Putting it on the house

In the last week we’ve received news on household spending and the housing market – two areas which are typically closely interlinked. While household spending looks to have made a firm start to 2017, the housing market has had a weak start. We’re forecasting house price growth to slow this year, and we expect that growth in household spending will follow suit.

In New Zealand there’s typically been a close relationship between growth in house prices and consumer spending. That reflects the importance of housing as a major portion of the wealth of New Zealand households. When house prices are rising and the market is turning over rapidly, Kiwis feel more inclined to borrow against some of that wealth and spend it. That means the housing market plays an important role in New Zealand’s economic cycles, and therefore has important implications for the outlook for inflation and interest rates.

Over the past couple of years we had been surprised by the extent that the linkage between house prices and spending appeared to soften. House prices accelerated in 2015, while growth in per-capita spending slowed to a crawl. Some of the divergence may have reflected the narrow scope of house prices growth across regions, with gains dominated by Auckland over that time.

But the latest GDP figures showed a marked acceleration in household spending through the middle of last year. And along with substantial upward revisions to historical data, it now looks like the relationship between house prices and spending is alive and well. So with history now squaring up a little better, where to from here? Last week’s data provided mixed signals on where we might be heading this year.

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