‘Higher costs, dropping house prices ahead’

Slowing house prices, rising inflation pressures, and soonerthan-expected rises in interest rates will be prominent in the near term economic outlook, ASB Bank says.

In its latest quarterly forecasts the bank said there were growing pains ahead as the economy recovered from the covid-19 pandemic.

Chief economist Nick Tuffley said the vaccine rollout around the world was pointing to aboveaverage growth this year.

He said the trans-tasman bubble, global commodity demand, and rebound in domestic spending had all been positive for the economy which had outperformed many other developed economies.

But challenges on housing and inflation were looming.

“The growing headwinds that have picked up over the past year, including the government tax changes, will slow investor demand. We may also start to see some natural slow down with house prices very high relative to incomes, and mortgage rates not likely to fall any lower,” Tuffley said.

ASB expected growth in house prices will more than halve to 10 per cent by the end of the year — and halve again to five percent by the end of 2022.

Cost pressures were also rising for various reasons, ranging from supply chain problems, labour shortages and higher wages to the supply of raw materials.

“Cost pressures have begun to ramp up significantly in NZ, and these are expected to be passed on to consumers over the coming few months.”

ASB forecast inflation to reach three per cent by the end of the year, the top of the Reserve Bank’s inflation band.

Tuffley said that would result in the Reserve Bank moving quicker than expected to raise its official cash rate.

ASB expected the first move in May next year, which would add further downward pressure on house prices. –