Weakening housing market will "loom large" over Auckland; Otago will outperform all others, report says
Economic growth will weaken in all regions in New Zealand in 2023, but Otago will fare better than the rest, stimulated by foreign tourism and meat farming.
This was according to Westpac’s Regional Roundup outlook, which also found that Auckland will be the hardest hit by the weakening housing market.
Paul Clark, Westpac industry economist, said returning tourists, in large part, “should continue to boost the coffers of retailers, hospitality providers, and tourism operators over the coming months” in Otago, NZ Herald reported.
“While Australia will continue to be the main source of visitors, we expect that higher-spending long-haul travellers from the Northern Hemisphere will make up an increasing proportion of those visiting the region,” Clark said.
Meat farming is also expected to support activity in Otago.
“Prices are set to drop in the short term but should edge higher over the second part of the year as demand in key export markets recovers and global supply remains relatively tight,” Clark said.
Though one of the nation’s most improved regions this year, Clark noted that Otago was coming off a low base.
“Card spending by foreign visitors in this big tourist region is now back to pre-COVID levels,” Clark said. “The region’s meat farmers have remained profitable … farmgate incomes have also benefited from a supportive NZD exchange rate.”
He said it’s the regions with high exposure to export markets that generally fare better.
“Worst affected are likely to be regions that have a higher proportion of interest-rate-sensitive investors or who might have previously recorded big house price gains off small volumes,” Clark said. “Auckland tops that list followed by the Manawatū. Wellington also features because it has already experienced a significant loss of household wealth due to falling house prices.”
According to the report, economic activity in Auckland this year was mixed, with signs of easing becoming increasingly evident.
“The region’s weakening housing market looms large in this regard,” Clark said.
The latest REINZ numbers showed Auckland house prices dipped by just over 18% or $235,000 from the end of November 2021 to the end of last month – a big turnaround from the 24% rise between November 2020 and November 2021, NZ Herald reported.
Nationally house prices were down by $115,000.
Clark also said a weaker housing market had weakened the incentive to build.
One bright spot was that retail spending in Auckland continued to rise this year.
“Although much of that reflects rising prices,” Clark said. “By contrast, retail sales volumes have effectively moved sideways over the past year. The level of retail spending has been supported by the return of foreign tourists to the region, with accommodation providers, restaurants, bars, and cafes, particularly in the city, reporting higher sales following the opening of the borders and the relaxation of social distancing requirements. Spending by foreign visitors in New Zealand’s largest tourism region is now within touching distance of where it was pre-COVID.”
Looking forward to 2023, higher debt servicing will put more pressure on household spending while rising cost of living will further squeeze household spending power.
“A high proportion of mortgage holders [are] due to refix at much higher interest rates in the year ahead,” Clark said.
According to Reserve Bank figures, the average fixed rate mortgage was still just 3.68% as of August.
The successive OCR hikes, however, have seen some of New Zealand’s major banks lift their mortgage rates to over 7%.
“The effect on households will be exacerbated by falling house prices,” Clark said. “We continue to expect that Auckland’s housing market will underperform the national average, largely because of relative price differentials and the fact that interest-rate-sensitive investors make up a larger proportion of property purchasers in this region. Over time, the slowdown in spending is expected to result in a softening of the region’s labour market, as businesses pull back on hiring and unemployment edges higher from near record lows.”
The report forecasted growing tourism numbers, particularly over summer, to continue to bolster hospitality’s comeback.
In Wellington, the outlook was also murky, dragged lower by expected household spending as well as a softening of the region’s labour market.
“The big negative has been the performance of the region’s housing market,” Clark said. “House prices in Wellington have dropped further than in any other region in the country and are now back to where they were in late 2020. Sales volumes have also fallen but may have bottomed out in recent months.”
Activity should also be continued to be backed by the government’s ongoing legislative/regulatory programme.
“That will continue to drive employment in public administration services as well as supporting industries,” Clark said. “The return of foreign visitor arrivals should also provide a timely boost.”
In Canterbury, economic activity remains upbeat and is tipped to “outperform the other big metropolitan centres,” while continuing to slow overall.
“A key point of difference for this region has been the performance of agriculture,” Clark said. “Meat and dairy farming should support activity in the region. An expected increase in foreign tourists who use Christchurch as an entry point into other South Island regions should provide some cheer to local retailers and hospitality providers. That, though, will not be enough to offset the drop in spending elsewhere in the region.”
Waikato’s economy should continue to be supported primarily by dairy and meat farming.
“Similarly, building activity should remain elevated for a while yet given the large amount of work in the pipeline,” Clark said. “Thereafter, as financial conditions continue to deteriorate, we think that consent issuance will decline and that should eventually lead to a slowdown in building activity.”
Economic growth in the Bay of Plenty has weakened this year as traditional drivers have underperformed.
“Nowhere is that more evident than in the region’s big kiwifruit sector,” Clark said. “Many growers in the region have experienced lower returns due to fruit quality issues caused by labour shortages.”
Economic activity in the region will continue to slow down.
“On a more positive note, forestry owners in this big logging region should see some modest price gains over the coming year as the Chinese economic recovery gathers strength,” Clark said. “Still elevated demand for sawn timber from builders across the country should also support harvest volumes.”
The Westpac economist believed returning backpackers and Recognised Seasonal Employer (RSE) workers should bring a better kiwifruit harvest, NZ Herald reported.
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