By Bernard Hickey
The Reserve Bank is expected to leave the Official Cash Rate (OCR) on hold on Thursday morning and most economists believe a rate hike is unlikely before the end of this year because inflation is under control and the problems in Europe are slowing economic growth.
However, the housing market is beginning to bubble again in central Auckland and Christchurch where undamaged and watertight housing supply is limited and where migrants want to live. The prospect of low (and possibly even lower) interest rates is also encouraging some first home buyers to load up with more debt they believe they can afford.
There are few signs yet this surge in housing activity in these specific areas is spreading around the country in a similar way to the boom in prices from 2002 to 2008, although most economists see some moderate price growth over the coming year as unemployment remains relatively low, commodity prices remain high and the rebuilding boom in Christchurch gets under way. See more here in our report on the latest house price figures.
The decision to go with a fixed mortgage or floating mortgage remains dependent on any borrower's view on interest rates and how much certainty any borrower needs on regular payments.
Borrowers who are very nervous about their jobs or want to budget a fixed repayment for years to come are more likely to fix. Those who believe official interest rates are likely to remain flat or even fall because of low inflation and slow economic growth are likely to choose floating.
The interest rate outlook
Last week the outlook for inflation and interest rates changed substantially when the Consumer Price Index actually fell in the December quarter and the annual inflation rate slumped to 1.8% from 4.6% in the previous quarter. Most of this slump is linked to the removal of the October 2010 GST increase from the annual figures and a big drop in tomato and lettuce prices, but it was still much weaker than both economists and the Reserve Bank expected.
See more here in Alex Tarrant's article from last week.
Before the figures many economists expected the Reserve Bank to begin increasing the OCR from its record low current level of 2.5% from September of this year. Remember that the Reserve Bank made an emergency cut in the OCR on March 10 last year to 2.5% from 3.0% and has left it there ever since, despite suggesting through most of last year that it would have to increase it back to more normal levels.
However, the economy has stuttered along ever since then as many households try to save money and repay debt, and the European economy slumped into a sovereign debt crisis. Also, the Christchurch rebuild has been slow to get under way because of problems with insurance, zoning and new earthquakes.
The Reserve Bank forecast in December that it saw short term interest rates increasing from midway through this year with an implied OCR peak in 3.75% later next year. Assuming the relationship between floating mortgage rates remain the same (about 3% above the OCR), then floating mortgage rates would peak at around 6.7% by the end of next year, which would make two year fixed rates being offered right now of around 5.8-6% relatively attractive if you assume the Reserve Bank is correct.
Financial markets, meanwhile, are expecting the Reserve Bank to hold the OCR around 2.5% well into next year, or even cut it, which would make floating more attractive.
Here's what the economists say
BNZ's Head of Research Stephen Toplis said this week he still expected the Reserve Bank to start increasing the OCR from its September 13 Monetary Policy Statement (MPS). Toplis then expects the central bank to hike the OCR to a peak of 4.25% over this year and next.
He expects the Reserve Bank to keep signalling rate hikes on Thursday, which means he thinks fixed rates offered for 2 to 5 year terms offer good value.
"It will surely lean on the side of emphasising a continued tightening bias than sounding in any way iffy about one. The latter would be like a red rag to the already bullish debt markets, wanting to price rate cuts," Toplis said.
BNZ Chief Economist Tony Alexander said in his January 19 weekly overview he saw the OCR on hold in 2012 and he favours floating rather than fixing.
"Locally NZ data are not suggesting the economy’s growth rate is accelerating and there are plenty of risks still to the economic outlook. Therefore, until we get some greater clarity with regard to Europe, the United States, the timing of the Christchurch rebuild, and when farmers start spending more money, I find myself still extremely happy to sit floating," Alexander said.
He sees the housing market slowly improving, "driven by a shortage of listings and lowest construction in 40 years encouraging buyers with foresight to get in before a stronger labour market brings a wave of buyers in," although he notes rental property investor activity remains weak.
Westpac's Economists see the Reserve Bank hiking the OCR from September 13, although notes the markets see the OCR on hold until Mid 2013. Westpac still sees inflation building in coming years, forcing the Reserve Bank to hike the OCR to a peak of 6% by 2015.
"We think the RBNZ will now be comfortable a later starting date, though it need not be specific about it in this Thursday’s one-page communiqué. Our pick remains for a September start, on the basis that the RBNZ will still have an eye towards post-quake reconstruction and a pickup in the domestic economy," Westpac said.
ASB's Economists expect the Reserve Bank to leave the OCR on hold until December 6. It then sees the OCR rising by 1.5% to a peak of 4% in late 2013.
"With current inflation pressures subdued, and considerable downside risks to growth, the RBNZ has no urgency to increase the OCR before December 2012," ASB said.
It expects house prices to rise nationwide at an annual rate of around 3% heading into 2012, "underpinned by a continued contained level of housing inventory."
"House price growth in Auckland is likely to be stronger than that, reflecting its relatively tighter market," ASB said.
ANZ Economists see the Reserve Bank holding the OCR for most of this year, with no great urgency to move either way because of contained inflationary pressures and the risk of a bigger global slowdown.
