Kiwi economists keep eye on transtasman troubles
Should New Zealanders be worried about dark clouds over Australia’s economic outlook?
As our largest trading partner, Australia’s fortunes always have some influence on New Zealand’s GDP. But right now our cousins across the ditch are dealing with two key issues which could flow directly on to New Zealand this year.
Property prices have fallen sharply — particularly in Sydney where they are now off by more than 10 per cent.
Last month ASB economist Mark Smith looked at the historic house price data for both nations over the past 25 years.
The results showed a positive two-way relationship between the two markets, with Australia typically having a stronger influence on the New Zealand market than vice-versa.
Sydney prices also appeared to show a stronger influence over Auckland prices than did the prices
in cities like Melbourne and Wellington.
Typically the New Zealand market responds to Australian house price movements, with a peak impact after about six months, he found. However, he noted some of the key variables in the two markets may temper the flow through to New Zealand this time.
Both New Zealand and Australia have moved to address supply issues in the past few years but Australia has generally been more successful — building more dwellings in relation to population size than we have in here.
A regional analysis showed that while Auckland building consent issuance “has ramped up considerably over the past few years it pales in comparison to sizeable increases in Sydney”.
“This could be one factor resulting in New Zealand house prices outstripping those in Australia,” Smith said.
New Zealand’s relatively high levels of immigration may also temper downward pressure.
Also conversely, the slump in Australia has put downward pressure on mortgage rates which has flowed through to the New Zealand market and will help to underpin prices here, he says.
But the case could be made that the Aussie property downturn is pushing the banks to be more caution with their lending.
So even if rates don’t rise we could see credit conditions tighten — making it harder for first home buyers to get loans and squeezing cash strapped businesses needing to refinance.
On top of the wobbly market, Australia’s banks are under intense political and regulatory scrutiny after the Royal Commission Banking Inquiry.
The inquiry has already resulted in changes within the banks, which are now said to be making more thorough assessments of loan applicants’ personal expenses. Credit growth in Australia has slowed as a result and banks have lost market share to non-banks.
Mortgage brokers here have reported that banks are also asking for more information on people’s expenses, although just one bank — Westpac — says it has made changes to its methodology.
The double whammy of tightening credit and falling property prices has the potential to become a vicious cycle.
It will certainly be an issue to watch closely in 2019.