Can New Zealand’s Economy Recover Without a Housing Boom?
New Zealand’s economic recovery is facing a unique challenge: decoupling from the traditional reliance on rising house prices. While past recoveries have been fueled by the “wealth effect” of homeowners feeling richer and spending more, the current outlook suggests a different path. But is a sustained recovery possible without that boost?
The Shifting Dynamics of the ‘Housing Wealth Effect’
Michael Gordon, Senior Economist at Westpac, has been exploring this very question. He’s encountered skepticism about the possibility of a recovery independent of house price growth, but notes that elements of it are already visible. “Retail spending has consistently risen over the last five quarters, at a time when house prices were effectively flat,” Gordon observed. Though, maintaining this trend amidst subdued house price expectations remains uncertain.
Recent economic research suggests the traditional “housing wealth effect” may be more accurately described as an “income expectations effect.” Which means people spend more when they anticipate future income growth, which too drives up house prices. When people expect their incomes to rise, they are more inclined to spend and invest, including in housing.
Historically, New Zealand has shown a strong correlation between housing wealth and household spending, potentially stronger than in other developed economies. However, this relationship has become less consistent in recent years due to the volatility caused by Covid-19 and related policy responses.
Lower Interest Rates and Emerging Economic Strength
Even without significant house price increases, lower interest rates are already contributing to economic activity. Retail sales volumes rose 0.9% in December, exceeding expectations. This suggests that reduced borrowing costs are stimulating spending, even in the absence of a booming property market.
The magnitude of the impact on house prices will depend on how responsive housing supply is. While historically unresponsive, there are indications that New Zealand’s housing supply is beginning to improve.
Shamubeel Eaqub, chief economist at Simplicity, highlights that economic growth isn’t solely dependent on house prices. He points to regions that have experienced growth without property booms, noting that the residential property mortgage market is a significant source of capital for investment.
Beyond Housing: Catalysts for Growth
Eaqub emphasizes that much of the recent economic downturn has been driven by rising costs of essential goods, squeezing household disposable income. However, he also sees significant pent-up demand for investments – home improvements, vehicle replacements, and business expansion – that could be unleashed as conditions improve.
Positive developments in the primary sector, such as strong sheep and beef prices and dairy payouts, are injecting capital into the economy. The reduction in interest rates is also expected to play a key role.
A crucial factor will be bank lending. The availability of credit, both in terms of price and quantity, will be essential for supercharging the economic cycle.
Eaqub notes that the impact of the economic downturn isn’t uniform. Some individuals and businesses are already well-positioned to invest and capitalize on the improving conditions.
FAQ
Q: Is a housing boom necessary for New Zealand’s economic recovery?
A: Not necessarily. While historically critical, the economy can recover through other channels like income expectations, lower interest rates, and growth in sectors like primary industries.
Q: What is the ‘income expectations effect’?
A: It’s the idea that people’s spending and investment decisions are driven by their expectations of future income growth, which also influences house prices.
Q: What role do banks play in the recovery?
A: Bank lending is crucial. The availability of credit will significantly impact the speed and strength of the economic recovery.
Q: What sectors are currently showing positive signs?
A: Retail is showing resilience, and the primary sector (sheep, beef, and dairy) is experiencing favorable conditions.
Did you know? New Zealand’s historical reliance on the housing market to drive economic growth may be lessening, opening opportunities for more diversified and sustainable recovery.
Pro Tip: Keep an eye on bank lending data and interest rate movements, as these will be key indicators of the recovery’s progress.
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