"At 2.5% and with pressures on capacity remaining present the OCR will eventually need to move higher, barring global meltdown. However, the RBNZ can afford to be patient," ANZ said.
ANZ is cautious about house prices.
"With household debt still very high, future increases in consumer spending (and house prices) seem likely to be income-driven rather than debt-driven as in the early 2000s," ANZ said. "We still view the balance sheet constraint (debt levels,affordability) as dominating supply-demand balance measures in terms of the outlook. The former portends a slow grind for the property market ahead."
Floating vs fixing?
Before the Global Financial Crisis this was an easy decision for most borrowers because fixed mortgage rates were almost always cheaper than floating rates. But that changed after the Lehman Bros crisis because banks were unable to find the cheap and easy short term wholesale funding that helped them keep fixed rates lower.
Since then, the Reserve Bank has also tightened funding rules that encourage banks to fund more locally and for longer terms than before. This has made fixed more expensive than floating and is likely to keep it that way.
Any decision to fix or to float depends on how quickly and how high interest rates will rise. Floating makes more sense if interest rates stay lower for longer, while fixing makes more sense if the OCR rises soon, quickly and to a high level. Fixing may also make more sense for those who place a premium on having certainty about their repayments, regardless of whether they are higher than staying on floating.
Also see our calculator for working out whether fixing or floating is cheaper over the life of a fixed term mortgage.
My view:
I think high household and government debt levels in many large developed economies will restrain global growth for some years to come and New Zealand households are being a lot more cautious about taking on new debt and spending than they were before the Global Financial Crisis.
Further financial market turmoil and a slow Christchurch rebuild may keep the OCR interest rates lower and for longer than economists think. That means I think floating is cheaper than fixing for now, mainly only because I have a more bearish view on global growth than the RBNZ and economists.
We have a calculator which works out whether fixed is cheaper than floating, given the assumption that the RBNZ's forecast track for the 90 day bill rate is correct and given the current average mortgage rates. See the current mortgage rates offered by banks here.
I also think house prices will grow less than inflation and may fall further in some areas. I stick to my longer term view that house prices are still over-valued and will eventually fall to around 15% below their 2007 peaks.
They are currently around 3% below that peak and are down more than 11% in inflation-adjusted terms since that peak, which is the biggest fall in real house prices since the stagflation of the 1970s.
See David Chaston's article here.
(Updated January 24 ahead of January 26 OCR decision)
35 Comments
Posted this earlier on the other discussion. Even The Melbourne Age picked up this story today.
http://www.theage.com.au/business/nzs-housing-slide-a-pointer-for-australia-20111110-1n828.html
House prices? Its a hard call
Supporting house prices you have the following:
- very little construction limitting new supply
- very low interest rates which are likely to stay low for quite a while yet
- An Auckland Council that can't deliver appropriate housing policy
Opposing house price inflation you have the following:
- minimal immigration
- stagnant economy likely to get worse (see today's abysmal manufacturing data)
- sickly demand (prices still to high for many, prices need to drop for both investors and FHBs)
- big global economic issues
So....I 'd see stable Auckland prices in 2012, unless there is a major Lehman scale event in Europe, in which case I see drops of 5-10%
Rest of NZ in 2012 - drops of 3-4%
At a BRANZ seminar yesterday, a presenter mentioned that Akld Council has drastically lowered the CV on buildings deemed to be potential "leaky homes". This is going to have a negative effect on house prices initially in Akld but eventually throughougt the country. Just one more negative to throw into the basket.
And if you are contemplating buying a home - avoid "potential leaky homes!"
Predicting the next rise (or fall) in mortgage rates is getting difficult. Various opposing forces are interacting. However, if you've been floating over the last 18 months or so, you probably have your repayments set at $$ levels when rates were 6 or 7 % + so you can easily handle some rises - without payments going up.
I remember you predicting 30% price drops or more from the top of the market. Now, you've revised your fall prediction to 15%. You say values are 5% below peak, but actually QV's lastest report says we're now only 4.4 per cent below the 2007 top - closer to 4% than 5% - and the year on year trend is actually upward at present...
It looks to me that even during a huge and ongoing financial crisis the value in most NZ properties has been fairly well preserved, especially by comparison to values of share portfolios. This is even more the case for Auckland properties. And there is nothing to suggest that this will not be the case for the foreseeable future.
There is an excellent chance that when the world economies get back on track, and eventually they will, there will be another period of inflation driven and sustained capital gain on property. I would go so far to say that now is the time to buy. I'll be putting my money where my mouth is, as I plan to borrow to invest in property within the next 12 months. Will you do the equivalent of backing your predictions and sell your own property to put your money in cash or shares? You would be a fool not to sell and preserve your family's wealth wouldn't you? By your judgment, you should sell, invest the capital, and buy back into a better place when this hypothetical 10% price drop occurs. But really, in your heart of hearts, you know that is highly unlikely to happen. When I read a news report that you have divested yourself of real estate, I'll start to take your predictions of house price drops seriously. Until then, Bernard, you seem to be repeatedly singing the same (flat) tune.
"And there is nothing to suggest that this will not be the case for the foreseeable future."
