The general spirit across the housing market remains one of somberness as households repair balance sheets, National Bank economists say in their December property report, adding it is hard to see this spirit changing in the early part of 2011.
“We saw a fillip in housing market activity in November but it’s hard to get overly excited about it. The level of activity is 65% of the average seen over the prior decade. Some support to the property market is being provided by low interest rates and a net migration inflow,” National Bank economists said.
“But the general spirit across most indicators remains one of sombreness with balance sheet repair the prime focal point. It’s hard to see this changing in the early part of 2011,” they said.
Meanwhile, a weak and patchy economy implies that interest rates are likely to remain low for a while yet, they added.
"That was the message delivered by the Reserve Bank last week and we concur with it. While you’d never want to rule out interest rates moving up in early 2011, it’s hard to see the catalyst. In fact we can see some risk that the next movement in rates could be a cut. That’s a small risk at present but three months ago the probability was effectively zero. The mere fact we can put that on the table is testament to how fickle demand is across the economy at present."
"As was the case last month, the 6 month breakeven in 6 months is 6.55%. That’s only 0.20% above the current 6 month rate. While we don’t think the Reserve Bank is in any hurry to lift rates, odds are that there will be one rate rise by the middle of 2011 and hence chances are the 6 month rate will be above 6.55% in 6 months," they said.
"As such, the 1 year rate looks attractive – though less so relative to last month. Similarly, as it was last month, the 1 year breakeven in 1 year’s time is at 6.85%. That’s just 0.40% above the current 1 year rate, which isn’t much. Or put another way, the decision is effectively asking borrowers to decide whether the Reserve Bank will be hiking more or less than 50 basis points over the coming year.
"We think 50 is a minimum, though they will be in no hurry.
"Two year mortgage borrowing therefore also looks reasonably attractive. However, when we compare longer-term fixed rates against their breakevens, we find that the Reserve Bank would have to raise the Official Cash Rate by a long way to make long-term fixing beneficial," they said.