House prices to keep soaring but hopes of swift economic recovery on horizon with border tipped to ease mid-2021

Finance Minister Grant Robertson speaking at Treasury's update.
Finance Minister Grant Robertson speaking at Treasury's update. Photo credit: Newshub / Zane Small

House prices are expected to keep soaring but hopes of a "swift" econonic recovery is on the horizon with Treasury tipping border restrictions to start easing in July 2021.

The Government's final financial update of the year shows the COVID-19 shock is expected to have lasting economic impacts, with net core Crown debt expected to reach $190 billion by 2025.

As a percentage of GDP - comparing what the Government owes to what it produces - net core Crown debt is expected to increase in the coming years, peaking at 52.6 percent in 2022/2023, before reducing to 46.9 percent in 2024/2025.

Treasury notes how New Zealand's elimination strategy has resulted in a low prevalence of COVID-19 compared to most other countries and allowed for a "swift" economic recovery.

Although the contraction in the June quarter was the sharpest on record thanks to the strict March-April lockdown - plunging New Zealand into recession - it was "less severe" than expected, "suggesting that the effects of alert level restrictions on economic activity are smaller than previously assumed".

Treasury also highlighted how household spending has contributed to economic growth, but does not expect house prices to fall anytime soon.

It predicts house prices to increase 8.5 percent in 2021, 4.5 percent in 2022, 5.2 percent in 2023, 5.2 percent in 2024 and 5.5 percent in 2025.

"Although a slowdown in house price inflation is still expected, it is now forecast to remain robust throughout the forecast period," the fiscal update reads.

Rising house prices in New Zealand is not a new development and prices were increasing even before the COVID-19 pandemic, but Treasury officials provided an explanation for why it has gotten so bad.

The Government provided billions of dollars in financial support in response to COVID-19. The Reserve Bank also provided further support by keeping borrowing costs low during the Government's response to try and ease unemployment.

As a consequence, the expected returns on various forms of saving shifted, leading to greater interest in relatively riskier assets, such as housing. While returns on comparatively safer assets, such as term deposits, decreased.

Treasury notes that heightened levels of interest from first-home buyers and investors at a time of low inventory of housing are also likely to have supported house price growth.

"House prices have consistently grown faster than incomes since at least the 1990s and house price to income ratios have now increased to around seven times higher than the average incomes in 2020 compared to around six times above average incomes before the Global Financial Crisis."

Finance Minister Grant Robertson said during the update that the Government will be making housing announcements at the beginning of 2021 to try and ease rising house prices on both supply and demand.

Hope on the horizon

Treasury does forecast economic hope on the horizon.

Treasury expects alert level 1 restrictions to remain in place until the end of 2021 and as in the last Pre-election Update (PREFU), Treasury expects the border restrictions to be lifted from January 2022 and restrictions could be eased even earlier from July 2021.

Higher levels of activity over the second quarter has contributed to a more positive fiscal position than expected in the June 2020 quarter, with higher tax revenue and lower net debt than forecast in the Budget update.

Crown tax revenue is forecast to be $16.8 billion higher in the coming years compared to the PREFU update in September.

The unemployment rate is expected to increase further as Government support measures ease and border restrictions remain in place, although how much remains uncertain.

But the unemployment rate forecast has improved. The unemployment rate is forecast to peak at 6.9 percent by the end of 2021, compared to 7.8 percent forecast in PREFU.

Total Jobseeker numbers increased by more than 60,000, to more than 200,000, in the September quarter compared to the same period last year.

Once border restrictions are eased and economic activity continues to recover, the unemployment rate is forecast to fall gradually, reaching 4 percent by 2025.

Employment levels typically increase strongly over the summer months, reflecting increased demand over the holiday period and seasonal demand for labour in the agricultural sector, according to Treasury.

But with the number of international visitors in the country being lower than normal thanks to border restrictions, "less of this is likely to occur".

And while the economy is forecast to grow, this growth is expected to fall short of the growth in available job seekers in the next few quarters.

"A degree of 'scarring' caused by the COVID-19 pandemic on the labour market is still expected, as skills mismatches result in a period of lower labour productivity," Treasury says. "However, there are indications that the degree of 'scarring' is less than previously thought."

Treasury also notes that the economic impacts of COVID-19 have been "disproportionate" across population groups, with Māori and Pacific people, as well as women and Aucklanders due to their second lockdown.

Overall, the Finance Minister is optimistic about New Zealand's position, pointing out that while New Zealand's economy contracted in 2020, it is forecast to rebound strongly in 2021 outperforming regions we compare ourselves to, like the Euro Zone, the UK and Japan.

"Global economic activity is expected to continue to recover over the rest of the forecast period, although the pace of recovery is likely to be uneven as countries contend with renewed virus outbreaks and the resulting containment measures," he said.

"Of course the pandemic is not the only risk to global outlook. Ongoing trade and geopolitical tensions, in particular tensions between China and the United States have the capacity to affect growth and lead to higher levels of volatility."