NZ Housing activity continues to strengthen

Data Flash (New Zealand)

NZ Housing activity continues to strengthen

Key points

Continuing the run of surprisingly positive housing market data, Barfoot and Thompson - accounting for around 30% of the Auckland residential sales market - have reported a further sharp rise in house sales in February.

In seasonally adjusted terms, monthly growth over the past four months has printed at 4%, 6%, 10% and 8% respectively. As the chart above shows, Barfoot and Thompson's data has a very good relationship with nation-wide sales. If the current momentum is sustained, upward pressure house prices is likely to develop at some point. Increasing house prices would reinforce the generally positive influence of increasing housing activity on retail spending levels.

Commentary

As we noted following the release of the January building consents, data over recent months has pointed increasingly to the prospect of a significant rebound in housing market activity over coming months. The latest house sales data published by Barfoot and Thompson paints a similar picture.

Our recent Economic Forecasts, which project GDP growth to remain at or above New Zealand's potential growth rate (which, at present, may be no higher than 2% per annum), were based on a more modest upswing in housing activity than suggested by recent indicators. Our bullishness on this sector has been tempered by continued weak population growth due to high net migration outflows, with data early this week indicating that the rate of outflow has increased over the past two months. However, other factors, such as consumer sentiment and lower mortgage interest rates, are also important determinants of housing market activity. Today's NBR poll shows that consumer confidence in early March has maintained the level reported in February (up from +20% to +21%), suggesting that lack of confidence is unlikely to be a barrier to a cyclical rebound in sales activity. Similarly, mortgage rates have fallen over the past six months, with fixed rates having fallen in particular - by around 1.0-1.5pps depending on the length of term - reflecting the decline in long-term interest rates.

As the charts below show, a sustained improvement in the housing market would likely provide a boost to house prices and retail activity. The weakening in house prices over the past year is likely to have been a major factor underpinning the slowing in retail sales growth, reflecting the prominent position of housing as a component of household wealth. In addition, increasing activity in the housing market is usually associated with a strengthening in demand for durable goods. A stronger than expected domestic sector would help to provide a further buffer to any additional weakening in export growth over the next year.

These data leave us comfortable with our call that the RBNZ will leave the OCR at 6.5% at its 14 March meeting. The NZD has weakened by some 4% since the 20 January OCR review - the equivalent of a 2pp cut in interest rates under the old monetary conditions framework. The Bank is likely to view the weaker NZD as reflecting valid concerns about the near-term outlook global economy and its possible impact on New Zealand. Therefore, we expect the Bank to conclude that the associated easing in monetary conditions since January is appropriate. However, given the strengthening domestic sector, at this stage we think it likely that the Bank will be reluctant to ease policy further via a reduction in interest rates. Indeed, we expect the Bank to be quite happy with an interest rate setting that is broadly neutral and an exchange that remains very stimulatory (and which in the near-term, may become even more so given the ailing AUD).

Darren Gibbs, Senior Economist

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