Westpac economists change their call and now see two further cuts to the OCR this year - but they say even three cuts would be a possibility; house price rises may be even more than Westpac has forecast

Westpac economists change their call and now see two further cuts to the OCR this year - but they say even three cuts would be a possibility; house price rises may be even more than Westpac has forecast

Westpac economists have changed their call on interest rates and now predict the Official Cash Rate will be cut twice more this year - but they say there's even a chance there will be three cuts.

And they say more cuts could lead to more activity in the housing market and might lead to them raising their already bullish forecast of house price rises of 7% in the next year.

Westpac chief economist Dominick Stephens says he now expects that the Reserve Bank will cut the OCR in August and again in November, taking the OCR to an all-time low of 1%.

"And the risk to our new call is skewed towards earlier and/or more aggressive cuts – there is a possibility that the RBNZ could cut the OCR in September, and even a possibility that the OCR could drop below 1%."

Previously Westpac economists had forecast that there would be a cut next month - but no more. At the moment the OCR is at 1.5%.

Stephens said one possible catalyst to a September OCR cut could be adverse news on the labour market.

"If the RBNZ does cut in September due to rising unemployment, then there is a chance that they could go even further by cutting the OCR to 0.75% in November. However, at this stage we view earlier or more aggressive OCR cuts as a risk scenario – our central forecast is an OCR low of 1% delivered in November."

Stephens said the Westpac economists had been pointing out for some time that lowering interest rates will have consequences for asset markets, particularly house prices.

"In May we predicted that  nationwide annual house price inflation would accelerate from 2% now to 7% over the year ahead, partly due to the mortgage rate declines already seen.

"Recent data supports our view. Over the past two months, we estimate that seasonally adjusted housing market turnover has risen 10%. Brisker house sales are a reliable sign of price rises to come."

Meanwhile, he said, New Zealand appears to be in the grip of a “search for yield” investment environment more generally. [Note: Westpac's own spectacular success with a bond offer this week would appear to demonstrate that point.]

"Growth in bank deposits has been weak, as people have been turned off by low interest rates. Meanwhile, share market prices have risen very sharply, particularly for dividend-paying stocks, and we have heard anecdotes that fund managers are seeing an influx of investment funds.

"We think investors seeking yield will soon turn to the slower-moving housing market.

"We will reassess our house price forecasts we when release our next Economic Overview in August. However, if we are right about the Reserve Bank cutting the OCR to 1% this year, then we can expect even lower fixed mortgage rates.

"That could prompt us to upgrade our house price forecast.

"Rising house prices will tend to stimulate more consumer spending. On top of that, we are still expecting the large doses of government spending that have been administered over the past two Budgets to stimulate the economy. True, there has been little impact from the fiscal stimulus to date, but that is probably just a matter of timing – it always takes a new government time to get the wheels of the bureaucracy turning in the direction it wants."

Stephens said a slowdown in the New Zealand economy has been in train for almost two years now, "and was well forecast by us".

"The wind down of the Canterbury rebuild and slowing house price growth were predictable, and caused the slowdown in GDP growth that we anticipated. But we previously expected that the economy would be picking up by mid-2019, on the back of fiscal stimulus and lower interest rates.

"Instead, recent data suggests that New Zealand economic growth has remained slow."

Stephens said in addition to weak domestic economic growth, there were now the first cracks emerging in the previously-robust export sector.

"Some sectors are still booming, but dairy auction prices fell 8% over May and June, prompting us to lower our farmgate milk price forecast to $6.90/kg (previously $7.20). And over the past month, there has been a 25% drop in export log prices. Forestry accounts for only 9% of our merchandise exports, but it is disproportionately important for the economic cycle due to its impact on employment.

"When log prices drop, forest owners often stop harvesting, with an immediate impact on employment and on the health of forestry contracting businesses. After the last log price downturn, in 2014, employment  in the industry fell by 700 jobs. Other workers went onto reduced hours (and presumably reduced incomes). And of course, work for businesses involved in transporting forestry products and other related industries dried up, with an unknown impact on employment. This time could be similar."

Stephen said "to cap it all off", the trade-weighted exchange rate has risen about 3% over the past month, and is now about 1.5% higher than the forecast that underpinned the RBNZ’s May OCR decision.

"A higher exchange rate, if sustained, will compound the emerging concerns for some exporters and will suppress inflation by making imported products cheaper."

Stephens expects that on the back of the monetary and fiscal stimulus he's forecast, that economic growth will recover over the year ahead.

"This would preclude further OCR cuts in 2020.

