The Reserve Bank would not want to see mortgage rates falling any further at the moment, BNZ economists believe.
In recent days there has been a flurry of mortgage rate reductions as banks respond both to competitive pressures and the fact that wholesale interest rates have been easing.
These falls come after some very sharp increases in mortgage costs during the past year as our banks have responded both to the fact that the RBNZ has been hiking the Official Cash Rate to fight inflation and, more directly, due to some very strong earlier rises in wholesale interest rates - which reflected both the RBNZ's stance on inflation and what has been happening internationally in response to global inflationary pressures.
The RBNZ is set to make another decision on interest rates next week (August 17), and while there is virtually universal expectation that our central bank will hike the OCR by another 50 basis points (to 3.0%), there's a growing feeling in markets that the OCR could peak at around around 4% late this year and then maybe even be reduced again next year.
This is despite current annual inflation of 7.3% and a very clearly signalled intent by the RBNZ to get that inflation rate down and to curb 'inflation expectations'. The higher mortgage rates that have been seen in the past year are a big part of this, since higher mortgage payments curb spending and take steam out of what has been a very hot economy. A hot economy resulting in inflation.
In its most recent forecast of the likely track of the OCR (in the May Monetary Policy Statement) the RBNZ had (page 45) forecast the cash rate ending this year at around 3.5% before peaking at around 4% in June 2023.
However, while the RBNZ had the OCR peaking in the middle of next year, it wasn't forecasting any falls until the second half of 2024. And this is where market opinion is now diverging somewhat, with some expectation of earlier falls than that.
In a preview of next week's OCR decision contained in the weekly BNZ Markets Outlook publication, BNZ head of research Stephen Toplis said one of the tricky aspects facing the RBNZ is the market’s "desire" to price in rate cuts next year.
"This is particularly pertinent given recent falls in home mortgage rates," he said.
Toplis said he didn't think the RBNZ would want mortgage rates falling any further "any time soon".
Next week's OCR decision will be accompanied by a new Monetary Policy Statement from the RBNZ that will include an updated forecast 'track' for the OCR.
"Sure, the cash rate [OCR] should fall back towards neutral in due course but it is unlikely the Bank [RBNZ] would want to indicate any material decline within twelve months of rates reaching a peak," he said.
He expects therefore that in the new cash rate forecast, the RBNZ will retain a "peak" to remain in place for around an 18-month period.
"In our opinion, the Bank [RBNZ] should be forceful in trying to dissuade those who are currently driving market pricing of such an easing.
"Realistically, however, pricing is as much about investors, particularly offshore, believing New Zealand’s yield curve must have a similar shape to the rest of the world irrespective of the local idiosyncrasies. It’s always hard for the central bank to stand in the way of offshore momentum."
The BNZ economists are forecasting a 50 point increase in the OCR next week followed by two lots of 25 points in the next two reviews to occur in October and November.
"We have been tempted to increase our October call to 50 but simply have not found any justification in the data to do so. And we are always conscious of not being data-whipped by the noise in the published figures. If, however, the RBNZ is adamant it will go 50 again in October then we will probably adjust our track accordingly."
Toplis said that from the market’s perspective the key things that are being mulled are:
• will the RBNZ give clear indication that it intends going 50 basis points in October?
• will it indicate an intention to deliver two more consecutive 50 point increases this year (October and November)?
• what will it print as its terminal (peak) rate?
"In brief we think:
• possibly;
• it shouldn’t, albeit that it won’t want to provide the market with any excuse to rally;
• same again, around 4.0%."
Toplis said he still thinks there is a risk the cash rate does not need to get to 4.0% to achieve the RBNZ’s required outcomes but see no reason why the RBNZ would want to change its most recent forecast of 3.95% given the evidence it has received to date.
"With two meetings, after the August one, before the end of the year, we doubt the RBNZ would want to rule out the possibility of a further 75 basis points of hikes during that period so it will likely signal this, leaving a further 25 points for next year."
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Yes, but the contents of the article all suggest that the RBNZ will aim to pull its policy levers to counter that, and even sees OCR remaining close to peak for 18 months.
