Should we all just pack it in and move to Australia?

Guest Post by Tony Alexander

Until interest rates decline, we have to take a fairly cautious attitude towards the degree of strength in the residential real estate and home construction markets. That is because each week at the moment we are receiving fresh information showing weakness in the economy overall and weakness in housing.

The economy is officially back in recession

As I noted right after the Reserve Bank predicted recession in November 2022, this word seems to have quite a deep impact on Kiwis. We cut back on our spending and generally exercise caution. We did it after that late-2022 comment and we seem to be doing so again now.

My monthly Spending Plans Survey has just recorded a drop in people’s plans for buying things over the coming 3-6 months. A net 30% of people have said they are going to reduce their spending. This is a deterioration from 24% in March and 13% in December. The four year average is -3%.

A net 13% of people said they will reduce investment property purchasing compared with 12% last month and 9% in December and February. A net 8% will cut back on buying a home to live in — the weakest result since the end of 2022.

Business sentiment has also deteriorated in the quarterly survey run since the 1960s by NZIER, with a well-below 10% average net 2% of employers now saying they will hire more people.

I can see from my monthly survey of real estate agents with NZHL that the prospects for a weaker labour market are scaring people. When I ask agents what potential buyers are expressing most concern about, 37% have just said their outlook for income and employment. This reading was 23% last month, and only 14% (the four year average) in January.

So, is everything bad and should we all go to Australia?

No. We’ve been here before in a situation where the dark clouds dominate, and pessimism levels are high. Specifically, things looked worse in the 1980s, the Global Financial Crisis, and during the pandemic. But these periods did not prevent house prices, housing turnover, and construction levels from subsequently recovering strongly and this monetary policy-induced downturn in housing and the economy will be no different.

The question is, when can we reasonably talk about recovery?

In the context of a strong rise in people looking to sell their properties since the mid-2023 surge in house prices and turnover, probably not until interest rates have fallen by about 1%. When might that happen?

As noted in my last column, I don’t expect the Reserve Bank to make a comment indicating thoughts of cutting their cash rate before mid-2025 until the July 10 meeting. They will feel incentivised to keep pressure on the economy and business price-setting behaviour for as long as possible before easing. Then the chances are strong that they will engage in a period of “catch-up” easing, just as they imposed a period of rapid catch-up tightening from late-2021 to early-2023.

Given the many uncertainties in play it seems reasonable to expect interest rate declines from late this year which will set the scene for a recovery in house construction from late-2025. A year before then, residential real estate activity is likely to be improving once again, and it will be interesting to see how quickly people act on realisation of a shortage of construction following a period of exceptionally strong population growth.

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