ANZ economists are sticking with their view that house prices will rise 3% in the second half of the year but now say that "risks appear skewed to the upside".
In ANZ's latest Property Focus, ANZ chief economist Sharon Zollner, senior economist Miles Workman and senior strategist David Croy said housing data for July provided further confirmation that the house price cycle has turned.
"In July, the REINZ House Price Index (HPI) was 1.4% above April’s cycle low (after seasonal adjustment), with 0.6% m/m increases seen in both June and July," they said.
Annual house price inflation has "turned a corner", at -8.9% year-on-year on a 3-month moving average basis as against -10.6% in June and a low of -14% in February, the economists said.
"On balance, housing indicators suggest the market remains on a tightening trajectory."
They said auction clearance rates in Auckland continue to trend higher (signalling some upside risk to both ANZ and Reserve Bank (RBNZ) forecasts, and inventories are trending down despite relatively weak sales.
"Sales tend to lead prices by three months or so, suggesting our expectation that price momentum will fade a touch towards the end of the year is valid. If new listings remain weak enough to keep inventories on a significant declining trajectory, we could easily be surprised to the upside on prices. But our baseline assumption is that if sales do hold up, sellers will be drawn into the market as they realise that it’s become an easier time to sell," the economists said.
"All up, we certainly wouldn’t call the housing market strong, but it is does appear to have turned a corner, and it would be imprudent not to acknowledge that risks appear skewed to the upside, at least in the near term.
"We maintain our forecast that house prices will lift around 3% over the second half of 2023, before moderating as deteriorating job security, lingering unaffordability, and the reality of high-for-longer mortgage rates sets in," Zollner, Workman and Croy said.
But they acknowledged "there are so many potential sources of surprise".
In terms of risks from Consumers Price Index (CPI) inflation, they said that if this proves persistently strong -whether that’s related to a stronger-than-expected housing "impulse" or something else, such as inflation expectations becoming unanchored - then the Official Cash Rate would very likely have to go higher than currently generally expected, "and that wouldn’t be good news for house prices".
"Conversely, there is a ‘we get lucky’ scenario, where current high non-tradable (domestic) CPI inflation (which tends to be the sticky kind) slows faster than we anticipate, to the point that the RBNZ can deliver OCR cuts earlier than anticipated.
"But unfortunately, perhaps more likely is that if we do see a downside inflation surprise, it’ll come via a nasty economic shock. And while that may justify a lower OCR, it could also be accompanied by a sharp fall in household income and/or a credit availability shock (eg a global financial shock), and the net impact on the housing market would be unlikely to be favourable.
"All in all, while upside risks to our near-term house price forecast appear to be mounting, risks to the medium-term forecast are very much two-sided. The ‘we get lucky’ scenario is but a wafer-thin layer of pastrami nestled between two very fat slices of bread."
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