by Paul McBeth
Over-investment in housing is partly the reason behind our poor economic growth rate, but the economic weakness should be short-lived with a return to year-on-year levels of around three percent.
Those are the views of ASB Bank economist Rozanna Wozniak, who told the bank’s business customers in the latest Quarterly Prospects that some of the current weakness was due to one-offs such as a drop in residential construction and a correction after the pre-Y2K stock build-up late last year. While the housing sector will remain subdued, she says the benefits of the rural economy will gather momentum next year, exports will continue to make a positive contribution to growth (and that’s not just currency-driven), while the business sector is seeing continued strong imports of capital equipment.
As for housing, Wozniak says that population growth is slow but the industry is still geared to the high immigration times of the mid 90s, suggesting some scaling down of the housing sector.
"Less housing activity, in itself, need not be a problem. A large investment in housing over the years is one factor behind New Zealand’s relatively poor economic growth rate (as housing represents a large consumption item as opposed to an investment into productive capacity)."
And on monetary policy, she says the risk of relatively high inflation next year "remains significant", prompting her pick of further cash rate hikes: maybe 0.25 per cent each in December and January or a more aggressive 0.5 per cent in December.
Meanwhile, BNZ Chief Economist Tony Alexander, in the October New Zealand Observer, says the bank’s adopted the view that monetary policy won’t tighten again and in fact it’s likely to ease from mid 2001.
"This means that for home buyers there remains value in fixing one year, for risk-averse people fixing two years is acceptable, but fixing three years is relatively expensive."
Alexander also says we’re well away from what have traditionally been lows for the longer-term fixed rates, but those rates are likely to ease over the next 12 months – another reason not to fix three years and beyond at present levels.
However, he says "be warned…we are in an interesting period for the New Zealand economy". Factors such as the uncertain outlook for oil prices, the feed-through of a weaker dollar into consumer prices, whether the Employment Relations Act will cause accelerating wage growth and pressures brought by a shortage of skilled labour all add to the mix.
"These uncertainties mean one cannot dismiss out of hand the idea of fixing one’s interest costs for one or two years, even though these rates may exceed our forecasts of floating rates for the same periods of time."
On the housing market: