Latest Zealand’s economic recovery is proceeding, but may not rely on the traditional driver of rising house prices, according to economists. Although most forecasts predict house price increases of less than 5% this year, some anticipate even smaller gains.
Michael Gordon, a Senior Economist at Westpac New Zealand, has been examining whether sustained economic recovery is possible without the boost typically provided by increasing property values. He noted he’s encountered skepticism regarding this possibility, but believes it is already partially unfolding. “Retail spending has consistently risen over the last five quarters, at a time when house prices were effectively flat,” Gordon stated in a recent report. “But it’s not certain that this can be maintained in the face of what are some still-subdued house price expectations for the year ahead.”
Gordon’s research points to a shift in the dynamics of the “housing wealth effect.” He suggests that the effect is less about actual wealth gains from property and more about expectations of future income. Both spending and house prices, he argues, are driven by these income expectations. Historically, rising house prices encouraged spending as homeowners felt their property was effectively saving for them.
“We’ve noted in the past that there has historically been a strong relationship between housing wealth and household spending in New Zealand, and arguably stronger here than in other developed economies,” Gordon said. “But the relationship doesn’t hold all of the time, and especially not in more recent years, as Covid and the subsequent policy responses have led to significant volatility in both house prices and consumption.”
Lower interest rates are too contributing to economic activity. Retail sales volumes increased by 0.9% in December, exceeding expectations. Gordon’s analysis suggests that expectations of rising incomes are prompting increased spending and, influencing house prices. The extent of the impact on house prices, he added, will depend on the responsiveness of housing supply, which has historically been limited but is showing signs of improvement.
“All of this is not to say that housing wealth effects don’t exist. But their impact may be in amplifying the economic cycle, rather than being an essential driver of it,” Gordon explained. He forecasts spending growth of 3% to 4% over the coming year, which he believes is achievable given the economy’s remaining capacity.
Shamubeel Eaqub, chief economist at Simplicity, acknowledged that some regions have already experienced economic growth independent of house price increases. However, he cautioned that New Zealand’s economy is heavily reliant on the residential property market. “The residential property mortgage market is such a big source of capital into any kind of investments that we make. If house prices are not increasing, we just have less capital to invest. And that’s including in businesses,” Eaqub said.
Eaqub noted that modest businesses often rely on borrowing against their mortgages for growth, which could be constrained by stagnant house prices. Despite this, he believes growth is still possible, pointing to historical periods of economic expansion that occurred before the recent housing boom. He also highlighted that much of the recent economic downturn stemmed from rising costs of essential goods, reducing disposable income.
“There’s a whole bunch of pent up demand to do things… to do operate on your homes, to replace things, replace the car, invest in your business,” Eaqub stated. He also pointed to positive developments in the agricultural sector, including strong wool prices and dairy payouts, as potential catalysts for growth. However, he emphasized the crucial role of bank lending in sustaining the recovery, noting that the quantity of credit available is a significant unknown.
Eaqub also observed that the economic impact of the downturn has not been uniform, with some individuals and businesses possessing the resources and plans to invest despite the challenging economic climate.
