Westpac has revised its housing market forecast, predicting that house prices will rise 8% over the course of the next year.
The bank’s economics team reported in its latest Economic Overview, published today, that the housing market had turned the corner and was now on track for a stronger than expected revival in prices.
The team cited an uptick in sales and rises in net migration as reasons for its revised forecast.
“With population growth surging and expectations that borrowing costs are close to their peak, the sharp fall in house prices that began in late 2021 has now been arrested,” Westpac’s report notes
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“We’ve also seen sales rising from their post-pandemic lows. In light of the stabilisation over the past few months, we’ve revised up our forecasts for house prices. We now expect prices across the country to rise by almost 8% over 2024.”
The economists had previously forecast a rise of just 2.5% over 2024.
While the bank report was optimistic on house price growth, it was less so on interest rates.
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The report said there was a strong case “for some further tightening by the RBNZ”, pointing out that if inflation pressures continue at current levels, “then interest rates will need to remain higher for longer”.
“The last few months have revealed that, in common with other advanced economies, inflation pressures remain hot,” the report says.
“The fall in inflation in the June quarter from 6.7% to 6% was encouraging in the sense that it was in line with expectations. However, the underlying picture was more concerning as the decline owed largely to weaker tradables good prices. By contrast, inflation in the domestically influenced non-tradables components fell only slightly from 6.8% to 6.6%.
“Migration-driven population growth and fiscal policy are boosting growth right when the RBNZ would otherwise be banking on steady falls in inflation. The housing market has turned the corner and is taking the first tentative steps higher, and that has occurred sooner than the RBNZ would have hoped.”
The Westpac economics team expects the RBNZ to deliver another 25bp hike in November, taking the OCR to 5.75%, despite signals from the RBNZ in May and July that the OCR had hit its peak.
Westpac economists don't foresee a cut to the OCR until August next year, and have mapped out a slow decline from there onwards, with the bank predicting that the OCR won't drop below 4% until mid-2026.
Westpac chief economist Kelly Eckhold told OneRoof ahead of the report's publication that mortgage interest rates would need to play catch-up if the OCR goes to 5.75% in November.
“The market doesn't fully have that 25 basis point increase priced into the yield curve. So when that happens, then you would expect some further increase in mortgage rates, particularly the floating rate [and one-year rates],” Eckhold said.
Rising interest rates offshore could also have an effect on New Zealand mortgage rates, Eckhold said. “Global funding costs have been going up, which you need to keep in mind.”
He added: “It’s probably an environment where mortgage rates remain at these relatively high levels, for the foreseeable future,” he said.
Westpac’s rates forecast comes amid a shift in market sentiment on interest rates.
The New Zealand Herald reported today that ASB was preparing for higher interest rates to take their toll on borrowers in coming years.
