Economists' house price forecast 'may come good even sooner than expected'

by Roxanne Libatique22 Jan 2020

Westpac economists’ believe that their forecast for 7% house price growth “may come good even sooner than we expected” as the boost to the economy from low interest rates is now “undeniable.”

The Reserve Bank of New Zealand (RBNZ) dropped the official cash rate (OCR) to just 1% last year to stimulate the economy. Westpac’s first Weekly Commentary for 2020 noted the effect of low interest rates in the economy, which was mostly seen in the housing market.

“House prices have continued to push higher, with annual house price inflation rising to 6.6% in the year to December,” the Westpac economists said, as reported by Interest.co.nz. “Gains in prices have been widespread, with prices in Auckland up 4% and other regions up an average of 8.9%. We think continued solid gains are on the cards in the early part of 2019.”

Read more: Auckland's December house sales reach sky high

The economists emphasised the importance of the strength in the housing market, noting that “New Zealanders hold large amounts of their wealth in owner-occupied or investment properties.”

“The pick-up in house prices over the past year has seen households opening up their wallets again. With house price growth set to take another step higher over the coming months, we expect that there will be related strength in household spending,” the economists said.

“The second reason why the pick-up in the housing market is important is that the RBNZ is likely to be more circumspect about the need for further OCR reductions. Economic activity has already been a little hotter than the RBNZ had been assuming. And with signs that house prices and spending are heating up, they’re likely to feel comfortable staying pat for some time yet.”

“Consistent with that, we made a change to our forecasts for the Official Cash Rate late last year. We no longer expect the RBNZ will cut the OCR in February, or at any point over the first half of 2020,” the economists concluded.

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