House prices to rise 5-8% next two years before residential investment growth kicks in to boost supply, Treasury says; Picks earlier OCR hikes than RBNZ, Current account deficit to widen

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By Alex Tarrant

Rapid population growth and low interest rates are set to keep housing demand high over the next couple of years, although price rises are set to fall off as supply eventually reaches a level closer to demand, Treasury says.

Budget 2017 picks the QV house price index to be up by an annual 5.1% in the year to June 2017, lifting to 7.8% in 2018, then falling to 3.9%, 3.1% and 2.2% annually over 2019, 2020 and 2021. In early May, the latest QV house price index showed prices were flat over the last three months, with the annual change at 11%.

“Further out, most of the temporary headwinds are expected to subside and pent-up demand for housing returns to the fore (given rapid population growth and relatively low interest rates), resulting in a further pick up in residential investment,” Treasury said.

“House price growth is anticipated to pick up once more in 2018 then ease from 2019 onwards as supply increases to meet demand,” Treasury said.

Residential investment growth is expected to plummet from 6.7% in 2017 to 0.3% in 2018, before rising to near 9% through 2019 and 2020 – representing the increase in supply Treasury is hoping for.

Meanwhile, Treasury’s forecast for the 90-day bank bill rate indicates it is expecting the Reserve Bank of New Zealand will have to raise the Official Cash Rate earlier than the Bank itself is picking.

The 90-day rate typically sits 25-30 basis points above the Official Cash Rate. It is forecast by Treasury to rise from 2% in 2017 to 3.9% in 2021.

The track implies Treasury forecasts the OCR being at 1.75% in mid-2018 before rising to potentially 2.5% in June 2019, 3% in 2020 and 3.5% in 2021. The Reserve Bank of New Zealand is currently forecasting the OCR staying on hold at 1.75% to September 2019 at the earliest.

Treasury is picking annual Consumers Price Index increases of between 1.6% and 2.2% over the next four years.

Other key forecasts include:

  • Real GDP per capita growth to fluctuate between 0.9% and 1.8% between 2017 and 2021.
  • Unemployment falling from 5% in 2017 to 4.3% in 2021
  • Annual wage growth of 1.2% in 2017 to rise to 2.6% in 2018 then falling away to 2.1% by 2021
  • Current account deficit to widen from 2.8% of GDP in 2017 to 3.9% of GDP in 2021
  • Merchandise terms of trade annual growth to plummet from 6.2% in 2017 to -0.2% in 2018 then only recovering to between 0.0% and 0.4% the next three years
  • Core Crown tax revenue to stay flat at 27.7% of GDP from 2017 through 2021
  • Core Crown expenses to fall from 28.8% of GDP in 2017 to 27.5% in 2021
  • Total Crown OBEGAL rising from a surplus of $1.6bn in 2017 to $7.2bn in 2021 (0.6% of GDP to 2.2% of GDP)
  • Net core Crown debt falling from 23.2% of GDP in 2017 to 19.3% of GDP in 2021
  • The TWI to stay in the 76-77 range until falling to 74.7 in 2021

Below are Treasury comments on several of its forecasts:

House prices and residential investment

Rapid population growth and low interest rates increase demand for housing. In the near term, indicators including building consents suggest that real residential investment and house price growth will remain around current levels owing to a range of factors that are judged to be largely temporary. Factors explaining the recent slow-down in residential investment include the impact of tighter loan-to-value ratios, uncertainty around the Auckland Unitary Plan, capacity constraints in the construction sector (particularly for skilled labour) and tighter credit conditions (particularly for developers).

Further out, most of the temporary headwinds are expected to subside and pent-up demand for housing returns to the fore (given rapid population growth and relatively low interest rates), resulting in a further pick up in residential investment. House price growth is anticipated to pick up once more in 2018 then ease from 2019 onwards as supply increases to meet demand.

The recent slow-down in residential investment growth explains much of the lower momentum in near-term growth in the forecasts. There is considerable uncertainty associated with the judgement that this slow-down will be temporary. See the Recent developments in residential development box on page 13 for further discussion.

Housing market developments have been reflected in growing household debt, which reached a new high of 168% of household disposable income at the end of 2016. If income growth were to slow significantly or if interest rates were to rise sharply, debt servicing could become difficult for some households. This has the potential to constrain GDP growth as households adjust by reducing consumption and residential investment.

Net migration

Net migration has continued to outpace expectations, with annual net migration rising to 71,900 in the year to March 2017. Net migration is assumed to hold up at a higher level than forecast in the Half Year Update given New Zealand’s relatively favourable economic conditions and the persistent strength of recent net inflows, peaking at 72,500 in mid-2017.

Thereafter, net migration inflows are assumed to ease. Flows of New Zealanders are assumed to return to their long run average net outflow in line with real wage differentials between New Zealand and Australia. Net inflows of nonNew Zealanders are assumed to fall as New Zealand’s attractiveness relative to other locations declines, and as some recent migrants leave (eg, students). Net migration is expected to add 212,000 people to the population over the next four and a half years, similar to the gain over the past four and a half years. Relative to the Half Year Update, net migration is assumed to decline more gradually (adding around 67,000 more people), with risks to the forecast present in both directions.

Population growth is a key driver of economic growth. Average GDP per capita growth over the forecast period (1.3%) is similar to that forecast in the Half Year Update (1.4%), but the level of real GDP per capita is lower throughout, as revisions to history have led to a lower starting point (see the GDP revisions and their implications box on page 9). Scenario Two in the Risks and Scenarios chapter explores the implications should migration levels deviate significantly from those assumed.


Unemployment is forecast to remain flat over the year ahead, as rapid labour force growth (from a combination of high working-age population growth and record-high participation rates) is balanced by robust employment growth (with 215,000 additional people employed over the forecast period), before steadily declining to the long run unemployment rate of 4.25%. Wage growth is relatively modest in the near term, reflecting some spare capacity in the labour market, past low inflation and relatively weak productivity growth, before picking up to over 2% in mid-2018 as price inflation picks up.

Compared to the Half Year Update, employment growth is stronger over the forecast period. However, the labour force is forecast to increase at a faster rate, with higher participation rates and working-age population growth, meaning spare capacity in the economy is not used up as quickly as previously anticipated. This translates into a relatively higher unemployment rate and weaker wage growth over the remainder of the forecast period relative to the Half Year Update, and points to a softer near-term picture of non-tradables inflation.

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