Improving housing market good news for the economy
WESTPAC ECONOMISTS say the strengthening housing market is positive for the economy and should help to limit cuts to the Official Cash Rate.
In their Weekly Economic Commentary, they cite a strong pickup in house price growth over the past two months, with nationwide prices rising by 2.6 percent over August and September combined.
“That’s a marked acceleration from the middle part of the year. The turnaround has been particularly stark in Auckland where prices are up two percent since August, breaking the run of price declines that we saw over much of the past three years.”
Westpac’s economists predicted the housing market rebound in May when the Reserve Bank was assuming it would remain listless through this year and next.
“We said that the cancellation of the proposed capital gains tax combined with tumbling mortgage rates would give the housing market a powerful shot in the arm, and we forecast that house price inflation would climb to seven percent over 2020.
“Now, with two months of solid price rises behind us, as well as signs that sales are starting to lift, we feel very comfortable with that forecast.”
Westpac’s economists say the strengthening housing market is “particularly important” for the broader economic outlook.
“As we have often highlighted, New Zealanders hold a large proportion of their wealth in housing assets, and changes in the housing market have a big impact on sentiment and demand more generally.
“With the housing market acceleration in train, we’re also seeing a resurgence in households’ spending appetites.
“We continue to think that a November cut in the cash rate to 0.75 percent is most likely … But looking further ahead, signs that the economy is responding to interest rate cuts are mounting.
“And that means that the RBNZ will be feeling a lot more comfortable that they have done enough to support the economy as we go into the new year.
“If we continue to see the housing market and consumer demand improving – and we expect that they will – then 0.75 percent is likely to be the low in the cash rate.”
In any event, borrowers shouldn’t be in a rush to fix their mortgage rates long-term, the bank says.
“Mortgage rates are falling, and with the Reserve Bank expected to cut the OCR once more, we think they will keep falling. This means there is no hurry to fix.
“Among the fixed rates on offer, we think the best value at present is the one-year rate.
“It is lower than the floating or six-month rates, yet it may still allow borrowers to roll onto lower rates at the end of the fixed term.
“Fixing for a longer term may mean that borrowers miss out on re-fixing at the lowest rates, at least according to our forecasts.”