11 Jun 2021

Higher costs and slower house prices growth ahead - ASB Bank

6:21 am on 11 June 2021

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

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Growth of house prices is expected to drop to five percent by the end of 2022. Photo: 123rf

In its latest quarterly forecasts the bank said there were growing pains ahead as the economy continued the recovery from the pandemic.

Chief economist Nick Tuffley said the vaccine rollout around the world was pointing to above-average 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 out-performed 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 and 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 was picking the growth in house prices will more than halve to 10 percent by the end of the year, and halve again to 5 percent by the end of 2022.

He said 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 3 percent by the end of the year, the top of the Reserve Bank's inflation band.

Tuffley said that would result in the RBNZ moving quicker than expected to raise its official cash rate, with ASB picking the first move in May next year, which would add further downward pressure on house prices.

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