New Zealand housing crashes into 2023 as recession beckons

ANZ’s latest NZ Property Focus report reaffirmed the bank’s forecast that the Reserve Bank will lift the official cash rate (OCR) to 4.75% by mid-2023:

This increase in the OCR and mortgage rates will impact around 56% of New Zealand borrowers, given 56% are either on floating or fixed rates of less than one year. Therefore, a significant share of borrowers that purchased homes at rock-bottom pandemic rates will be required to refinance at much higher levels:

ANZ believes “further mortgage rate increases [will] maintain downwards pressure on prices”. It forecasts house prices to keep falling by just over 1% a month for the rest of this year “before gradually finding a floor over the first half of 2023”.

Overall, ANZ tips “a 15% peak-to-trough decline in prices, with the August data suggesting we’re about two thirds of the way through that”:

From a fundamentals perspective, we don’t see any good reasons why the housing market might suddenly turn a corner over the coming months. Mortgage rates are still lifting, housing scarcity has been greatly eroded, and affordability remains dire (albeit a little better).

If ANZ is correct, and the Reserve Bank hikes interest rates as aggressively as forecast, then it will lift Kiwi mortgage rates even higher and further shrink borrowing capacity.

In that scenario, it is difficult to see how house prices would only fall by another 5-6%.

Meanwhile, Bank of New Zealand has warned that “things could well and truly turn to custard” and the global economy could be plunged into recession:

The RBNZ already leads the global tightening race, and, with 3.50% penned in for October, will already have contractionary settings. The main point of interest is whether the Bank provides any hint of evolution in its view as to where interest rates might go in 2023…

Taking into consideration the balance of risks, we have formally introduced a further 25 basis point rate hike into our track for the February RBNZ meeting taking the OCR to 4.25%. The cash rate stays at this level through 2023 before progressively moving back towards a neutral rate, which we have lifted to 2.25%…

We can’t stress enough our fear that the rapidity of rate increases globally, coupled with the disastrous consequences of Europe/UK’s energy crisis, means things could well and truly turn to custard.

The way things are going it’s increasingly looking like a “when” not an “if”. When it becomes clear central banks have “over-tightened” there will be a rush to forecast rate cuts. The higher rates go now the bigger will be the reversal…

In our opinion, folk are now underestimating the likelihood of a global recession…

A global recession is a lock for next year on the back of central banks’ overly aggressive monetary tightening and rising energy costs.

When it arrives, and the Australian and New Zealand economies deteriorate, both our Reserve Banks will be forced to quickly change track and cut rates aggressively.