There are growing signs that the slowdown in the housing market is weighing on people’s willingness to spend. Westpac’s recent confidence surveys suggest that consumers remain in a relatively good mood, but spending on debit and credit cards has flattened out over the course of this year.
The New Zealand economy looks to be on track for further expansion over the coming years. But there are some changes emerging in the mix of activity, with some of the factors that have powered growth in recent years now beginning to wane.
One of the most important factors for the retail sector is the housing market. Housing makes up a significant portion of household wealth in New Zealand, and when property values are rising, people tend to feel wealthier and more inclined to spend. Consequently, we tend to see a close relationship between growth in retail spending and house prices.
The housing market has cooled substantially over the last year, after a strong and increasingly broad-based run higher in the previous couple of years. House prices have seen a gradual decline in Auckland and Christchurch, while the rate of increase has slowed across the rest of the country.
We think that the rise in mortgage rates over the last year has been a significant factor in taking the heat out of the housing market. The latest round of restrictions on loan-to-value ratios, which were targeted at property investors, are also likely to have been a factor.
To date, households haven’t expressed a great deal of concern about this situation. The Westpac-McDermott Miller survey found that consumer confidence was down only slightly in the September quarter. People were quite comfortable about their own finances, and there was little to suggest that they are turning their minds towards debt reduction.
However, the actual spending figures tell a different story. Spending on debit and credit cards has flattened out over recent months. A fall in petrol prices could explain some of the slowdown in spending, but there’s little sign that households are taking advantage of their fuel savings to spend more elsewhere. Spending on clothing and durable goods has flatlined, and the rise in hospitality spending has slowed. The link between house values and consumer spending appears to be alive and well.
Is this slowdown likely to persist, or is it just a bump in the road? We’d note that there may well be a brief revival in the housing market over the next few months as the uncertainty around the election clears, depending on whether the next government changes the tax treatment of property. (Coalition talks were still under way at the time of writing.) But beyond the near term, we expect that interest rates will exert the greatest influence over the housing market again.
We don’t think that short-term interest rates, which are strongly influenced by the Reserve Bank’s official cash rate, are going higher any time soon. The Reserve Bank needs a period of strong economic activity to fully ward off the low inflation that has dogged it in recent years, and that requires support from low interest rates. However, longer-term interest rates tend to take their cue from international trends. There’s a growing sense that the world economy is gathering momentum, and that interest rates can head higher from their ultra-low levels of recent years.
There’s one more change in the air that retailers will need to consider. Population growth, led by record levels of net immigration, has made up a substantial share of the economy’s growth over the past couple of years. But the balance of migration appears to have reached a turning point. The number of non-New Zealand residents leaving the country is on the rise again – a product of the large number of temporary arrivals in previous years. We still expect people numbers to make an important contribution to growth over the next couple of years – but less so than we’ve experienced up to now.
Michael Gordon is a Westpac senior economist.