Westpac economists see the heat staying on in the housing market this year and 17% gains in house prices - but eventually the market will turn negative, with price falls by 2024.
Another cautionary note, is that the economists see some possibility the Government might limit the deductibility of interest for investors.
In the bank's latest quarterly Economic Overview Westpac chief economist Dominick Stephens says the housing market has heated up "much as we warned".
Stephens says a 17% rise in prices this year will be a very strong pace compared to history, but implicitly actually a slowdown from the current monthly pace.
"We believe that mortgage rates have reached their lows for this cycle, with long-term interest rates now starting to head higher as global economic sentiment improves.
"The impact will become greater as the prospect of OCR hikes draws closer; we expect house price inflation to turn negative by 2024."
Stephens notes that rising house prices have rapidly become a social and political flashpoint, with the Government pledging to take “bold action” on both housing demand and supply.
"We regard the options as limited. The Reserve Bank’s tightening of loan-to-value restrictions will have some dampening effect on prices, but historically it has been a small one."
He notes that the Government has ruled out many of the options regarding the tax treatment of property, such as a capital gains tax.
"However, one remaining possibility is to limit the deductibility of interest for property investors, which could have an impact on prices depending on how it was applied. We regard this as a downside risk to our house price forecast."
He reiterated the point the Westpac economists have made previously that with housing supply, the ground has already shifted. The construction sector turned out to be one of the surprise stars of 2020, and with dwelling consents soaring to new multi-decade highs, there is a strong pipeline of work for 2021 as well.
"This building boom is coming at a time when population growth has plunged to its lowest rate in a decade. Net migration has been close to zero since Covid-19 struck, a far cry from the 70,000 net migrants the country received in 2019. This means that the severe housing shortages that have been dogging New Zealand for years are now rapidly eroding. By our estimates, housing shortages will continue to shrink even after migration resumes, because today’s level of construction activity is so much higher than what is needed to keep pace with population growth even in a normal year.
"We expect to see rent inflation easing within a year. And this erosion of housing shortages is one reason that we expect house price inflation to start gradually cooling from later in 2021."
In terms of the economy in general, Stephens says GDP may have been strong recently, but the Westpac economics team thinks the “summer without tourists” will cause a decline of 0.7% over the six months to March.
Additionally they estimate that disruptions to global supply chains will cause inflation to spike to 2.5% by June this year, but that it will drop all the way back to 0.8% by June 2022.
"That’s partly because supply chains will normalise and partly because we anticipate a big lift in the exchange rate, to 78 cents against the USD."
The economists expect moderate growth in household incomes this year.
"Labour market indicators point to further growth in jobs, but we expect wage growth to remain subdued this year. Solid agricultural prices will also provide a boost to rural incomes. Fiscal support to households has moved away from direct transfers, and is now coming through more in the form of rising public sector employment."
This is some of the key points:
- The “summer without tourists” will cause a GDP decline of 0.7% over the six months to March.
- Inflation will reach 2.5% by June, but will drop back to 0.8% by June 2022.
- The exchange rate will rise to 78 cents against the USD.
- The OCR will remain at 0.25% until early-2024.
- The housing shortages that have long dogged New Zealand are now rapidly receding thanks to booming construction activity and low population growth.