Housing slowdown risks derailing NZ economy

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By Leith van Onselen

The New Zealand Institute of Economic Research (NZIER) has today released its Quarterly Predictions report, which sees dangers ahead for the New Zealand economy on account of the slowing housing market:

The New Zealand economy has been recovering from the recession. But slumping house sales are a significant risk to our optimistic outlook for the economy.
House sales, which lead economic growth by around six months, have slumped by nearly 20% in the last six months (Figure 1).

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We expect the economy to grow by 3.5% in 2014. This growth is being driven by increased spending and investment by households and businesses. The Canterbury rebuild remains a prominent feature, although economic growth is broadening to more regions. The impact from last year’s drought was also less than in 2008, and is now boosting rural growth.

Auckland house prices have surged to record highs. Investor demand is driving the Auckland market. In an investor-driven market, sales and prices can turn rapidly. A sudden stop in house sales could make banks more careful in lending. That would put the brakes on broader economic growth.

The NZIER also sees the slowing Chinese economy as another risk, both directly via dairy exports as well as indirectly via its impact on Australia (New Zealand’s second biggest export market):

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Slowing growth in China is another risk. New Zealand exports over 20% of its exports to China. The indirect links through Australia and other countries exposed to China may be even more important, particularly for exporters outside of dairy, meat and forestry.

Accordingly, after two interest rate increases, the NZIER believes that the RBNZ will soon stop raising rates:

The RBNZ has been raising interest rates. Further hikes are likely to cool the Auckland housing market. A pause in hikes is possible after June, if the economy slows too quickly. The RBNZ will be wary of causing a housing bust in the provinces and sectors outside of Auckland housing, which are not overheating.

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It is also worth noting that New Zealand households are even more exposed to housing than their Australian cousins, as illustrated by the below charts from the IMF:

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This suggests that any fall in New Zealand home values could severely dampen consumer sentiment and spending (via the ‘wealth-effect’), further slowing the economy.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.