Westpac has done an about face on house prices and now expects them to keep rising this year and next year.
In a Home Truths newsletter Westpac chief economist Dominick Stephens said when COVID-19 broke out, Westpac's economists predicted a 7% decline in house prices between March and December, while other major banks, Treasury and the Reserve Bank picked even greater declines.
"But our collective predictions of house price decline have been proven wrong," he said.
Between March and August house prices had actually risen 2.6%, which Stephens said was "no statistical quirk or brief period of catch up."
"Back in July we upgraded our house price forecasts," he said.
"We shifted to forecasting a fall of 2.5% over the second half of 2020 and an increase of 8% over 2021.
"We now expect an increase of 3.5% between March and December 2020 and we are sticking with an annual increase of 8% for 2021."
Stephens said there were two main reasons the housing market had performed better than expected - the overall economy had been more resilient than anticipated and lower interest rates had a bigger impact on prices than expected.
"We were stunned when we saw that, outside of activities related to international travel, the economy quickly rebounded after the first lockdown," he said.
"For example, employment fell by 34,000 people in April, but had regained the entire loss by June.
"Early data is showing that the second lockdown is following much the same trajectory as the first - a hit to activity followed by a rapid rebound."
As a result, Westpac's GDP forecasts had also been revised.
"Our original GDP forecast was that the economy would shrink 3.6% between March and December 2020," Stephens said.
"As the facts have revealed the surprising resilience of the economy, we have upgraded that to a 0.6% decline in GDP over those nine months.
"Similarly, our forecast for peak unemployment has dropped from 9.6% to 7%.
To be clear, this still amounts to a severe recession, but it is not as bad as we first feared."
And falling interest rates also appeared to have had a bigger than expected impact on house prices.
"Our original expectation for a fall in New Zealand house prices was based on the fact that prices fell during the recessions of the early 1990s, 1998 and 2009," Stephens said.
This created an association between rising unemployment and falling house prices in the data, and we expected that association to repeat.
"But all of those past recessions were preceded by a rapid increase in interest rates, whereas the current recession was not.
"This unusual feature of the current recession may be teaching us that interest rates play an even more powerful role in determining house prices than previously appreciated."
However Stephens also warned that house prices couldn't keep rising indefinitely.
"This cannot continue forever, so the big question is, when will it all end?" he said.
"The answer is when inflation rises enough to concern the Reserve Bank.
"Only at that point will the Reserve Bank see fit to increase interest rates.
"When interest rates eventually do rise, the forces that have driven New Zealand house prices ever higher over the past decade will go into reverse."
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