"Indeed, we expect the Reserve Bank will be slowly hiking the OCR again in the early 2020s, although our tentative start date for OCR hikes is now mid-2021. That is later than previously forecast, because interest rates are going to have to stay low for longer than previously thought in order for the Reserve Bank to achieve its inflation and employment targets."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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99 Comments

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23
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people can no longer afford those over priced assets?

22
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Well Albert Einstein is widely credited with saying, “The definition of insanity is doing the same thing over and over again, but expecting different results.”

Yep and "the significant issues we face today cannot be solved by the same thinking that created them" and "only two things are infinite, the universe and human stupidity, and I'm not sure about the former"

Whether the DGM majority here like it or not, if the OCR drops to 1.0% (or lower) by year’s end, then the housing market will be delivered a near-certain stimulus.

TTP

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Whether the DGM majority here like it or not, if the OCR drops to 1.0% (or lower) by year’s end, then the housing market will be delivered a near-certain stimulus.

I'll play devil's advocate. Why is it not possible that house prices cannot go up forever and a day by providing stimulus beyond reducing the cost of money to zero?

Because TTP's job depends on the public's belief that house prices always go up.

TTP, this is a common sense statement that shouldn't be controversial, but this a den of DGMs, and they are world class Olympians when it comes to mental gymnastics.

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TTP, this is a common sense statement that shouldn't be controversial, but this a den of DGMs, and they are world class Olympians when it comes to mental gymnastics.

What's a DGM and how do you categorize them? If Ashley Church says house prices rize by approx 7% per year, but someone asks 'why', would the person posing the question be a DGM?

How do you define a "non DGM"?

Oh absolutely they are a DGM, you may not question the Church. Just keep the faith.

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Look at all the stimulus (OCR drops) the housing market has been delivered this year! And yet, no increase in sales. Actually, sales are dropping. How do you explain that?

But this time it will be different because reasons!

An entirely rational comment.

Sales would have dropped more if the OCR had not been lowered. If you don't accept that explanation then you really need to explain why leaving the OCR at 2.5% (as at January 2016) would have had no impact on property sales (i.e. they would have dropped at the same rate or perhaps even lower rate?... Maybe even explain how there would have been more sales if the OCR stayed the same or was raised?... (we're in fantasy land now but give it a shot)).

So asset prices are so disconnected from market fundamentals that they cannot be maintained without central bank help? That's scary isn't it.

No, why do you think it is?

What happens when the 'support' runs out?

We'll have inflation.

No, you'll have deflation! This is what Central Banks are trying right now to prevent deflation breaking out with a pre-emptive strike.

Their progress doesn't look encouraging.

I don't think you understand monetary policy, here's a link to RBNZ's website.

https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy

HeavyG, what specific tidbit of information are you trying to share in this disinflationary environment? You need to be more specific with your prediction of what will happen when -0.75 OCR fails to ignite inflation, sustainable growth and prosperity. Your link tells everybody here you're just being evasive and passing the buck when you cant address the question. I can see how a collapsing currency can cause hyperinflation. In such a scenario, collapsing property prices through loss of precious foreign capital would be just the beginning. We would all have to install bars on our windows. Is this what you are predicting when the support runs out?

Are you in fact a DGM?

When rates fall below zero, here are the unintended consequences. For starters, savers can make money by investing in deposit boxes. https://www.stuff.co.nz/business/114328314/when-interest-rates-fall-belo...

Banks still need to offer rates to encourage households to deposit. There is only so low deposits can go when related to the prevailing inflation/deflation rate of the time. Where that leaves property prices is an easy guess.

If you go deeply enough negative then then even those without an income will pass servicing to buy a home provided they borrow enough, heh, snicker.

..

Interest rate isn't the reason house prices are falling. Your logic falls apart considering the other cuts have done nothing.

OCR movements are (well should be) dictated by CPI not house prices. All the current drops in the OCR are consistent with CPI targeting but don't let that spoil your tinfoil hat party.

And CPI is flawed

TTP, ask yourself why an internationally recognised severely unaffordable housing market would need stimulus from the central bank to keep going up? Does that seem sustainable to you?

You know, It strikes me that if the so called “DGM” are the majority here now, it could be that way “out there” in the actual market too. Behaviour finance 101.

DGMers have been the majority around these parts forever. That's the problem. The same message over and over again irrespective of the economic indicators. They have the same mentality of the helicopter gunner in "Full Metal Jacket" shooting villagers in the rice fields as he flies over them... "Anyone who runs is a VC. Anyone who stands still is a well-disciplined VC!"

OCR going up = crash, OCR going down = crash. House prices going up = crash coming. House prices going down = crash. Everything is crashing or about to crash. That's a DGMer.

