Not out of firepower yet

Evidence of the current slowdown in the NZ economy continued to trickle in last week. Data showed further sluggishness in household spending with news that retail card spending fell 0.1% in July. Core spending (excluding fuel and vehicle spending) was even weaker than this, down 0.5% in July and essentially flat since the start of the year.

One factor that has weighed on retail spending this year has been the slowdown in the housing market. Annual house price inflation fell from 3.6% a year ago to around 0.9% now. And measured across New Zealand as a whole, June was the first quarter of falling house prices since December 2010. This weakness has weighed on consumer spending, with spending on durables particularly weak.

Our view, however, is that the housing market won't stay this weak forever. Wholesale interest rates have fallen dramatically in recent weeks and this is being passed on via another round of reductions in mortgage rates. For our part, we are steadfast in our view that these lower interest rates will have consequences, most notably in the housing market. We're forecasting annual house price inflation to 7% next year from about 1% now.

With such a significant turnaround predicted, we've been closely examining housing market data to assess how this forecast is panning out. Last week REINZ data showed seasonally adjusted house sales fell 5% in July after a 9% increase the previous month. Accounting for usual delays in some sales being reported it's probably a bit stronger, more like a 2% fall. While that's still softer than June sales, it is still well up on the March lows. While not conclusive, for now we're happy to say that house sales have been gradually improving over the last couple of months, although a more definitive assessment of the trend can't be made for a few more months yet.

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