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Bernard Hickey looks at what the RBNZ's countenancing of a possible rate cut means for mortgage rates and property prices

Bernard Hickey looks at what the RBNZ's countenancing of a possible rate cut means for mortgage rates and property prices

By Bernard Hickey

The Reserve Bank of New Zealand held the Official Cash Rate (OCR) at 3.5% as expected, but surprised financial markets by openly talking about the possibility of a rate cut this year and dropping its previous bias towards a rate hike.

The bank referred to the slump in petrol prices and weak local inflation in commenting about the chance of deflation later this year. Wholesale interest rates and the New Zealand dollar fell sharply after the statement.

The central bank said it expected to keep the OCR on hold for some time, but pointed out future interest rate adjustments "up or down" would depend on economic data. This is the first time the bank has even mentioned the possibility of a cut.

Financial markets immediately priced in the expectation of a 25 basis point rate cut later this year. Bank economists now expect the bank to hold the OCR until well into 2016 and also now see a chance of a cut later this year. Inflation all around the world is falling because of lower oil prices, ageing populations and new technology that helps companies reduce costs and wage growth.

Governor Graeme Wheeler noted the Auckland housing market was picking up again, but made no further comment on what he would do about it. For more detail on the OCR decision and the reaction see here.

Some economists are calling for the bank to introduce new Macro-Prudential controls, similar to the high LVR speed limit introduced in 2013, which helped slow the Auckland housing market for almost a year.

What does this mean for rates?

Longer term mortgage rates have been falling in recent months as inflation remains dead globally and New Zealand's inflation is subdued despite solid GDP growth.

Money printing in Europe and Japan is also depressing long term interest rates globally, which is making it easier for banks to cut fixed mortgage rates.

Floating rates

Advertised floating mortgage rates are flat at 6.75% and could stay there well into 2016, unless the Reserve Bank cuts the OCR, which would be passed on. See all mortgage rates here.

Fixed rates

Banks have been cutting their fixed rates towards 5%. Bank funding costs from overseas borrowing and local term deposits have been falling, which means banks are competing hard.

Fixed rates depend more on wholesale interest rate moves than the OCR. They also depend on the banks' funding costs on international markets, which have been falling in recent months because of deflation fears and renewed central bank money printing.

The fixed vs floating decision depends on your outlook for the OCR and your personal situation. A flat to falling OCR makes floating more attractive, while a fast-rising OCR makes fixing more attractive.

In my view, the OCR is likely to remain unchanged, possibly well into 2016, although the chances of a cut are rising.

This had made me less keen to fix for a longer than a year, but recent moves in two and three year fixed rates to well below floating rates have made them more attractive.

What does all this mean for the property market?

The property market is warming up again, particularly in Auckland as fixed mortgage rates fall, net migration rises and new housing supply remains below population growth. House price inflation is picking up elsewhere too, but to a lesser extent.

The Reserve Bank's response will be interesting. Some economists are calling for more macro-prudential measures. See more here from Gareth Vaughan on the Reserve Bank's decision and whether it is 'pouring petrol on the fire in Auckland.'

Mortgage rates

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6 Comments

It could just be my perception, but Mr Wheeler seems to have signalled that inflation is his only real concern, and that house prices are not his problem, other than their rather remote role in any possible bank failures. The OCR seems the main tool he is likely to use. He is reverting to his officially agreed role therefore, which seems to me a departure from the last year, in both senses. It did seem to me he had to either take the position I've noted, or explain what other targets he in fact was aiming at, given he was clearly going to miss the inflation target by some margin, and even more so if he kept any kind of tightening bias.

If he does have only one target, one tool, then with the benefit of hindsight the OCR clearly went up too far too fast, with inflation even by his estimation looking to in fact be deflation for a period in 2015. 

As it happens I would give him other targets, and more explicit other tools. (And I think he spent a fair bit of 2014 sort of having other targets as well). As well as inflation, the current account is a favourite of mine (which it seems to me Singapore, a similar sized country hugely exposed to trading as we are, is doing with its monetary policy, where it targets the exchange rate and not interest rates). It could be employment, or asset prices, or foreign money flows. The tools could well include a more retail approach to the money supply. E.g. "You want $1 billion between you, 4 Aussie/NZ banks, and you can source it offshore at a net equivalent of 3%? (0.5% below the OCR). Okay, I'll give you the billion at 3%, because I would prefer the exchange rate didn't get a lift right now." 

I'm not sure housing will in fact shoot up, but regardless, he seems to be saying it's no longer his problem. He will be very happy with the drop in the exchange rate, and is probably looking for another 8-10% depreciation against the TWI. 

 

 

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seems to be presenting a lesser trading target for market participants to double bluff/game.

not clear if this is original or assisted thinking.

 

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The house problem is being driven by people who are funded from outside his reach.

His only lever is OCR (and a useless LVR which only keeps out the NZ new kids).  Foreign money isn't effected by either.

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Other projects they are working on:   A 2% stamp duty on all Auckland house purchases for residents/NZers,  a 5%  Stamp duty for all non resident buyers,  all non residents may only purchase new houses. 

Plus a .5% loading on all mortgages on Auckland residential properties.   

 

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sounds like a good plan.  Of course he may also have inside informationl on what gov is doing plans to do to further assist the supply side.... and the positive effects of the rma review.

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0.5% mortgage premium on Auckland properties?!?

 

f**k that. I think a lot of people will simply do what I'll do. My parents will mortgage their house to pay mine off in full, I'll simply take over the mortgage on their place in Hawke's Bay.

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