What to expect: Recession at an end and house prices on the up - but no rates relief

1. Inflation as expected

Stats NZ reported last week that consumer prices in Q2 were 6% higher than a year ago, down from the peak inflation rate of 7.3% in Q2 last year, and the lowest since 5.9% in Q4 2021. Petrol prices were a key contributor to the overall drop in inflation, but it’s still important to acknowledge that 6% remains way above the official target (1%-3%), and non-tradeable (domestic) components such as many foods, new housing construction, and rents haven’t been tamed yet.

In other words, although the latest headline result was in line with most expectations (meaning no major implications for the future path for interest rates or the housing market), there is still the lingering fear/risk that inflation could take a bit longer to get back to target than expected, keeping mortgage rates elevated for longer too.

Trying to predict inflation and the OCR is not a central part of my job, but gut feel for me is that another rate rise is unlikely, given the lagged effects of previous tightening are yet to fully flow through to consumer spending – and could still bite pretty hard, especially for people repricing their existing mortgages from lower rates onto current higher levels.

2. Buyer choice is tightening

Meanwhile, the property market itself continues to tighten gradually. For a start, the new flow of listings to market each week remains at multi-year lows (for this time of year), and with sales activity at the other end of the pipeline starting to pick up (annual rise of 17% in June), the stock of available listings on the market continues to decline. That reduces the choice for buyers, leads to a bit more competitive pressure, and could start to boost prices.

As it happens, very similar trends are apparent for new rental listings and total choice of available rental properties for tenants – and lo and behold, there are signs that rents have started to grow a bit more quickly too.

3. LVR changes supporting higher activity?

Part of the early rise in property sales volumes might be down to the loosening of loan to value ratio rules (LVRs), which was announced in late April and officially kicked in June 1 – albeit the changes may have been acted upon in advance by some banks in May. In any case, the Reserve Bank will publish June’s mortgage lending figures this Wednesday, so it’ll be interesting to see how the overall total fared last month (we already know that sales volumes rose) and then how much extra high LVR finance was advanced, particularly to first home buyers (who absorb most of the banks’ allowance).

CoreLogic chief economist Kelvin Davidson says the drop in listings "reduces the choice for buyers, leads to a bit more competitive pressure, and could start to boost prices". Photo / Peter Meecham

4. NZ Activity Index may suggest recession is over

The NZAC for June will be published on Thursday, and based on April/May’s readings, there are tentative hints that the mild recession of Q4 2022 and Q1 2023 may not have lasted into Q2. We’ll get better insight into that when we complete the set of Q2 NZAC results, with my hunch being that June’s result will be OK – hinting at an economy that is ticking along, creating jobs, and that in turn has been a factor in bringing the property downturn to an end.

5. Labour market still resilient?

Speaking of employment, Stats NZ will release June’s filled jobs figures on Friday. There seems a good chance of another rise, but there are also risks that the momentum peters out soon (nothing can go up forever, especially with firms still in a relatively cautious mood).

- Kelvin Davidson is chief economist at property insights firm CoreLogic