OCR going up = crash, OCR going down = crash. House prices going up = crash coming. House prices going down = crash. Everything is crashing or about to crash. That's a DGMer.

I get it. Anyone who entertains the idea of a property crash is a DGM. What about those people who perhaps accept that a property crash is possible? Are they DGMs?

No. But they are the minority on this site. The majority are "crash, crash!, CRASH!!!!!"....

A DGMer does not "entertain" the possibility of a property market crash, a crash is a certainty to them, what they cannot entertain is that there may not be a crash.

A little while ago I went into the archives and had a chuckle at the DGM comments on property articles from back in 2011, just before prices started to skyrocket. DGMs have always been prominent on this site, but its gotten beyond a joke now. Here are a couple of random examples.

https://www.interest.co.nz/property/53858/volume-house-sales-rises-may-b...

https://www.interest.co.nz/property/53722/auckland-property-market-turni...

Little do today's DGMs realise that their comments will age like milk and are set to be a source of amusement in years to come.

Love it DD thanks for sharing these highly amusing and incredibly short-sighted comments. Heres one from nicholas arrand (where's nick now) I especially like, it could have been written this week by youknowwho

"by Nicholas Arrand | 13th Jun 11, 6:57pm
... vendors are holding back, waiting for 'the good times' to re-emerge. They aren't going to. Then, the log-jam will break, and the market will be awash with desperate vendors, clambering over each other ( I believe it's called "leapfrogging") to attract the ,by now, conditioned purchasers. New Zealand has a finite borrowing capacity at viable interest rates ( Ask the Rating Agencies if you have a doubt!). ..."

Priceless

This comment is solid gold from magnum PI, its the type of nonsense thing RP would say while he tries desperately to convince us of his failing strategy.

"by Magnum PI | 1st Jun 11, 1:34pm
... I have seen endless spruiking by property fanboys. They refuse to accept that property is anything other than golden."

So confident, just like today's bunch. I feel sorry for any prospective first home buyers that listed to them though.

Completely agree with that. 2011 was about the time wise fhb and smart investors were buying. Buy in the doldrums and reap rewards later

And what do you call the opposite, ie. someone who talks with certainty that there will be no correction or crash?

Yes like the price of bread received stimulus in the Weimar Republic.

And we do like to listen to people who are not qualified to comment on complex issues (not that I believe that he ever said it).

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"Stephens expects that on the back of the monetary and fiscal stimulus he's forecast, that economic growth will recover over the year ahead."

I think the EU/ECB economists thought the same for the last 10yrs, but this did not happen and it won't happen here either. Taxes are sure to rise and will more than offset any boost from fiscal/monetary stimulus, and confidence is beginning to tank for very good reasons. When the majority realise that those at the wheel (govt and RBNZ) don't have a clue and are simply in panic mode, then the real circus will begin.

Just remember that when a banker says the words "economic growth" they really mean "increasing debt issuance" they conflate the two together and that's why we are where we are

Growth is the increasing sum of transactions, debt is primarily an increase to the stock.

Yeh lets cut the BS and start increasing the OCR Rate.

Listen to this from 7 mins, I would recommend the whole thing.

https://www.youtube.com/watch?v=a4_U6bS-cU4&feature=youtu.be

I had a look and realised that I watched that recently. I found his investment approach agreeable.

This guy is all over the place.

And the risk to our new call is skewed towards earlier and/or more aggressive cuts – there is a possibility that the RBNZ could cut the OCR in September, and even a possibility that the OCR could drop below 1%.

Followed closely by...
Indeed, we expect the Reserve Bank will be slowly hiking the OCR again in the early 2020s, although our tentative start date for OCR hikes is now mid-2021.

So, what, Westpac's/Dominic Stephen's position is that the RBNZ is going to cut the OCR twice this year and then start raising it in the early 2020s?
Does he realise how ridiculous that sounds?

Stephens expects that on the back of the monetary and fiscal stimulus he's forecast....
I fail to see how he could ever 'forecast' exogenous factors in the economy.
Predict, yes. Forecast, no. If that's a direct quote from him, he probably needs to adjust his understanding of time series models.

I really really don't rate him.

Apparently he's a great fan of yo-yos.

14
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House price rises ? Really ? Rates are being cut precisely because of house price weakness.

At what point does the news change to "oh fk, Houston we have a problem" ?

