Treasury hedges its house price bets

Housing Market Written by Tony Alexander, Sep 17 2020

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This Wednesday, Treasury released their latest set of economic and fiscal forecasts, as legislation requires they do just ahead of a general election. In many regards they make for sobering reading. After shrinking 3.1% in the year to June 2020 they see further shrinkage of 0.5% to June 2021, then growth rates of near 3.5%, 4%, and 4% for the following three years.

The growth, when it returns will be at an above average pace. But it is unlikely to be strong enough to make much immediate dent in the rising number of unemployed people around the country. In fact, taking into account the growing population, Treasury see the unemployment rate not peaking until early in 2022. They see the peak as likely to be 7.8% rather than the 9.8% they predicted back in May.

However, after the Global Financial Crisis of 2008-09 New Zealand’s unemployment rate peaked at just 6.7% in 2012. Why the higher peak this time? Simply because of the greater hit to our economy and the strength of the recovery from the effects of fighting back against Covid-19 – including the unique feature of our international borders remaining closed until perhaps the start of 2022.

Does this outlook bode badly for the housing market?

On the face of it one would say yes. If you don’t have a job, you’ll not be able to get a mortgage and you may not be able to service one you might already have. However, a key characteristic of this unique economic shock is that the bulk (not all) of the people suffering unemployment come from sectors like hospitality, retail, tourism, accommodation, and entertainment.

These people tend to be young and they tend to be earning below average wages. Plus, they tend not to be home owners. This therefore limits the number of people who will be unwilling sellers of property, or absent as property buyers in the short-term at least.

There are some other key differences with the GFC period

This time around interest rates are much, much lower, and they look set to stay low for a great number of years. Back from 2009-2014 we repeatedly expected a return to relatively high interest rates on the expectation that strong growth would surely push inflation higher. It did not.

This time around, the world is likely to continue grappling with low inflation for many years, and experience now tells us there is little need to be worried about one’s mortgage debt servicing costs jumping up strongly as soon as the economy starts entering an above-average growth period.

What else is different this time?

We can throw in other factors like strong net immigration ahead of lockdown and an expectation that reopening of the borders in 2022 will eventually see strong net migration gains return. In fact, in my Tony’s View publication of September 17 I list 24 reasons why house prices have surprised us all by rising recently, and why they are likely to continue to rise.

And perhaps Treasury have reluctantly accepted that the old linkages between unemployment and house prices no longer apply this time around. In their set of predictions, they include a forecast of house prices falling over 5% in the coming year. But they also make this comment.

“However, given the recent resilience in the housing market, there are upside risks to our forecasts if current sentiment is maintained.”

My surveys of real estate agents, individual consumers, property valuers, and mortgage advisers, all suggest that “current sentiment” is quite likely to be sustained. Therefore, the chances remain strong that even as we see data over the coming couple of years showing above average unemployment, house prices are more likely to continue their recent upward moves than settle back down again.

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