RBNZ can impact short term rates by altering their projected rate path if they believe short term rates are deviated from the desired path
Not true Miguel, here's another extract from the article above:
there's a growing feeling in markets that the OCR could peak at around around 4% late this year and then maybe even be reduced again next year.
and also this:
BNZ head of research Stephen Toplis said one of the tricky aspects facing the RBNZ is the market’s "desire" to price in rate cuts next year.
Agreed. The better option would be to raise taxes to take hot money out of the system, but that ain't going to happen heading into an election year.
Unless maybe something utterly crazy like - I dunno - a super tax on excess profits (looking at you bank/petro cartels, other cozy duopolies) and demanding all those lovely COVID ducats are repaid rather than given to shareholders by some of NZ's finest?
Correct. There is lots of delusional / wishful thinking going on, especially by people with vested interests in the housing Ponzi. The reality is that rates will have to keep increasing until inflation, and most importantly its non-tradeable component, are put back under some control. Which is not going to be easy at all, nor a quick process. Anybody who think that inflation is not going to be a problem next year is just deluding himself.
"The reality is that rates will have to keep increasing until inflation, and most importantly its non-tradeable component, are put back under some control."
I really don't think so. Yes I agree inflation won't be between 1 - 3% in 2023 but the RBNZ will be forced to change its tune. The famous "path of least regrets" won't be to control inflation anymore, it will be to save NZ from a deep recession, businesses collapsing and people losing their jobs.
We shall see in 12 months.
The non-tradeable inflation figures are a crock. They completely fail to recognise how much petrol, diesel, fertiliser, etc influence the costs of so called 'non-tradeable' products. Inflation in NZ will stabilise (or even come down) when international oil prices come down. Oil is an input cost to our whole economy and change in oil prices correlate almost exactly with NZ CPI.
What we should be focused on is the growing cost of living crisis - consumer spending is tanking as disposable income is diverted into loan repayments, and this demand reduction will be reflected in jobs numbers over the coming months as companies hold back on recruitment. RBNZ have slammed the brakes on too hard - and it will be workers that suffer.
Ah, thanks. I admit that I had to look up what 'proclivity' meant!
I have a lot of time for the best of the MMT economists - Scott Fulwiler, Rohan Grey, Stephenie Kelton, Randy Wray, Bill Mitchell, Steve Keen (sometimes), Nathan Tankus, Richard Tye and Steven Hail (the latter two are outstanding on how central banks actually work - as is Michael Reddell who is obviously no MMT economist but has the same clarity of understanding of monetary operations). I think the problem that MMT has is that people 'strawman' it. They assume they understand what it is (printing money, zimbabwe, venezuela etc), and they start to disagree with their strawman of it as soon as you mention it. So, I don't talk about it.
Isn't that like a pot calling a kettle black? I know part of your repertoire is kind of mild trolling, but most people need to learn a more Soccratic mindset when thinking about economics. Your thinking is definitely mainstream and not what I would consider contrarian.
I want to agree with you in the hope that there is a correction coming to straighten our economy out. However, it is hard to see unemployment tick up while population growth resumes to high levels with all this pent-up demand for cheaper workers.
For the average Kiwi worker, migrants once again will give them a run for their money on both decent wages and basic necessities. Just like old times but add persistently high inflation into the mix.
Those wanting out of this hamster wheel will likely leave for greener pastures, so will never get counted in the official stats.
Less than an hour after I post this comment, Stuff comes up with an article titled NZ could 'easily slip into recession' if tourism and education slow to rebound.
More pressure on the government to fling the gates open wider and help restart the population Ponzi. Export education is a great workaround for vested interests to lock low-wage workers in for years, especially now that direct hires from overseas come with a $27.76/hour cost.
NZ could 'easily slip into recession' if tourism and education slow to rebound | Stuff.co.nz
slammed the brakes on!!!! LOL
They started applying minimal pressure to the brakes way too late whilst steering towards a concrete wall!
The fact we are just back at normalish OCR rates and people are already shitting their pants, shows how bad a mess they have created!
