Earning power should stop huge house price falls

“We’re simply not forecasting a household income (employment) shock that would necessitate the forced sale of properties and exacerbate the downturn, says Sharon Zollner, ANZ’s chief economist.

She says however, it is entirely possible the bank’s 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 it is forecasting.

“This is where the RBNZ’s inflation-targeting grit may well be tested over the coming year or so. Higher interest rates mean stronger headwinds for the housing market.” Given the strong starting point, we’d still call this a soft landing – something that’s quite evident when looking at the implied house price level.”

The bank’s house price forecast still leaves house prices up a whopping 30% at December this year compared to December 2019, pre- pandemic. In that light, the bank’s relatively pessimistic forecast seems rather optimistic. 

Relative to the past few business cycles, this time may be a little different for the housing market, says Zollner.  

In the past, waning consumer demand - and a softening housing market - was likely enough to halt inflation pressures and for the Reserve Bank (RBNZ) to achieve its targets. “This time inflation has so much strength and persistence the RBNZ will likely need to continue hiking despite softening housing and demand. 

If house owners think the RBNZ has 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 uncertain, but we think this is a risk well worth outlining,” says Zollner. 

ANZ expects multi-decade inflation highs are going to make the RBNZ worried about its inflation-targeting credibility. It is now forecasting the RBNZ to adopt more aggressive rate hikes, with the OCR to reach a high of 3.5% by April next year (previously 3.0%), turbo-charged by a couple of 50 basis point hikes in the near term. 

“All going to plan, that will prevent inflation expectations from becoming unanchored and head off the potential for a damaging wage-price spiral, which would necessitate an even more aggressive monetary policy response later on, if it were to occur, says Zollner.