Following painfully high global inflation that’s set the tone for expectations at home, Kiwis have become paralysed on the residential real estate bench, waiting to see how volatile economic conditions play out.

But for the first time in many months, recently released quarterly inflation data shows consumer prices have increased below market expectations and significantly, much lower than what was anticipated by policymakers at the Reserve Bank of New Zealand (RBNZ).

Rising 1.2 percent in the March quarter and 6.7 percent in the past year, commentators now note consumer prices look to have peaked, but what does this mean for residential transaction activity?

HOMEGROWN

While still above the maximum sustainable level outlined by the RBNZ, the key message is that core inflation is no longer pushing higher. However, worrying local signs persist.

Food prices are up an enormous 11 percent year-on-year – reflecting some of the highest consumable inflation we have seen since the late 80s.

Crucially, non-tradeable (or domestic) prices have increased 1.7 percent in the March quarter and 6.8 percent over the last year, which contrasts against the prices for imported goods, which are tracking lower and have been the key contributor to more pleasing recent results.

This shows that domestic inflation – controlled by our policymakers and Government – continued to gather momentum in the three months to March and may prove harder to shake than initial data suggests.

SMALL STEPS FORWARD

Domestic inflation pressures, including business operating costs, labour, wages and output, remain the most important part of recent inflation data and a key contributor to the RBNZ’s monetary concerns.

However, a relaxation of migration policy has provided a significant recent boost to the labour market, with the addition of many new healthcare professionals, including chiropractors, social workers and councillors to the ‘green list’ for New Zealand’s work-to-residence and straight-to-residence visa schemes.

Previously, this category was reserved for the upper echelon of professionals, given its permanent residency offering, which also allows a candidate’s partner and children entry into New Zealand with full rights to education, health and welfare.

The change in immigration policy provides a significant supportive demand factor for the residential housing and rental markets, particularly across regions where the housing supply is currently stressed.

ALL TOGETHER NOW

Kiwis in Australia recently received a boost from strengthened residency provisions. At the same time, New Zealand’s population continues to grow, we expect to see some offsetting effect from a loss across the ditch.

While the effect of this remains to be seen, New Zealand’s domestic population has risen by almost one percent in the year to February, requiring by some metrics, an additional 19,000 new homes.

In addition, sharply falling house-building activity further exacerbates demand fundamentals, and a shortage of homes resulting from recent cyclone damage plays a key role in upward rental pressures.

Despite the RBNZ’s recent move to raise the Official Cash Rate (OCR) by a larger-than-expected 50 basis points (0.50 percent) in April, the chances that it will need to be raised again at the next meeting in late May have declined.

Lower inflation expectations continue to buoy consumer sentiment. While too early to indicatively say recent inflation data has provided a boost for housing market activity, Bayleys expects the building backlog of residential buyers will take their opportunity to act with renewed enthusiasm over the coming pre-election months – before migration, easing mortgage lending rates and the supply-demand imbalance reappear to motivate the masses.