The latest set of economic data has shown surprising strength is a double-edged sword – with New Zealand avoiding a technical recession. Still, that fact requires a prolonged and higher rate tightening cycle from the Reserve Bank (RBNZ).

Quarterly Gross Domestic Product (GDP) data from June shows the economy grew 1.7 percent, which was significantly higher than the median market forecast of a one percent rise in activity.

The reading has seen several of New Zealand’s big four banks revise forecasts for the Official Cash Rate (OCR), and markets are now pricing in a peak OCR of around 4.34 percent by the mid-year point of next year.

These recent changes show just how difficult the inflation monster is proving to contain – and observers say the central bank has their work cut out for them with an extremely tight labour market working in conjunction with solid wage growth that’s having an offsetting impact on rapidly rising mortgage lending rates.

Consumer confidence surveys show Kiwis are feeling rather downbeat about their economic prospects. However, the data doesn’t match what we see on the ground.

Signs of warmth were visible in housing market data from August, with monthly sale volumes increasing ever-so-slightly to reflect an early increase in activity.

This has been led by the first home buyer market, with participants understanding that even though fixed mortgage rates have risen some three percent in the past year, they’re still amongst the lowest levels over the last 30 years.

Building and construction activity has also continued to hit new heights over the last month, with the Value of Building Work Survey by Statistics New Zealand estimating some $5.8 billion worth of new residential work has been added to the pipeline of planned projects.

While the sector is ploughing ahead, determined to deliver welcome housing, the government has run into trouble progressing with its Medium Density Residential Standards (MDRS) – which would see three townhouses of three levels built on most urban sites without the requirement for resource consent.

Several councils across Aotearoa have flagged concerns about the operational components of the MDRS, with the Christchurch City Council recently voting against the government directive to introduce the intensification standards. Critics have said the policy was developed behind closed doors and rushed through with minimal consultation. At the same time, supporters argue councils like Auckland and Hamilton are hiding behind ‘Special Qualifying Matters’ to safeguard existing homeowners against change.

It will be interesting to see whether the government moves to force councils to introduce the MDRS. For the time being, the discord seems to point to little progress and a battle between those who want to deliver affordable housing in urban areas and those that don’t.

In-depth reports:

• In his round of September surveys, including consumer spending and mortgage advisors, independent economist Tony Alexander says households are feeling more hopeful as the chance that New Zealand will see a recession diminishes. Household bank balances are around 21 percent higher than they were pre-pandemic, and the labour market’s strength continue to help Kiwis to feel supported. While results show we are headed in the right direction, there is not yet a discernible trend, and the indication is one of ‘less degradation’ of market conditions rather than a firm upward footing.

• The September edition of ANZ Bank’s Property Focus Report says Kiwis are about two-thirds of the way through the 15 percent forecast peak-to-trough decline in residential values. Despite this, the report notes that transaction numbers tend to be a decent indicator for price momentum, and a more than nine percent bounce in sale volumes according to Real Estate Institute of New Zealand (REINZ) data shows some warmth in the spring marketplace. Stopping short of predicting green shoots for the housing market, the bank says broader economic conditions will continue to dampen consumer demand. The real story will be how far the RBNZ needs to go pursuing a more sustainable trajectory for our financial markets.

• In its Economic Commentary for the end of September 2022, Westpac notes New Zealanders are on a rollercoaster ride as the economy gives with one hand and takes with the other. While benefitting from median weekly wage growth of circa 8.8 percent in the year to June 2022, households are feeling the pinch of higher costs for goods and services – which has seen the Consumer Price Index (CPI) rise 7.3 percent over the same period. The tight labour market continues to provide the upward potential for wage growth. However, sentiment remains relatively low, which has seen retail spending flatten in recent months. These features indicate that Kiwis are cautious with their discretionary spending, especially in the lead-up to Christmas, as some 45 percent of mortgage holders roll onto substantially higher mortgage lending rates the following year.

Topical articles:

• Banking commentator David Chaston has analysed bank margins on one, two, and three year fixed mortgage terms, finding some of New Zealand’s big four banks have insulated borrowers from even faster rate rises. Wholesale swap rates, which dictate retail lending rates, have been rising at a rapid pace recently amidst a backdrop of global economic turmoil. In addition, the expectation that our RBNZ will continue to raise the OCR by 50 basis points at the October and November reviews will likely see mortgage lending rates push higher as the central bank works hard to control persistent inflation.

• In his daily newsletter dated 14th September, economist Bernard Hickey says there is evidence the ‘housing slump’ is over in our main centres. However, the outlook for homeowners will remain relatively benign for the foreseeable future. Structural features of the market continue to provide support for value growth despite rapidly rising mortgage lending rates. These include; the absence of a realistic prospect for capital gains tax that will keep investment demand high; a troubled (or non-existent) infrastructure funding model between central government, local government and the private sector, which is set to blockade meaningful construction of vital infrastructure; the loosening of migration settings which will add further impetus for demand; and wage growth that is outperforming inflation and helping Kiwis to service mortgage debt.

• A new study by the Auckland University Business School explores the effects of ‘touristification’ on rents, noting that short-term accommodation providers like Airbnb are having a disproportionate impact on rental rates, depending on neighbourhood density and proximity to CBDs. The study found the platform helped to increase rental rates in high traffic central city areas, while suburban communities experienced reduced rental incomes. The effects highlight the impact that both domestic and international tourists have on New Zealand’s rental markets and show it is essential that local councils develop policies that manage and regulate short-term accommodation by type and location to ease pressure on suburban services.

• Research firm CoreLogic says housing market data for August suggests first home buyers may have passed ‘peak pessimism’ as their share of the housing market rose to its highest level since December 2021. The data supports anecdotal evidence of early signs of warmth across the marketplace, as buyer and seller expectations become better aligned after a period of uncertainty resulting from rapidly rising mortgage lending rates and an unpredictable outlook for the global economy.

• Observers say policymakers could deliver more affordable housing quickly by changing a rating system discouraging development rather than removing planning protections in character neighbourhoods. Auckland and Wellington, amongst many other councils across the country, use a capital value rating system which has been criticised for disincentivising efficient development and building improvements in high-growth areas. Under a capital value rating system, the more improvements a site has, the higher its capital value, and thus, the rates it owes, which means landowners efficiently using property to provide high-density housing have a much higher rates bill than those sitting on underdeveloped sites. Moving to a land-based value rating system could speed up the supply of infill development by putting vacant land to its best use by levying taxes against the value of land rather than the value of land plus improvements.