Economists share OCR and housing market forecasts
The COVID-19 pandemic has been impacting New Zealand’s economy since it hit the country last year, but what were the impacts of the outbreak in August?
In the latest Westpac Economic Overview, the bank’s economists stated that many aspects of the country’s economy continued to push ahead despite the recent COVID-19 outbreak. Compared to last year, businesses were better positioned to deal with the recent lockdowns, allowing them to continue investing and hiring.
“We expect that activity will return to its previous strong levels as restrictions are eased,” said Westpac acting chief economist Michael Gordon.
By contrast, economist Tony Alexander’s latest survey found that the recent COVID-19 outbreak had caused a significant backlog in developing commercial properties as costs remained high and rising, project leads had to be qualified ruthlessly, and complex or highly competitive ones were declined.
The survey also reported that commercial property investments faced red-hot demand for leased investment property due to low-interest rates. However, it noted a lack of stand-alone commercial property investments, a pause of listings due to reluctance to sell, tenants facing difficulty over paying leases, and owners having unstable businesses.
Read more: Westpac sees slowdown of home price growth over coming months
Westpac economists predict that the official cash rate (OCR) will rise to 3% in the future to bring demand and inflation back down. They also expect house price growth to slow down in the coming months, turning to moderate price declines by late 2022.
“Even so, on our forecasts, it would take several years just to bring house prices back to where they were at the start of 2021,” Gordon said.
Westpac economists’ forecasts have been consistent this month, with the bank’s economic commentary in early November showing that the economists expect “a gradual glide path up to 2% would be enough to keep inflation on target over the medium term.”
They added: “But that is looking increasingly unlikely. We think that the Reserve Bank will need to go beyond a ‘neutral’ level of the cash rate and into ‘tight’ territory, at least for a time, in order to rein in demand.”
In addition, they claimed that higher interest rates, rather than supply-side issues, would have a more significant impact on house prices.
“As mortgage rates rise, we expect to see a substantial slowing in house price growth over the coming months, turning to modest price declines by the second half of 2022,” Gordon said in a previous statement. “Even then, the recent rate of increase has been so dramatic that, on our forecasts, it could take a few years just to get house prices back to where they were at the start of this year.”
