The bank’s economists say housing market data has come in stronger than expected and on the back of some falls in fixed mortgage rates and the proposed easing of high loan-to-value restrictions, it prompted them to adjust their forecast to 18% based on the OCR peaking at 5.5% next month.
Recent data suggest the floor for the housing market is approaching a little faster than previously forecast, says Sharon Zollner, ANZ chief economist.
She says broadly speaking, housing market resilience appears to be boosted by a couple of key factors:
- Fixed mortgage rates could be close to their peaks, and some longer-term fixed rates have even fallen recently. It’s unclear if the RBNZ will be happy with this development. On the one hand, any newfound strength in housing will likely lead to higher- than-otherwise CPI inflation, but on the other hand, the RBNZ probably has a little more wiggle room than it thought it had given that April’s CPI came in weaker than it was forecasting in February. “If the RBNZ feels mortgage rates should be a little higher than currently, perhaps because wholesale pricing and bank funding spreads are not quite consistent with its assumptions, then it will hike by more to get them there,” says Zollner.
- Net migration has surged in recent months, and if sustained at recent levels could end up leading to materially stronger activity and housing outcomes. Zollner says a working assumption is that after pent-up demand dynamics have played out, net migration will settle at an annual net inflow of around 40,000 in 2023. But if the February pace was maintained for a year, the country would be looking at an annual inflow of 140,000 by this time next year, so the risks look skewed strongly to the upside.
She says increased fundamental demand for housing through migration appears to be occurring just as residential construction activity is slowing.
That’s monetary policy in action. “It’s what’s needed to take the heat out of the economy and get inflation lower, but it isn’t great for New Zealand’s housing supply-demand balance, particularly if migration does surge to new highs.”
Meanwhile, housing anecdotes have been mixed. Zollner says there are still plenty of tales from the coalface about the negative impacts of higher mortgage rates on demand.
There has also been the odd anecdote suggesting first-home buyer interest might be picking up in some areas. “That makes sense if would-be buyers believe rates don’t have much further to rise - or are at the peak - house prices don’t have much further to fall, and job security is intact,” she says.
“Of course, these same would-be buyers should be aware that monetary policy tends to impact the labour market with a considerable lag, meaning job security and household incomes are likely to deteriorate to some degree in the period ahead.
“In addition to that, although inflation is falling, it’s still entirely possible that it doesn’t fall as far or as fast as the RBNZ is expecting, representing upside mortgage rate risks. And if rates are falling rapidly, it’s probably because unpleasant things are happening to the economy. So even if the housing market does find a floor earlier than expected, we still see limited scope for prices to surge higher anytime soon.”
Those animal spirits keep knocking
Zollner says lastly, it’s important to note that ‘animal spirits’ in the housing market can get very wild, and these are extremely difficult to capture in a consistent way in econometric modelling – which is at the end of the day largely why economists are so bad at forecasting the housing market.
“Ultimately, house price forecasts require a decent dose of judgment on top of any ‘fundamentals’ view. And we are aware of the possibility that we’ve got this wrong - we’re just not sure if we’re too pessimistic, or too optimistic.
“As the eventual floor in housing approaches, we are becoming wary that there’s a potential cohort of would-be buyers out there, waiting to get in at the low point. The irony is, if they do this in droves and housing picks up steam, it'll probably stoke
CPI inflation along the way, and if the RBNZ deem that to be premature and inappropriate, it’ll likely lead to a renewed round of OCR hikes and an eventual renewed downtrend in house prices.”
Zollner says so while animal spirits may well surprise the outlook, the RBNZ has the tools to tame this beast if needed, no matter how wild it gets.