NZ Economy: Can Recovery Happen Without Rising House Prices?

The question of whether New Zealand’s economy can sustain a recovery without the traditional boost from rising house prices is gaining urgency. While a slow recovery is anticipated this year, the historical reliance on housing wealth to drive economic activity is being challenged. Recent data suggests a decoupling may already be underway, but sustaining that trend remains uncertain, particularly given subdued expectations for house price growth in the year ahead.

Michael Gordon, Senior Economist at Westpac, has been examining this dynamic, noting the skepticism surrounding the possibility of a recovery independent of the housing market. His analysis, as reported by RNZ, points to a shift in the underlying drivers of consumer spending. RNZ’s reporting details Gordon’s findings, which suggest that income expectations are now playing a more significant role than perceived housing wealth.

The Income Expectation Effect

For years, New Zealand’s economic cycles have been heavily influenced by the “housing wealth effect” – the tendency for people to spend more when their house value increases, feeling as though their home is effectively “doing the saving for them.” However, Gordon’s research indicates that this effect is increasingly tied to expectations about future income. When people anticipate higher earnings, they are more inclined to spend, and this, in turn, can contribute to rising house prices. This is a subtle but vital distinction. The relationship between housing wealth and household spending, historically strong in New Zealand, has become less predictable in recent years due to the volatility introduced by the Covid-19 pandemic and subsequent policy responses.

This shift is supported by recent economic literature, which increasingly favors the idea that income expectations are a primary driver of both spending and house prices. Gordon notes that retail spending has consistently increased over the last five quarters, even while house prices remained largely flat. However, maintaining this momentum will be contingent on continued positive income expectations, especially with forecasts predicting house price increases of less than 5% this year – and potentially even lower.

Beyond Housing: The Role of Interest Rates and Retail

Despite the uncertain housing outlook, other factors are contributing to economic activity. Lower interest rates are having a discernible impact, as evidenced by a 0.9% rise in retail sales volumes in December, exceeding expectations. This suggests that even without significant house price appreciation, monetary policy can still stimulate economic growth. Westpac’s Michael Gordon can be found on LinkedIn here, and his contact details are available in a Westpac economic bulletin from November 2024. The bulletin details his contact information as [email protected].

Regional Variations and the Importance of Lending

Shamubeel Eaqub, chief economist at Simplicity, highlights that economic growth isn’t uniformly tied to house price increases across all regions of New Zealand. While the residential property mortgage market remains a significant source of capital for investment, particularly for modest businesses, growth can occur independently of rising house prices. Eaqub points to historical periods of strong economic growth that weren’t fueled by a booming housing market, particularly in provincial areas.

A key constraint on growth, according to Eaqub, is access to credit. The availability of lending, not just the price of credit (interest rates), is crucial. If banks are hesitant to lend, it can stifle investment and expansion, even if businesses have the plans and resources. This is particularly relevant for small businesses that often rely on borrowing against their home equity to fund growth initiatives.

The Impact on Different Sectors

The potential decoupling of economic growth from house prices has implications for various sectors. The construction industry, traditionally reliant on housing demand, may require to adapt to a more stable or slowly growing market. Conversely, sectors focused on discretionary spending, such as tourism and hospitality, could benefit from increased consumer confidence driven by positive income expectations. The agricultural sector, particularly sheep and beef farming, is currently experiencing favorable conditions, with good wool prices and dairy payouts providing a boost to rural economies. This positive momentum could act as a catalyst for broader economic growth.

A Grinding Recession and Pent-Up Demand

Eaqub emphasizes that the current economic downturn feels like a “grinding recession,” characterized by a decline in disposable income due to rising essential costs. However, he also notes a significant amount of “pent-up demand” – postponed investments and spending plans that could be unleashed as economic conditions improve. This includes home renovations, vehicle replacements, and business expansions. The realization of this pent-up demand will depend on consumer confidence and access to credit.

Navigating the Credit Landscape

The quantity of credit available, alongside the price, is a critical factor. Banks’ lending practices will be a key determinant of the pace and strength of the economic recovery. According to MarketScreener, Michael Gordon is currently the Chief Economist at Westpac Banking Corp. (New Zealand Branch). MarketScreener’s profile details his position history and network.

While the economic landscape remains challenging, the possibility of a sustained recovery without relying solely on house price appreciation is becoming increasingly plausible. The interplay between income expectations, interest rates, lending practices, and regional economic strengths will shape the trajectory of New Zealand’s economy in the coming months. The current situation isn’t a uniform experience. some individuals and businesses are already positioned to benefit from emerging opportunities, while others face greater challenges.

Looking Ahead: Bank Lending and Investment

The most significant unknown remains the willingness of banks to extend credit. A cautious lending environment could constrain growth, even with positive economic indicators. Monitoring bank lending data and assessing the appetite for risk within the financial sector will be crucial in gauging the strength of the recovery. Businesses with solid plans and available capital may discover this an opportune time to invest, potentially capitalizing on the emerging opportunities as the economy navigates this period of transition.