House prices stabilised earlier than RBNZ expected

“While the outlook for house prices is highly uncertain, they are now assumed to have reached a trough earlier than was assumed in the May statement,” the statement said.

But house prices are still significantly below their previous peak, substantially decreasing household wealth.

“The earlier-than-expected stabilisation in house prices is assumed to support household consumption over the next three years, somewhat offsetting the dampening impact of overall lower house prices.”

But house prices are still significantly below their previous peak, substantially decreasing household wealth.

RBNZ is now assuming house prices will “grow gradually over the next year before increasing at a slightly faster pace in nominal terms over the remainder of the projection,” which is out to the September quarter of 2026.

RBNZ now forecasts the OCR will be at 5.6% in the March 2024 quarter, up from May's forecast of 5.5%, and by the June quarter 2025 it will be at 5.4%, up from May's 4.8%, before falling to 3.8% in the June quarter of 2026, up from May's 3.3% forecast.

By the September quarter of 2026, RBNZ expects the OCR will be at 3.4%.

Surging immigration

That stabilisation has coincided with stronger net immigration but RBNZ thinks this may be less inflationary than it was before the covid pandemic because of its positive impact on easing pressures in the tight labour markt.

Pre-covid, the largest share of arrivals was from Australia but post-covid, the largest share of arrivals are coming from India, China and the Philippines with fewer people from Australia and Britain arriving.

An RBNZ paper published in 2013 found that arrivals from Britain and European countries “tended to have more inflationary effects on house prices than arrivals from Asia.”

But because departures from NZ have been only slightly higher while arrivals have been much higher since covid, that is likely to put upward pressure on house prices.

Falling housing demand has led to reduced home building over the past year with higher interest rates making residential housing development less attractive.

“The number of new residential building consents has fallen over recent quarters, indicating a substantial slowdown in residential building activity ahead,” the statement says, adding that high construction costs are also depressing activity.

“Business contacts have suggested that these factors have led to a large decline in development pre-sales, which will lead to a significant reduction in residential construction over the next year.”