As cost-of-living rises, property prices fall, say economists
As the nation continues to grapple with the soaring cost-of-living, people are being warned to add roughly an extra $110 per week to household budgets over the next 12 months.
New ASB Bank data has revealed high wage inflation and an extremely stretched labour market have also been good for household income growth, which should provide a sizeable offset. However, a sub-par outlook for household spending is on the horizon with an official cash rate peak of 4.25% expected.
ASB Bank senior economist Mark Smith (pictured above left) said the household sector had gone from leading the domestic expansion to being more of a bystander.
“Current headwinds facing the sector include the rising cost-of-living, lower house prices and lower population growth,” Smith said. “This has contributed to downbeat headlines and weak measures of consumer sentiment.”
Read more: First signs emerge that falling inflation is on its way
Smith said household weekly outgoings looked set to rise by roughly $110 per week over the next 12 months or so, although exposures would vary.
“Large borrowers are expected to be particularly exposed, but the household sector in general looks to be well placed to handle higher debt-servicing costs,” he said. “We have also been surprised with how quickly household incomes have climbed, with increases in after-tax incomes expected to modestly exceed the surging cost-of-living. This does not mean a repeat of the 2021 honeymoon period.”
Smith said household spending growth was likely to remain sub-par over the next year or so.
“This should cap some of the upside risk to the OCR outlook, but not all, given our expectation capacity pressures will remain tight. We see the OCR peaking at 4.25% early next year,” he said.
“However, stronger household spending could further add to inflation, tighten the labour market and see even more restrictive monetary settings.”
Westpac NZ senior economist Satish Ranchhod (pictured above right) said property sales remained low and house prices continue to fall.
“Compared to July 2022 they [prices] are up 1.4%, however compared to August 2021 they are down 18.3%,” Ranchhod said. “The rot in the housing market continued in August which is the ninth monthly fall in a row. House prices have now fallen 9% from their peaks in November 2021.”
Ranchhod said the drop in prices continued to be heavily centred on Wellington and Auckland.
Read more: New Zealand property price freefall continues
“Prices in Wellington were down 3.6% in August alone and have now fallen by a total of 17%,” he said. “Similarly, prices in Auckland have dropped 14% since November 2021.”
Ranchhod said this result followed the banks’ forecast.
“Looking ahead, we expect that prices will fall by a total of 15% over 2022 and 2023 combined which implies continued modest declines over the coming months,” he said. “Such declines would be consistent with the continued creep higher in the average number of days to sell, as well as anecdotes about an increasing number of unsold homes.”
Ranchhod said the downturn in the housing market signalled a period of broader softness in household demand.
“We’re forecasting further OCR hikes in October and November which would take the cash rate to 4%,” he said. “However, as signs of softening in demand become increasingly evident, we expect that the RBNZ will become increasingly comfortable that the tightening in monetary policy is having the desired dampening impact. That will support a shift to an ‘on hold’ stance by the end of this year.”
