its biggest monthly net inflow of migrants for 10 years in September, with the net gain of migrants passing 15,000 for the 12 months to September.

The Westpac economists said monthly net immigration had been above 2000 for three of the past four months, and above 1000 since March.

"The last time we had a similarly strong run was back in 2009," they said.

Following the Global Financial Crisis there was min-boom of net migration gains as many Kiwis stayed at home, culminating in an annual gain of over 22,500 people.

The Westpac economists said the reasons for the current gains were similar.

"Back then [2009], Kiwis stayed home as overseas work opportunities dried up following the Global Financial Crisis. This time, it’s the winding down of the Australian mining boom and the resulting drop in Australian business confidence that’s caused offshore job prospects to wane, and departures of New Zealanders to Australia to decline."

The economists said, however, that the latest migration upswing was likely to be bigger and last longer than the 2009 "boomlet".

"We now expect it to peak at an annual rate of 33,000 by the second half of next year, as Australian unemployment continues to rise and the Canterbury rebuild continues to attract overseas-based workers into New Zealand."

History shows

To give historical perspective, the highest net inflow of migrants was 42,500 recorded in the year to May 2003, while the biggest net outflow was 43,600 recorded in the 12 months to July 1979.

The Westpac economists said that historically, an extra 10,000 migrants had meant around 3% extra house price inflation.

"In other words, migration is turning from a drag on the housing market to a significant supportive factor.

"This is one reason why we expect house prices to keep rising next year (albeit at a slower pace), despite the headwinds of lending restrictions and recent rises in fixed-term mortgage rates."

The Reserve Bank has introduced "speed limits" on high loan-to-value lending principally to protect financial stability but also with the aim of dampening the housing market.

The RBNZ has estimated that the LVR limits, imposed from October 1, might knock between one and four percentage points off the rate of housing inflation in a year, while official interest rates might need to be about 30 basis points lower than otherwise would be necessary.

Worried about rises

The RBNZ has been leery of raising interest rates because of concerns about the high Kiwi dollar and the prospect that rate hikes would force the value of the dollar still higher.

But the central bank is nevertheless forecasting that it will need to raise rates from next year onward, possibly lifting the Official Cash Rate by as much as two percentage points (from the current 2.5%) by 2016.

The Westpac economists said they were now are starting to doubt the idea of a March OCR hike, "which has been our forecast since April this year and is now priced in by markets".

"The recent appreciation of the exchange rate looks as though it will be maintained, and our long-held view is that the housing market will slow in the final months of this year. Under those conditions, the RBNZ would choose not to hike in March, despite the strength of the domestic economy. Subject to confirmation that Thursday’s OCR review is along the lines we expect, we are therefore likely to shift our call to forecasting an April 2014 start date to the OCR hiking cycle."

But while that might seem good news, the Westpac economists think that longer term the RBNZ is still likely to push rates higher than the central bank currently hopes it will need to.

How much?

"For markets, almost as important as the start date of the OCR hiking cycle is its extent. Everybody agrees that the OCR will have to rise to its neutral level or beyond. But that begs the question: what is the neutral OCR?

"The RBNZ gave a speech a couple of weeks back contending that the neutral OCR had fallen from 5.8% in the mid-2000s to around 4.3% today. We issued our own take on the neutral OCR in a bulletin last week. We agree with the idea that the neutral OCR has fallen to around 4.3% today.

"However, we make the additional point that neutral is not a static concept. There are very good reasons to expect the neutral OCR will rise over the next five years, including higher inflation expectations, falling bank funding premia, lower global population growth, and possibly even a reduction in the intensity of global preferences to save.

"We are working off the assumption that the neutral OCR will rise to 5% by 2018. If the OCR has to rise a little above neutral to control the inflation consequences of the huge Canterbury rebuild, that implies a peak OCR of 5.5% – on our current forecast, we’ll reach that level at the end of 2016."