Taking a breather

Last week we released our latest Quarterly Economic Outlook. If you haven’t seen it already, it’s well worth a read (you can download it here http://www.westpac.co.nz/ business/economic-updates/economic-and-financial forecasts/). The team’s flagship publication, it provides a summary of prospects for the New Zealand economy as well as discussing the outlook for interest rates, the exchange rate, the agricultural sector and delivering an overview of developments in the global economy.

This quarter we titled the publication “Taking a breather”. As we’ve regularly pointed out, a range of indicators of activity in the New Zealand economy have softened noticeably over the past few months. This is important information, but rather than signalling a clear turning point in the New Zealand economic story, we think the slowdown over the last few months will prove to be a temporary phenomenon, in the midst of an ongoing broader economic upswing. Granted, the New Zealand economy is probably on a path which will eventually lead to a sustained economic slowdown, a lower exchange rate, falling house prices and falling interest rates. But with the construction boom set to peak, such a scenario remains a few years off yet.

One sector of the economy has already taken a breather and entered a recovery is the housing market. Having slowed substantially since late last year under the weight of the Reserve Bank’s restrictions on low equity lending and rising interest rates, most recent data show renewed signs of life. Last week the REINZ reported that the volume of house sales in July edged a touch higher for the second straight month (led by solid gains in Canterbury, Wellington and the Waikato). And the week before the Quotable Value Residential Price Movement Index, our preferred measure of house price trends in the market, showed a 2.3% increase in the three months to July compared to a 0.1% rise over the first three months of the year. Other market gauges, such as days to sell or available listings all suggest that a “sellers’ market” is developing, if only very slowly.

A modest, and ultimately brief, revival in the housing market around mid-year is something we have been foreshadowing for a while. Net migration soaring towards record highs (we’ll get another monthly update this week but there appears to have been little to change the attitude of Kiwis opting for NZ over Australia), banks becoming more comfortable with the LVR restrictions and undertaking more low equity lending, and competition in the sector pushing some fixed mortgage rates below where they were when the RBNZ first started hiking rates in March, all support a period of sturdier housing market activity. House prices are on track to rise about five percent this year compared to almost 10% last year.