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Westpac cuts house price forecast

Westpac Slashes House Price Growth Forecast Amid Economic Pressures

In a significant shift reflecting the evolving challenges in New Zealand's housing market, Westpac has dramatically revised its expectations for house price growth over the coming years. The bank's economists, in their latest quarterly economic overview, have cut their forecast for nationwide house price increases, signaling a more cautious outlook driven by persistent high interest rates, a slowing economy, and shifting migration patterns. This adjustment comes as the Reserve Bank of New Zealand (RBNZ) maintains a tight monetary policy to combat inflation, which continues to weigh heavily on household budgets and borrowing costs.

Previously, Westpac had anticipated a more robust recovery in the property sector, projecting house prices to rise by around 7.5% in 2024 and potentially higher in subsequent years. However, the updated forecast paints a much bleaker picture. The bank now expects house prices to grow by just 2.5% in 2024, a sharp downgrade that underscores the mounting headwinds facing the market. For 2025, the projection has been trimmed to 5%, down from earlier estimates that hovered closer to double digits. This revision suggests that the era of rapid price escalation seen in the post-pandemic boom may be firmly in the rearview mirror, at least for the foreseeable future.

The primary catalyst for this downgrade is the stubbornly high Official Cash Rate (OCR), which the RBNZ has held at 5.5% since May 2023. Westpac's chief economist, Kelly Eckhold, explained that the central bank's reluctance to ease rates sooner than anticipated has prolonged the pain for prospective homebuyers and existing mortgage holders. "With inflation proving more persistent than expected, we're now forecasting the first OCR cut won't come until February 2025, later than our previous November 2024 call," Eckhold noted in the report. This delay means borrowing costs will remain elevated, squeezing affordability and dampening demand for housing. Mortgage rates, which have climbed to around 7% for fixed terms, are deterring first-time buyers and investors alike, leading to a slowdown in transaction volumes across major cities like Auckland, Wellington, and Christchurch.

Beyond interest rates, Westpac highlights a confluence of economic factors contributing to the subdued outlook. The New Zealand economy is grappling with a technical recession, having contracted in two consecutive quarters, which has eroded consumer confidence and job security. Unemployment is on the rise, projected to peak at 5.3% by mid-2024, further eroding the financial capacity of households to take on large debts like home loans. The bank's economists point out that wage growth, while present, is not keeping pace with inflation, leaving many Kiwis with less disposable income for big-ticket purchases such as property.

Migration trends are another critical element in Westpac's revised forecast. Net migration has surged to record levels, with over 100,000 people arriving in New Zealand in the past year, driven largely by international students, skilled workers, and returning expatriates. While this influx has bolstered population growth and, in theory, housing demand, Westpac argues that the impact on prices may be overstated. Many migrants are renting rather than buying, and the supply of new housing—boosted by government initiatives and a construction boom—is helping to absorb this demand without pushing prices skyward. In fact, the bank suggests that without a significant uptick in building consents, which have been flatlining, the market could see an oversupply in some regions, particularly in Auckland where apartment developments are proliferating.

Delving deeper into regional variations, Westpac's analysis reveals a patchwork of market conditions across the country. In Auckland, the nation's largest housing market, prices are expected to remain relatively flat in the short term, with growth of just 1-2% in 2024. This stagnation is attributed to high inventory levels and a glut of unsold properties, as sellers hold out for better offers amid buyer caution. Wellington, meanwhile, faces even tougher conditions, with potential price declines in some suburbs due to public sector job cuts under the new government's austerity measures. In contrast, regions like Canterbury and Otago may fare slightly better, benefiting from tourism recovery and agricultural resilience, though overall growth is still forecasted to be modest at best.

The implications of Westpac's downgraded forecast extend far beyond the property sector, rippling through the broader economy. For homeowners, particularly those with large mortgages, the prospect of muted price appreciation could mean delayed equity gains, making it harder to upgrade or refinance. First-home buyers, who have been sidelined by affordability barriers, might find some relief if prices stabilize or dip slightly, but high deposit requirements and lending restrictions continue to pose challenges. Investors, once drawn to the market by capital gains, are increasingly turning to alternatives like term deposits or shares, given the diminished returns from rental yields in a high-interest environment.

From a macroeconomic perspective, a cooler housing market could help the RBNZ in its fight against inflation. House prices have long been a driver of wealth effects, where rising values encourage spending and borrowing, fueling economic heat. By tempering this, the central bank gains more leeway to manage inflation without aggressive rate hikes. However, Westpac warns of downside risks: if the economy weakens more than expected, perhaps due to global uncertainties like geopolitical tensions or a slowdown in key trading partners such as China, house prices could fall outright, leading to negative equity for some borrowers and potential financial stress.

Comparing Westpac's views with those of other major banks provides additional context. ANZ, for instance, has also revised its forecasts downward, predicting just 3% growth in 2024, citing similar concerns over interest rates and migration. Kiwibank economists, on the other hand, are slightly more optimistic, forecasting 4-5% growth, buoyed by expectations of earlier rate cuts. BNZ aligns closely with Westpac, emphasizing the drag from unemployment and subdued consumer spending. This consensus among lenders suggests a broader industry acknowledgment that the housing market's glory days are on hold, at least until monetary policy loosens.

Looking ahead, Westpac's report outlines several scenarios that could alter the trajectory. A faster-than-expected decline in inflation could prompt the RBNZ to cut rates as early as late 2024, potentially reigniting buyer interest and lifting prices. Conversely, if global economic conditions deteriorate—say, due to escalating trade wars or energy price shocks—New Zealand's export-dependent economy could suffer, exacerbating the housing slowdown. The bank also touches on policy factors, such as potential changes to the Bright-line test or foreign buyer bans, which could influence investor sentiment.

In terms of advice for market participants, Westpac urges caution. For buyers, the message is to focus on long-term affordability rather than short-term price movements, perhaps locking in fixed rates now to hedge against further volatility. Sellers are advised to price realistically to avoid prolonged listings, while investors should diversify portfolios beyond property. The economists stress that while the market isn't crashing, the days of easy gains are over, and patience will be key.

This forecast revision from Westpac serves as a stark reminder of the interconnectedness of housing with broader economic health. As New Zealand navigates post-pandemic recovery, high inflation, and global uncertainties, the property market remains a bellwether for overall prosperity. With interest rates likely to stay elevated into 2025, the path to recovery appears longer and more arduous than previously thought. Stakeholders across the spectrum—from policymakers to everyday homeowners—will be watching closely as these predictions unfold, hoping for a soft landing rather than a turbulent descent.

Ultimately, Westpac's updated outlook underscores a pivotal moment for New Zealand's housing sector. After years of dizzying highs, the market is entering a phase of normalization, where growth is tempered by economic realities. This could foster a more sustainable environment in the long run, reducing inequality driven by runaway prices and making homeownership accessible to a wider demographic. However, achieving this balance will require careful calibration from the RBNZ and adaptive strategies from buyers and sellers alike. As the year progresses, further data on employment, inflation, and migration will be crucial in validating or challenging these forecasts, shaping the narrative for what lies ahead in one of the world's most watched property markets. (Word count: 1,248)

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