House prices in cities expected to drive economic recovery - Westpac

Rural areas are essentially back to pre COVID levels - but cities have some catching up to do.
Rural areas are essentially back to pre COVID levels - but cities have some catching up to do. Photo credit: Getty

A report by one of the biggest banks in New Zealand says the big metropolitan areas are likely to drive economic recovery this year, and that further-increasing house prices will play a big role.

Westpac's Regional Roundup predicts spending activity on the back of skyrocketing house prices in places like Wellington, Auckland and Christchurch will effectively close the performance gap with already high-flying rural regions.

The report showed many rural areas, supported by strong commodity prices and demand for goods, had not been badly affected by the economic downturn caused by COVID-19.

But regions exposed to foreign tourism, such as Auckland and Central Otago, recorded a greater impact on their economies.

Westpac's industry economist, Paul Clark, told Morning Report regions with traditionally rural economies were essentially operating at pre-COVID levels, including Bay of Plenty, Hawke's Bay, Gisborne and Northland.

China's economic strength during the pandemic had propped up New Zealand's regional exporters, with commodity prices remaining relatively firm.

"The economy in general has shown quite a strong recovery and we think a lot of the regions are showing a similar trend and its really those regions that have a strong regional background... we're talking about agriculture, horticulture and forestry," he said.

The big metropolitan regions of Wellington, Auckland and Christchurch, where service industries were significantly affected by lockdowns, and tourism-dependent Otago, had more catching up to do.

However, biggest gains expected this year are in these big centres, which will close the gap on the back of further increasing house prices, Clark said.

"They're likely to make up a lot of ground and a lot of that has got to do with the housing market, which we think will perform well over the coming year and that will drive household spending in these regions, so more of us go down to the shops and start spending."

This week economist Cameron Bagrie, from Bagrie Economics, urged the Labour government to balance a desire to achieve a strong economy with a social conscience, as run-away house prices made it impossible for many to buy their first home.

He said the Reserve Bank should be made to consider house price stability when setting policy for the economy.

Clark said a proposed travel bubble with Australia in early 2021 would be good news particularly for places like Otago, Southland and Auckland.

The regions also stand to benefit most from a gradual lifting of restrictions on travellers from other countries later in the year, although he thought a return to pre-COVID vibrancy in tourism remained some way off.

"That is the key reason why we think Otago will remain New Zealand's weakest performing region over the coming year," he said.