Yeah a lot of chicken and egg

Perhaps Mr Stephens is unsure if May and June occur at the same time each year ?
"Recent data supports our view. Over the past two months, we estimate that seasonally adjusted housing market turnover has risen 10%. Brisker house sales are a reliable sign of price rises to come."
Nationwide real estate sales ( ex lifestyle) 2018 ,,,14089, Auckland 4341 in the year of the economist 2019 (seasonally adjusted) Nationwide sales 13417, Auckland 3820.
Actually Mr Stephens the six month rolling ( non seasonally adjusted )sales numbers offers a completely different view.
Are falling house sales a reliable sign of price falls to come ?

Exactly. How did he even come up with that 10% figure?
And yes, of course this "Brisker house sales are a reliable sign of price rises to come" only works on the way up. Since house prices always go UP! They never go down, don't you understand?!

There are only brisker house sales because there are sellers and buyers agreeing on a price. A sales increase doesn't predict the direction of pricing.

But... but Westpac chief economist Dominick Stephens says they do! He's a highly trained professional, an expert with amazing credentials!
At least that's what I've been told.

I believe TTP agrees with his position as well. I've found the comments on this article to be quite interesting this morning as there are quite a few comments about how markets actually operate.

"Brisker sales" in last 2 months he said. Not in Auckland.
Residential sales were 17% lower in Auckland in June, compared to a year earlier.
On Hibiscus Coast total sales were 32% lower
It is no coincidence that the Aussie bank which is seen as most risky by the IMF and BIS is also the one being most bullish. Come on in, greater fools, the water is lovely

17
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A few facts for our readers, as Westpac is in la-la land. Total NZ sales, last 6m, compared to same 6m in 2018: down 13.3%. Total NZ residential sales: down 10.8%.
Auckland total residential sales in same period: down 15.85%
Auckland apartment sales down 39%
Auckland section sales down 50%
Sales are not rising in the last 2 months, they are merely falling less numerically and in % terms than they were in March, April and May. That is: NOT increasing
These people, I am afraid, are fatally flawed and biased. They are NOT independent sources of real economic forecasting. I think this needs pointing out, regularly.

At this point I wouldn't be surprised if Westpac chief economist Dominick Stephens simply looked at the chart the wrong way, mixing up the 2018 and the 2019 stats. This seems to be the most likely explanation.

well said Mike

Boom boom

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Oh, a bank with one of the biggest exposures to the mortgage market thinks (wants) unaffordable house prices to rise even further, rather than staying flat or dropping. Which begs the question, why would the RBNZ want to keep an admittedly unaffordable housing market rising? To keep the debt house of cards from collapsing in on itself? It all seems really unsustainable.

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Didn’t Joe Wilkes say yesterday that Thursday would bring the arrival of an article that would feature Mr Stephens? Spooky.

He seems strangely silent given he called it to the penny...

Looks like the editors have sent him off on holiday to the mystical land of ‘403 Access Denied’

https://www.interest.co.nz/users/joe-wilkes

Is he perma-banned? I wonder what he said that led to his censorship? I know he challenged the current mainstream narrative, I hope that this wasn't the cause of his demise. At least he's still on the DFA channel if people want to hear his view on housing.

JW said he thought there would be a spin the positive news story and low and behold there it is above. Is that really worthy of tinning the guy ?

I find it all strange at the moment in NZ . Even Stuff have gone full censorship on comments on everything Property related.. but still the emotive stories continue.

If he has been banned I'm sure (hope) there's a good reason for it.

Unfortunately I am sure he will be back here with his 3rd (or is it now his 4th) nom de plume.

What makes you think he was here prior? I don't recall too many other people persistently highlighting the fact credit growth is the primary driver of the current bubble.

He came on the scene after another prolific commentator with the same writing style and state of mind was banned. When asked directly if he was the phoenix of the old commentator he refused to answer. Give it a day or 2 and I am sure you will recognise the old Joe Wilkes writing style e.g. "bubble", "end of days", "crash", "greed", "I told you so" etc.....

Come to think of it you may be hard pressed to tell him apart from 90% of the commentators on here;)

Can’t say I remember him being that dramatic, but I did enjoy the information and viewpoint. I get the impression that he’s not so shy as to want to hide behind a false name. Tell me, have you seen anyone else in NZ who is prepared to call out the craziness of the credit excesses and failure of banking regulation in our housing market and then actually go on camera to say it?
As someone who was thinking of buying, most of what he says makes perfect sense to me and I might have already lost thousands of dollars of equity by now, had I not found DFA and decided to take my time and see what happens.
Not sure what he’s done to get disappeared, But I hope it’s not permanent, because he did call today’s article content and protagonist perfectly.

...is that you Joe?.....

