Budget 2021: Slower house price growth could inhibit spending despite bigger benefits - economist

Treasury's forecast of a slow-down in house price growth could inhibit spending despite the big boost in benefits delivered by this year's Budget, a leading economist says.

The 2021 Budget, delivered on Thursday, announced long-awaited benefit increases, putting more money into beneficiaries' back pockets. From July 1, benefit rates will go up by $20 per week, and again from April 1, 2022. That's expected to support spending, helping to drive economic growth and recovery. 

Infometrics senior economist Brad Olsen said the overall reaction to the benefit increases was "a sense of relief rather than elation," which he expects to provide "a small boost to overall economic activity".

But as rising house prices influence Kiwis' perception of wealth and therefore their willingness to spend, a collapse in house price growth could limit some of this higher consumption. 

Treasury is forecasting annual house price growth to slow from a peak of 17.3 percent next quarter to 0.9 percent by the June 2022 quarter. That's due to the Government housing announcement, lower net migration and the pipeline of building consents.

"If Kiwis aren't feeling they're going to get a whole lot wealthier, they may well become a little bit more stingy on their spending," Olsen said.

Combined with the Government housing announcement, Olsen anticipates the new house price growth forecast to dampen investors' expectations of how hot the housing market will remain. 

House sales could slow further as people remain cautious about the future direction of the housing market. And aside from funding for insulation support and hospitals and schools, there was no specific budget allocated to increasing housing supply.

"Unless the Government comes up with a second significant housing package which includes increases to supply by allowing for intensification and more land to be opened up, combined with the likes of prefabrication and much swifter building levels, I think we're going to see challenges remain in the housing market for a while yet," Olsen said.

Budget 2021 also lacked specific support for businesses and middle-income earners following the COVID-19 wage subsidy.

"In my mind, expectations will rise in the next few years for more support for middle-income New Zealanders and for trying to get businesses to increase their hiring rates bringing more people into the workforce," Olsen added.

Economist Cameron Bagrie said despite Budget 2021 being about 'Securing Our Recovery', with the exception of tourism, the economy has recovered.

Current capacity constraints in the economy are causing inflation pressures. Treasury forecasts CPI inflation to rise to 2.4 percent in the near term, falling back below 2 percent in 2022.  Inflation is expected to rise again from 2023.  Real GDP growth is forecast to rise from 2.9 percent in 2021, to 4.4 percent in 2023. 

"The big issue we've got at the moment is not demand...its supply," Bagrie said.

If there was one element missing from Budget 2021, it was transformation of the economy.

"We keep on talking about it and the can [keeps] on getting kicked down the road…we really do need to take the narrative of the story beyond recovery," Bagrie said.

BusinessNZ chief executive Kirk Hope said while he was pleased to see money set aside for infrastructure, training and digital skills and a scheme to support unemployed people finding jobs, from a business perspective, Budget 2021 represents a missed opportunity for growth.

"Business was keen to see less burdensome regulation, policies to stimulate growth and development, and more certainty around business policies into the future," Hope said.

Treasury forecasts net core crown debt to peak at 48 percent of GDP by 2022/2023, falling to 43.6 percent by 2024/25. Unemployment is expected to rise in the short-term, falling to 4.2 percent by 2024.

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