There is so much uncertainty regarding how long oil prices remain high and how disruptive the effects will be on our economy and others that forecasting where we likely go from here is extremely difficult. Probably the best we can say is that the strengthening of the pace of recovery in our economy expected for this year will now be muted.

That means growth in employment will be less than previously thought which in turn means growth in demand for housing will be slightly weaker than expected. Nonetheless, the recovery in real estate activity evident since the first half of 2023 is still likely to continue.

What about average house prices? Already we can see in the data that prices growth is near completely absent. This reflects some growth in demand for housing being offset by continuing caution about the jobs outlook, rising interest rates, and good growth in new house supply.

With regard to interest rates there is new upward pressure over and above that which I was already predicting for this year because of the hikes in oil prices feeding through the global economy. It is possible that Australia’s inflation rate this year will exceed 5% while ours gets close to 4% from 3.1% at the moment.

To a certain extent the Reserve Bank will “look through” the one-off spike in inflation coming directly from higher fuel prices – the legislation requires them to do that. However, they have to pay attention to the second round effects and those are likely to be large in an environment where business profit margins are already tight.

In Australia the Reserve Bank has already raised its cash rate twice this year. Once before the Iran War because inflation had hit 3.8% and they realised they had cut too much last year. Once since then in response to anticipated extra inflation from the war.

Here, our central bank would probably have held off raising rates at all this year given our lower starting point of 3.1% and their bias towards allowing inflation to track at the top end of the 1% – 3% target range. But now, a rate rise or two before the year is out is likely and already medium to long-term wholesale interest rates have been rising in expectation of policy tightening.

This has led to some increases in fixed mortgage rates, and more rises are expected as we advance through the year. These rate rises will tend to cap the growth in real estate turnover this year along with the extent to which construction rises. As for prices. It is hard to see gains on average amounting to very much at all this year.

We are at the beginning of an oil shock the duration and magnitude of which we cannot know. Maybe the safety of ships transiting through the Straits of Hormuz will be quickly restored now that a number of countries are going to work to protect the route. Maybe their efforts will fail. We don’t know.

Thankfully for New Zealand there are some factors which suggest that our economy will continue to grow this year, though not by as much as previously thought. A key driver will be higher farm incomes spurring some extra farm spending, with assistance from the $3.2bn to be allocated to Fonterra shareholders. But higher prices for fuel and fertiliser will curb this traditionally healthy stimulus to growth in our economy.

Foreign student numbers here are rising, infrastructure spending is firming, and both businesses and consumers have some spending to catch up on in areas of capital expansion and renewal and things like whitewear and motor vehicles.

A return to recession in New Zealand is possible but not highly probable this year. But wherever we head, for the moment the pressure on interest rates is upward because of rising inflation, not downward because of weakening growth prospects.

This article has been provided for general information only. Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called "Tony's View". You can sign up at www.tonyalexander.nz