I don't see any DD (BLSH) posts either, did DC take a moment for a cleanup?

Nah DD is up the top with the usual message.

I live to post another day. I'd never post anything that warranted banishment to 403 land. I'm not this BLSH character, but he clearly left quite an impression on you.

Not BLSH.. bwahaha. pull the other one.

I agree, (DD) is indeed Buylowsellhigh. He no longer wants to own New Year predictions made under the BLSH username for 2019.

12:52am? Sleep is important Pragmatist, you’re going to be tired today. Let’s work on that OK?

...now that you've been sprung, you have to retain ownership of your over optimistic predictions. Reinventing oneself on an anonymous forum? Your behaviour speaks volumes.

.

I said yesterday that the spruikers including the bank economists will be turning up the volume

You must be very happy to have a correct inkling at last Fritzy

Ha!!!!
How have I been incorrect, please tell me?
For at least 1.5 years I have been predicting a fall in house prices from peak in Auckland of 5-10% (hardly doom and gloom). It's nearing 5% and who knows where to next, but so far I have been close to the money.
I was also stating here mid-late last year that the OCR would be cut several times this year. Not many were calling that.

So - 'Houseworks' - please advise me of all my 'incorrect inklings'.
In fact, I have been much closer to the mark than almost all economic commentators.

How have you gone?

I have also called a drop away in residential development by the end of this year, and a slump in related employment. Let's see how I go on that one. Always happy to be called out on inaccuracies, because no one is an 'Economic Nostradamus, are they?????

Um go back and read your intro, you admit to being WRONG "for at least 1.5 years"
Boom bang whack ... doh

You really are an idiot. I have said they will FALL 5-10% FROM PEAK. Can your sub-100 IQ cope with that?
I didn't say precisely when. They are down about 4% in Auckland, that's obviously nearly 5%, and the way things are looking they will fall from peak by at least 5%.

"Brisker house sales are a reliable sign of price rises to come."

What has Dominic been smoking?

https://www.interest.co.nz/charts/real-estate/days-sell

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If we have to cut OCR 3 x by the end of the yea, that would indicate our economy is in deep sht, and maybe it is.

We are seeing unemployment rise significantly for the first time in a while, Imports for June where significantly down. House sales in Akld are super low. Credit growth is evaporating.

As ive said many times before if businesses cant thrive in the current low rate environment then I doubt they can in a 0.75% environment. Maybe it will save a few with high debt from drowning but in all seriousness it is a sign of weakness and that is likely to trend into housing as more job losses occur.

If we have to cut OCR 3 x by the end of the yea, that would indicate our economy is in deep sht,

Probably something even bigger to ponder is what most people know about how money is priced is disintegrating...not just in NZ but amongs the developed countries. And for some reason, people's eyes light up because they think they can get an ultra-cheap mortgage and their house is supposedly going to be worth more than they could ever earn in a lifetime. Strange times.

Not just us - The global economy is in the crap with weak demand .... hence the need to completely financialise all housing stock to infinite ...
the guts of it is we need more Debt/credit growth to try and hold up commodity prices ... otherwise supply chains will grind to a stop
But in doing so we debase our currencies and eventually we crash capitalism

Underneath it all, we find Resource/energy limits are physical limits which cant be manipulated by money or using houses as free ATMs

If house prices increase by [another] 7% there will be a revolt.

Aren't house prices simply a by-product of success? I think it was the great John Key who said something similar.

Adrian Orr : " I say John , the voters are revolting ! "

John Key : " No , not really ... some of them are nice chaps ... "

I understand that confidence plays a huge part in the markets and once you don't have that ...well .These guys are there to talk it up and of course they have a crystal ball in terms of saying "rates will start going up in mid 2021"If people aren't paying off debt now how are they doing to do that in 2021 with a higher interest rate.?
It really does bugger belief. Attached is the real situation and I'm not using a crystal ball either.
https://www.zerohedge.com/news/2019-07-25/credit-card-splurge-suggests-i...

That is plain scary reading. Basically the crash in America is coming again, like it or not. Who knows exactly when, maybe a year or two at tops. It could all coincide with the American presidential election.

Cutting the OCR will follow the law of diminishing returns. Banks will not pass on all of the the cut because its all about what their borrowing rates are. Deposits in the banks will start to flow out because some of the elderly will potentially have no other option but to seek better returns in riskier investments. Essentially a number of things will start to come into play that prevents the banks passing on any of the cuts. Smells like fear to me, a big storm is on the horizon and its time to start battening down the hatches.

Once upon a time there was a thing called a business cycle. Then daddy bear central banker decided that was too risky and abolished interest rises