The magnitude and pace of the change (increase in rates) is completely unprecedented - and has been applied to an economy with ridiculous levels of private debt.
Now, RBNZ *absolutely* messed up by letting cheap credit flow into housing, but the way out of that should have been to focus on winding housing back, not crashing household disposable income, which leads to workers being thrown on the dole in vast numbers.
"People are dreaming if they think rates are coming down already."
Errr, rates have actually already come down, as per article above
In recent days there has been a flurry of mortgage rate reductions as banks respond both to competitive pressures and the fact that wholesale interest rates have been easing.
Exactly. Even if inflation levels off at 7% rates still have to go up until it drops to the target level. THEN the RBNZ can drop rates a little if the economy needs a boost. Aim should be to have rates at a higher level to prevent the new (more rational) level of housing prices from bubbling again whilst better controls are implemented.
135k with 20% deposit and DTI of 3x comes out at just over 500k. I think that if RBNZ do go ahead with DTI it would be 5 or 6x.
Though average household income is around $110k, median household income would be a better metric and I believe it is still under $100k.
$100k with a DTI of 5x and 20% deposit would put median at around $625k. That’s a believable figure given the current rate of falls in some parts of the country.
$100k with a DTI of 5x and 20% deposit would put median at around $625k. That’s a believable figure given the current rate of falls in some parts of the country.
Sorry to burst your bubble but I think even if demand falls off a cliff in China and the U.S., consumer prices in NZ will remain elevated for a number of different reasons (mkts and businesses in NZ cannot adjust down like they have in deflationary Japan). $100K (before tax) is not a lot of moolah in the 'new normal'. F'more, market entrants into the housing mkt are more or less broke now. That means no real savings, even for a deposit.
Therefore, your $625K could be seen as ambitious and hopeful.
Less hopeful, more just a numbers game. If Marty showed up on my doorstep and said that’s where the market was heading, I’d believe it.
Not sure this comment stacks up. If new entrants to the housing market are more or less broke now, who’s left to support the high prices. Investors trying to time the bottom?
The wisdom of the crowds may be our best guess at where things level out. Would be a great survey to run!
Not sure how reputable but here:
https://figure.nz/chart/QRwTnCDzvn0Do1D6
Median much more useful in population, median household income over median house price is what we should focus on. Ignore averages, easily muddied.
And that's exactly why they went for LVR instead. It was a two-for-one: knock those pesky FHBs out of the market and keep the party going for those already playing the game, whilst pretending "we're doing it for your own good".
Long term investors with decent equity won't be worried by a DTI - multiply your $90k by x number of already-paid-off rentals.
The article refers to the RB wanting to 'curb inflationary expectations'. Perhaps they should read this.
/https://www.federalreserve.gov/econres/feds/files/2021062pap.pdf
This lengthy paper from the Fed makes a very good case that there is little or no good evidence that this phenomenon actually exists. It's worth reading.
The RBNZ seem to be stubbornly stuck in their ways. They must think our economy is some kind of game, or a place where they can demonstrate their power.
Has it occurred to the RBNZ that our economy consists of people, that the official cash rate mainly drives property prices (not so much consumer prices), and the livelihood of most people depends on property prices one way or another?
For example, the ultra-low interest rates up to 2021 led to first home buyers being unable to buy, due to sky-high prices. Now, the ones that did manage to buy have been financially ruined, due to sharply dropping prices.
Why have the RBNZ not attempted to engineer a soft landing of the property market, via mildly and slowly increased official cash rates? Why are they stubbornly holding on to their game plan even when it is visibly destroying our country and triggering a possible financial crisis unheard of in New Zealand?
Ooh really ?
Is housing market the one that is affected by OCR changes?
In case if the OCR did not go down next year? How will the building industry keep so many people for work ?
Recession ?
where are the so called foreign workers going to stay once they arrive. Ooh in the space of those who might probably flew away
and what will happen to the building industry if so many flew away due to the high rent and house prices
and if none comes in as students or tourist to spend?
Any idea ?
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