We will find out after the latest Level 4 lockdown just how important the massive rise in house prices last year was in seeing the New Zealand economy recover so rapidly from the first Level 4 lockdown in March 2020.
That was one of the points raised on Tuesday in an S&P Global Ratings' 'Breakfast with the Economists 2021 - New Zealand session', which featured ANZ chief economist Sharon Zollner, ASB chief economist Nick Tuffley and BNZ senior economist Craig Ebert, as well as S&P Global Ratings Global chief economist Paul Gruenwald, speaking from New York.
ANZ chief economist Sharon Zollner said macro economists don’t usually have "a counterfactual to observe" in working out what is likely to happen. But with this current lockdown they do.
They have the counterfactual of observing what the recovery was like in the past year - with 30% house price rises. Consumer confidence was up and people went out and spent.
“Obviously we are all pretty modest about our ability to forecast house prices after being fairly bruised over the last 18 months but I think we can all probably agree it’s probably not going up another 30% [this time].
"So how important were those confidence and wealth impacts in supporting the consumer?"
But on the other hand, one thing that would support this time around it that we have got a very strong labour market.
"People will be much more confident that their jobs are going to be there for them on the other side of this lockdown."
'A rude interruption'
She said the ANZ economists 'base case' scenario of after lockdown for the economy was that it would be a "rude interruption", which will leave us with more debt.
But the country had gone into the lockdown "with reasonable momentum and should come out the other side relatively unscathed".
Asset bubbles and particularly the housing market were a key part of the exchanges between the economists.
S&P Global Ratings Global chief economist Paul Gruenwald said the massive stimulus from central banks and the post Covid recovery was "turning into an inequality issue as much as it is to a bubble issue".
"So, we’ve got the parts of the economy that were relatively unaffected by Covid and people have kept their jobs and incomes are good and those are in the pockets where we’ve got the high housing prices, which are also an asset and on your balance sheet if you own a property already. So that’s exacerbating the problem.
"So, I don’t think there’s some sort of ginormous bubble that’s got to pop but I think that this particular channel of monetary policy is generating a lot of inequality in a key asset class and I don’t think we are paying enough attention to that.
"So, I think if we are going to be talking about central banks and the business of QE for the next five or 10 years even if we stop tapering and start lifting policy rates that’s just going to continue. It’s a social problem as well as an economic problem."
'The housing market was a huge concern 30% ago'
In response to that ANZ's Zollner said New Zealand's housing market "was a huge concern for all the reasons that you outlined 30% ago".
"...And the Covid response. The lower interest rates. The suspension of some of the [RBNZ's] macro-prudential tools just really put a fire under it.
"And so, if affordable house prices are four times your income - we’ve just gone through eight.
"So, that obviously comes with a number of unpleasant consequences for society, but also for financial stability."
Zollner said she thought that everyone was now "on the same page" that this is "an enormous problem".
"But of course not everyone’s quite on the same page about how much they would like house prices to fall and how quickly. In a very low inflation environment obviously real house price falls are pretty messy compared to say in the 1970s when real house prices fell a lot but the debt was disguised - it was eaten away by the inflation as well.
It's political
“But it’s obviously highly political. The Reserve Bank’s talking about putting more macro-prudential restrictions on. Whether they will be necessary is going to be an interesting question.
"If the Reserve Bank goes ahead with its rate hikes we expect that to get quite a lot of traction quite soon.
"The Government has made a tax change which has some pretty large implications for heavily leveraged investors and certainly they appear to be stepping back from purchasing at the moment, although there’s no fire sale of properties going on.
"But if the Reserve Bank goes ahead with raising the OCR to 2.1% [as its forecasts indicate by 2024] then there might be a few investors decide to downsize their portfolios, for example."
ASB's chief economist Nick Tuffley noted we had now had 30 years of "structural decline" in interest rates.
He said much focus in our housing market was in trying to stop a particular type of buyer. The keys were addressing the supply side issues, the fact there are so many restrictions in place and high building costs.
Caught in a tug of war
“We are caught in this tug of war between probably the majority of households own their own house and probably would not be voting for a Government that says ‘hey, let’s put house prices down 30% so that the millennials can buy a house and still have avocado on toast'.
"We are going through probably quite a slow adjustment process and that does mean we have got quite a number of years where the entry into a house is going to be very challenging for a generation, or part of a generation. We are going to look a lot harder at the broader solutions for how we help finance people into homes.”
He talked about the "haves and have nots" including those who can rely on the "bank of mum and dad" -parents with homes and lots of equity.
“But its the people who don’t have that established background that are going to be the real losers out of this.
“It’s going to be a societal challenge for quite some time, which does keep it on the political radar.
"But what we need is the long term solutions to come through, which is what we have seen many a government lacking.
'The Band Aid approach'
"And unfortunately we’ve still been seeing the Band Aid approach in the short term because some of the proposed supply solutions like Kiwi Build never really got off the ground.
"And this government’s been left like others scrambling to solve what’s a hard problem that has lots of things that need to be done to improve the outcome and none of them happen very quickly unfortunately."
BNZ senior economist Craig Ebert noted that in the housing market “a lot of things that were supposedly causing this have been disproved as drivers". Among these were taxation issues, foreign buyers - now banned - and low deposit loans, which have been largely got rid of.
“So, a lot of people sort of barking up trees.
"I think it still boils down to a few key ones, which is population growth - and yes there had been a lot of population growth towards the end of 2019, putting a lot of pressure on. And I know immigration now is next to nothing, but there was a huge backlog, which we really couldn’t cope with and we certainly didn’t build…the building rate of homes was very low."
You can 'kind of' explain the extraordinary house prices'
Overlay this with the structural decline in interest rates and we saw what happened.
He said there were extraordinary house prices “but you can kind of explain them if you look at some of the key drivers".
"But it also means they are unsustainable.
"So, you follow these things through. Rising interest rates. Continuation of high home building. And a lack of population growth. There are the bigger drivers there to resolve this issue.
"The question is will you resolve it gently or will you resolve it aggressively with some major correction? Who knows. But I think the broader forces are there to bring this thing under control if only we follow through with it.
“...One of the main exposures that people probably haven’t thought enough about is what happens to the construction sector when they realise they are probably building too many homes in two or three years time because the rate of building at the moment, although there are problems converting consents into building, is enormous. So, it is something to watch out for. "
Labour problems 'across the board'
In terms of the migration situation in future, Zollner noted how dependent industries such as horticulture had become on migrant labour - though she said there were now "labour problems across the board".
“We have just become accustomed to importing the people we don’t grow ourselves.
"So if we are not going to be doing that in the future we need to go right back and take a much harder look at the likes of our education system and whether it is delivering the people we need.
"Because there is no quick solution to the bottleneck that is our border. And it is going to remain a bottleneck for a long time to come.”
Tuffley agreed on upping the technical and lifestyle skills for the young. However...
“In the short term we do have the Government, I think, being overly restrictive over who it will allow in terms of visas.
“I think we need to have a lot more pragmatism from the Government in the short term as some of those skill shortages are going to be very hard to fill domestically and we do have a lot of businesses crying out for people that they just simply won’t be able to find here.”
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