Falling house prices in NZ would push RBNZ to start dropping interest rates again from next year, economist predicts
New research by Capital Economics found that some housing markets are looking vulnerable to “even a modest rise” in interest rates, with New Zealand pinpointed as one for particular concern.
Interest rates “might have to rise only a bit further than we expect to cause more widespread [price] falls” and this “could weigh on the economic growth in the countries concerned and could cause interest rates to start falling again in some places,” said Vicky Redwood, Capital Economics senior economic adviser.
Read more: Ex-ANZ chief economist on the global and local trends likely to affect Kiwi investors and advisors
Redwood said that “housing markets in some areas look vulnerable to even a modest rise in interest rates,” with Canada, Australia, New Zealand, and Hong Kong as the most worrying, “and there is a risk that interest rates will need to rise above their equilibrium in order to get inflation under control,” which, in turn, might result in more widespread falls in prices, interest.co.nz reported.
In early January 2022, Ben Udy, Capital Economics Australia and New Zealand economist, said falling house prices in New Zealand would push the Reserve Bank of New Zealand (RBNZ) to start dropping interest rates again from next year. And he is sticking to that view.
“New Zealand’s high share of fixed mortgage rates won’t insulate the housing market from RBNZ rate hikes,” Udy told interest.co.nz. “Indeed, we’re sticking to our view that house prices will fall this year and cause the RBNZ to reverse course next year by cutting interest rates.”
Udy now expects the central bank to hike rates at every meeting this year, lifting the official cash rate, from the current 1%, to 2.5%.
“Home sales have slumped to a level consistent with prices coming to a standstill before long,” he told interest.co.nz. “If anything, the slump in home sales means that house prices could start falling even earlier than our current forecast.”
Redwood said countries differ in how vulnerable their economies are to house price falls.
“Most at risk would be those that have relied heavily in recent years on residential investment (especially Canada) and those where the links between house prices and consumer spending are strongest (such as New Zealand),” she said.
Redwood said in countries where property “looks overvalued,” particularly in New Zealand, “where the house-price-to-income ratio is almost double its long-run average,” “even a modest rise in interest rates may well therefore prove too much.”
While it is not Capital's “central forecast,” Redwood said there clearly is “a significant risk” that interest rates will end up rising above their equilibrium rates in order to get inflation under control, interest.co.nz reported.
“In that case, we would probably be looking at more widespread falls in house prices,” she said.
Read next: Rising interest rates – what do they mean for first home buyers?
The “good news,” however, is that widespread property price falls would be unlikely to cause another global financial crisis. The house price increases over the past decade have not been accompanied by a prolonged loosening in credit conditions. As a result, household debt as a share of income has remained stable and at a much lower level than seen ahead of the financial crisis.
“Having been propped up by low interest rates and bond yields for over a decade, property markets will certainly be tested as monetary policy tightens,” Redwood told interest.co.nz. “How they fare will depend in large part on just how far interest rates rise and what impact quantitative tightening has on financial conditions.”
