New Zealand recession – how likely is it?

The Reserve Bank of New Zealand’s monetary policy statement for 2022 took New Zealanders by surprise.

People were not shocked by the historic 0.75% official cash rate (OCR) rise when the RBNZ announced it in November, but the indication that the country’s economic outlook is worse than previously anticipated.

The RBNZ is now forecasting a mild recession in 2023, which the Reserve Bank says is required to start to bring inflation down from the second half of 2023.

CoreLogic NZ chief property economist Kelvin Davidson (pictured above) said the OCR was potentially headed from 4.25% towards 5.5% – perhaps via a 0.75% increase in February 2023 and a 0.5% rise in April.

“This implies further upwards pressure on mortgage rates, at least for floating and shorter-term fixes,” Davidson said. “Assuming a fairly steady margin between the OCR and lending rates, a typical high-equity one-year fixed rate could easily top 7% shortly, potentially reaching 7.5% or more.”

He said higher mortgage rates would limit the pool of potential new borrowers/house buyers, but would also mean a big adjustment for existing borrowers rolling off previously lower fixed rates.

“Indeed, about 20% of existing loans are fixed but due to reprice in the next six months (about 10% in the next three) and 26% set to reprice within a six to 12-month horizon.”

Davidson said in terms of property sales volumes, CoreLogic’s forecasting model – which took in account prospective GDP growth, the change in mortgage rates, net migration and wage growth – pointed to another quiet year in 2023 following New Zealand house prices suffering their biggest drop in 13 years in November.

“After a likely total of around 67,000 sales this year, activity may struggle to get much above 70,000 again next year as the economy weakens, mortgage rates remain high, but rising migration and wages provide some support,” he said.

“Annual sales volumes in a quiet market means house prices likely have further to fall too. Indeed, using the CoreLogic House Price Index as their base, the RBNZ now envisages a total peak to trough decline in property values of 20% by the end of next year. Even after such a significant decline, house prices would still be 15 to 20% above pre-COVID-19 levels.”

Davidson said the RBNZ’s monetary policy statement indicated a peak for the OCR of 5.5% by the middle of 2023, which was likely to be sustained for about a year until potential rate cuts in the second half of 2024.

“The RBNZ also envisages the unemployment rate rising for most of the next two to three years from 3.3% currently to around 5.5% in late 2024, due more to a larger labour force rather than outright job losses,” he said.

“In terms of the property market outcomes, higher unemployment due to a rising labour force is the ‘less bad’ situation – in other words, although it’s not obviously great for prospective new buyers if they can’t find a job, at least if others (existing homeowners) aren’t losing their jobs, it means they should mostly be able to keep servicing their debts and avoid fire/mortgagee sales.”