A snapshot of 2021 for property prices, interest rates and unemployment

Money with crystal ball.
Leading economists share forecasts for property prices, interest rates and unemployment in the year ahead. Photo credit: Getty.

This year house price growth could slow but interest rates will stay low and unemployment is likely to rise, leading economists say.

Last year, COVID-19 caused a significant shock to the economy. In March, the Official Cash Rate (OCR) dropped 75 basis points to 0.25 percent. In September, two negative quarters of GDP growth put New Zealand officially in recession, with unemployment rising to 5.3 percent. Record low interest rates, temporary removal of loan-to-value (LVR) restrictions and Kiwis placing more value on homes caused demand for property - and property prices - to skyrocket.

Infometrics data shows property prices rose an average of 10.3 percent in 2020, boosted by a 17 percent rise in the month of December alone. The REINZ national median sale price reached $749,000 - an increase of almost 20 percent year-on-year.

As Kiwis are hoping for a more settled 2021, Newshub asked a group of economists what changes they expect for property prices, interest rates and unemployment in the coming year. 

Property prices to rise at a slower rate

Economists expect house prices to keep going up, buoyed by low interest rates and continued demand from first-home buyers and investors looking for a higher rate of return.

Infometrics chief economist Brad Olsen is forecasting an average house price rise of around 12 percent this year.

"Infometrics expects house prices could rise 12 percent p.a on average as low interest rates, slow Government action, and widespread housing interest pushes up prices further," Olsen says.

But from mid-year, economists expect price growth to slow as LVR restrictions flow through to lending. By restricting higher-risk lending, most investors will be required to provide a 30 percent deposit (20 percent for first home buyers).

"We'd expect the restrictions on investor lending to flow through into the property market in the second half of 2020, with slower house price growth," Olsen adds.

"Prices will still grow, but perhaps not as fast as right now."

Senior economist Brad Olsen said Infometrics is forecasting a 12 percent average rise in house prices in the year ahead.
Senior economist Brad Olsen said Infometrics is forecasting a 12 percent average rise in house prices in the year ahead. Photo credit: File.

Kiwibank senior economist Jarrod Kerr also expects double-digit price gains to start slowing down from the middle of the year. 

"LVR restrictions should take some of the investor-related froth off the top of the market," Kerr says.

"A closed border means population growth is slowing… house price growth should slow to a more modest 5-to-6 percent year-on-year pace from the second half of 2021," Kerr adds.

Low interest rates to continue, big drop unlikely

Retail interest rates could fall slightly, but as a negative cash rate looks increasingly unlikely economists don't expect the drop to be huge.

Mortgage rates offered by the main banks on Monday start from 2.29 percent fixed for one-year, or from 3.4 percent for a floating rate. The Official Cash Rate, currently 0.25 percent, will be reviewed on February 24.

Olsen expects borrowing to get slightly cheaper as bank uptake of the Reserve Bank Funding for Lending (FLP) programme increases. The Large Scale Asset Purchase (LSAP) programme is helping to keep interest rates low.

"We expect that interest rates could fall further over 2021... [but] we don't expect to see any aggressive falls," Olsen says.

He expects the Reserve Bank to consider the rise in inflation and how the FLP programme affects interest rates before cutting the Official Cash Rate further.

"Barring any unexpected reversal in our economic recovery, a negative OCR is now off the table," Olsen says.

"We expect interest rates to remain at current, or slightly lower levels, for the next couple of years."

Unemployment expected to peak at 6.5 percent

Reflecting the number of people actively looking for work, official unemployment, currently 5.3 percent, is forecast to climb to around 6.5 percent.

Kerr says the labour market mirrored the rebound in economic activity.

"We're forecasting a peak of 6.5 percent in early 2021 - well below the double-digit rate thought possible during the height of the COVID-19 crisis," Kerr says.

The tourism and education industries are among those bearing the brunt of border closures.

"The challenging summer months and the quiet beginning to the academic year could see a further lift in unemployment."

Kiwibank chief economist Jarrod Kerr is forecasting unemployment to peak at 6.5 percent early this year.
Kiwibank chief economist Jarrod Kerr is forecasting unemployment to peak at 6.5 percent early this year. Photo credit: File.

This year is about recovery. Although the hospitality sector is still affected by the loss of international tourism, outside the sector, job numbers and spending activity is holding up.

Kiwibank expects GDP to rebound 3.5 percent over 2021 and that economic activity will reach pre-COVID levels by early 2022. 

The Government is expected to announce further measures to control property prices. Aside from LVR restrictions, debt-to-income limits are among the tools that could be used to restrict lending, or on the supply side, working with councils to release more land and build infrastructure. 

Housing affordability, international trade disruptions and COVID-19 vaccine rollouts are among the areas to watch. Following a confirmed community case of COVID-19 on Sunday, New Zealand is at risk of another outbreak. Economist Shamubeel Eaqub says in the event of another lockdown, the upside is we're better prepared.

"We saw in the second lockdown that households and businesses figured out how to deal with lockdowns much better… if there's another lockdown I would expect it to have a much smaller impact than we did in April 2020," Eaqub says.