There’s plenty of gloom and doom about Australian house prices, but yesterday Westpac pointed to the growing risk that Kiwi house prices could start to fall by 2018 as NZ’s debt-fuelled spending surge of the past few years starts to catch up with the Kiwi economy.
Westpac said in a note that drew headlines yesterday that Kiwis were in a “borrow and spend” cycle that could not be sustained and it expected economic growth would slow from 2018.
Similar comments have been made about our house price boom, especially in Sydney and Melbourne. In NZ’s case the boom has been concentrated in the Auckland area, but prices in other centres have started rising in recent months thanks to stepped up restrictions on investors and foreign buyers.
Westpac chief economist Dominick Stephens said in a report that earlier this decade the rebuilding of Canterbury was ramping up and the dairy sector was booming, but households remained cautious.
"We are now in a new phase of the economic cycle. Growth is being challenged by the dairy downturn and the levelling off of the Canterbury rebuild,” he wrote.
"Rapid population growth, driven by strong migration, was underpinning parts of the service sector and the construction industry in Auckland.
"But the real kicker for growth in the current phase is debt. Households have thrown caution to the wind, and a borrow-and-spend dynamic has emerged amid rising house prices."
Stephens forecast debt-fuelled spending could only last another year or so before the consequences kicked-in. "Debt-fuelled growth is not sustainable. For that matter, neither is the Canterbury rebuild or rapid population growth, both of which we expect to taper off," he said.
"We expect the New Zealand economy to enter a phase of slower GDP growth, beginning around 2018. At that time, we would expect to see interest rates and the exchange rate falling, while house prices stagnate or fall.”
The Westpac report has echoes of last week’s Financial Stability Report from the country’s central bank which focused on the twin domestic problems of house prices (especially in Auckland0 and the weakening dairy sector.
"Dairy prices remain low with global dairy supply continuing to increase. Many farmers now face a third season of negative cash flow with heavy demand for working capita,”RBNZ GOvernor, Graeme Wheeler said in the central bank’s report last week.
“Imbalances in the housing market are increasing with house price inflation lifting again in Auckland, after cooling in late 2015 and early 2016 following new restrictions in investor loan-to-value ratios and government measures introduced in October.
“House prices have also begun increasing strongly in a number of regions across New Zealand, although house prices outside Auckland are generally much lower relative to incomes.
“The Bank remains concerned that a future sharp slowdown could challenge financial stability given the large exposure of the banking system to the Auckland housing market. Further efforts to reduce the imbalance between housing demand and supply in Auckland remain essential.
“This includes measures such as decreasing impediments to densification and greenfield development and addressing infrastructure and other constraints to increased housing supply,” Mr Wheeler wrote.
Both the RBNZ report and the warning from Westpac apply generally – so include the local arms of the NAB, ANZ and the Commonwealth when assessing the risks.
