Will the recession throw housing market recovery off course?

The recent confirmation that NZ’s economy was in recession at the end of 2023 obviously isn’t good news and the natural assumption is that this could result in a renewed property slowdown. So, what are the key things to know, and what might it really mean for the housing market?

First, what actually is a recession? Technically, it’s defined as two quarters in a row of falling gross domestic product (GDP), or in other words, declining general economic activity. A couple of weeks ago, Stats NZ confirmed that GDP dropped by 0.1% in the final three months of 2023, after a 0.3% fall in the three months to September. Hence, we have a recession – and in fact, there was also one in the last quarter of 2022 and first quarter of 2023 as well.

In addition, what’s probably made the headlines around the latest recession even more striking/dramatic is the fact that our population growth has been very high – on the back of strong net migration inflows. That is, as a country, we’ve been producing slightly less economic output in the last 3-6 months even though we’ve got a lot more people. Not a great result.

However, there are also reasons not to get too tied down by the GDP data and an official recession. After all, it’s ‘old news’, relating to the final three months of 2023 – and in reality, we’re now into April! Moreover, it probably wasn’t ‘new news’ either, given that for many households it already felt recessionary; the data just confirms what we already knew and were dealing with. On top of that, it’s not a big slump in GDP and the figures could easily be revised in due course, meaning we might never have actually been in recession at all.

Given all of that, I’d tend to focus much more on what’s happening right now. To be fair, there are still some less encouraging results floating around, such as the latest business and consumer confidence readings from ANZ, which both fell. But on the flipside, the unemployment rate remains low (albeit slightly rising) and new jobs are still being created.

The resilience of the labour market, even as wider economic activity has dropped a bit, has been a key support for fresh house buyers and also those existing property owners who are facing higher mortgage costs as their fixed loans are repriced from previous lower interest rates up to current prevailing levels.

I’d also stay mindful of the fact that there are always trade-offs in economics. That is, yes, the economy might not be in great shape and there is a lingering risk of some job cuts in the rest of 2024. But that might also mean a faster drop in inflation and the potential for the Reserve Bank to cut the official cash rate (OCR) a little sooner too – meaning a bit of downwards pressure on mortgage rates, especially floating and shorter-term fixes (e.g. a one-year rate).

Bringing all of this together, then, it’s definitely not good that we’ve been in recession – clearly, growth would be much better. But by the time official statistics show a recession life has already moved forward by 3-4 months anyway. And weak patches for economic activity will tend to bring down inflation and interest rates, eventually.

In the current situation, significant mortgage rate falls might not necessarily be imminent, but relief looks likely in 2025 at least. So to answer my original question, there’s no guarantee that the recession will drive a renewed housing market slowdown. But the subdued economic backdrop does add to the case for thinking that the emerging recovery will remain slow and patchy compared to the past.