'The implications for housing demand are clearly negative,' BNZ chief economist says

The BNZ's Chief Economist Mike Jones is warning inflation adjusted house prices could fall back to 2016 levels by the middle of next year.

But he also says the market is clouded in uncertainty.

"The lengthening conflict in the Middle East has prompted a rework in our macro forecasts," Jones says in the bank's latest Property Pulse report.

"We're now looking at a weaker economy, higher inflation, a delayed labour market recovery and slightly higher mortgage rates," the says.

"Rising net migration will work in the other direction, but the implications for housing demand are clearly negative overall.

"We've consequently pruned our house price inflation projection to flat for this calendar year, from +2.0% previously," says Jones.

However, Jones also acknowledges the difficulties in making forecasts given current market uncertainties.

"It's a wild time to be making any sort of forecast." 

"Ours may yet prove optimistic," he says.

"But if they're in the ballpark, spiking inflation would still see real or inflation adjusted house prices fall through to about mid-2027.

"That would return them to late 2016 levels, 30% below their 2021 peak," Jones says.

On the mortgage interest rate front, BNZ's economists expect the Reserve Bank to hike the Official Cash Rate twice in the second half of this year.

"We now see inflation rising to a peak of 4.3% year-on-year in the second quarter, and remaining above 3% for the rest of the year."

"The oil price shock is hoped and assumed by most to be temporary, but such is the magnitude of the inflation shock and likely pressure on medium term inflation, that we think the Reserve Bank will have to lift the OCR, and potentially rapidly, later in the year.

"We continue to forecast a a 25 basis points hike in September and another in December.

"Based on our OCR outlook, we might expect floating rates to start rising around the third quarter, finishing the year in a higher 6.0% to 6.5% range," says Jones.

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