There is a great deal....
"There is an excellent chance that when the world economies get back on track, and eventually they will, "
It wont, ever.....peak oil will make sure it never happens...like Isaid there is a great deal.
"there will be another period of inflation driven and sustained capital gain on property."
This depression looks like a multi-decade event....so now you are day dreaming....you miss ppls ability to pay....it isnt there for most ppl. Those wise ones will be in cash right now IMHO waiting to buy in at huge foresale/mortgagee discounts.....they will make a good living....
"I would go so far to say that now is the time to buy. I'll be putting my money where my mouth is, as I plan to borrow to invest in property within the next 12 months."
Why wait 12 months? go for it now....if you are right, this summer is a great opportunity to buy....If the EU collapses and I think its 99% certain, I think most highly leveraged PIs will be toast inside 12months myself......
regards
"Peak Oil" is a continuous series of onging problems to solve, not a single insurmountable obstacle to all further progress. Realistically, the effects of Peak Oil have been building for many years: dwindiling oil reserves have forced us to design more efficient vehicles, develop cheaper/more efficient sources of alternative energy, and use the oil that we can extract more sparingly. And these adaptations will continue and accelerate. Peak Oil is not the world-ending game changer that alarmists think it is.
Highly leveraged investors are always toast when any financial crises hits... so don't be highly leveraged in uncertain times. But it's possible to be *somewhat* leveraged and survive and prosper.
Four years ago, in 2007, Bernard and other bearish commentators were talking imminent property price falls of 30%-- 70%. Quite simply, time has proved those predictions to be wrong. Even if we have entered a multi-decade Japan-style property price deflation cycle (and I don't believe this is the case) then that is quite a different set of circumstances to live through than what was predicted. Those predictions were wrong.
The Year 2000 bug did not cause systemic infrastructure fauilure nor cause a nuclear exchange. Climate change due to global warming will not destroy the interlinked world economies in our lifetime. Peak Oil will not suddenly tip us back to a low energy low tech stone age society. The break up of the EU will not end global trade or suddenly make paupers of us.
New Zealand has generations of growth and development in its future before we tap out our resources or reach carrying capacity.
Alarmist headlines sell stories. The world is much more complicated. Don't believe the hype - and the negatrive hype is the most seductive.
Do you own property? Or maybe a stockpile of guns, seeds, and gold?
NZIER Economist Shamubeel Eaqub predicting that NZ Reserve Bank will be cutting the OCR over the next 6 months - as a needed response to global situation.
Floating rates at 4.95% at a bank near you?
Cuts - not increases .... ...... where is our Westpac economist/s etc with their wild predictions of floating rates at 8 - 9% in 2012?
I agree, I think cuts are the most likely thing now because Italy will blow.....trouble is such cuts are likely to be ineffective....
I dont think rates are going much in any direction there are so many external factors like we are borrowing at 5% so I just dont understand why rates could drop to 4.95%....
Westpac, joke....LOSER....he should be sacked......so far off the mark he has to be grossly incompetant......if i did that badly in my job I wouldnt have one.
regards
"Most see it rising to between 4 and 5% by the end of 2012." I dont think they understand a) the debt mountain will stiffle all but aneamic growth next year and thats if we are lucky. b) Thats a huge rise for a very sick economy with no wage increases out there. So if we start to see an OCR rise in 2012 at least past 3.5% I will gob smacked.....I dont even think 3% is probable myself....
This is in a business as usual economy......just watching Italian bonds at 7.5% tells me that thats extremely unlikely....now it how many weeks if not days to blow out.....no one will buy Italian bonds and if the ECB wont....well italy has no where to go....athey might have done this if they had sorted Greece 2 years ago.....they couldnt or wouldnt then so its death ride time for the EU.
regards
I hate to say this (because of all the PI's on this forum, ahem), but every property I have looked at recently in central Auckland has had buyers lining up. Two houses didn't even get to auction, such was the concern about missing out.
I really do think there is going to be some upward price movement in Auckland, and it’s not going to be as tame as 2-3%.
Why?
- Mortgage rates are LOW, everyone thinks they can afford a more expensive house
- Stupidity. In the kiwi mind property = wealth, no matter what the fundamentals are
- Fear of missing out - If i don't buy now, I'll never be able to afford a shitty NZ house.
- No new houses are being built
As soon as interest rates go up, this will change, but I'm beginning to think they never will, (look at japan).
Does Bollard realise that he is exacerbating the biggest millstone around this countries neck every month he keeps the OCR low?
Fascinating - as the stats seem to bear out - everyone in Auckland appears to be rushing to the "centre"? Much slower out in the (now) suburbs.
I wonder whether the establishment of the Super City has created this notion of central Auckland now being the place to be?
But the Auckland City Council debt must be overwhelming? We were just in NYC a few months ago and its a great example of what a bankrupt metropolis looks like after a few years under that kind of financial strain.
Bernard, it would really be useful to publish a list of the level of indebtedness on a per population and/or per rating unit basis for of each of the city/district councils in New Zealand.
Basically, were I looking to buy property - I'd want to look in those main or regional centres with the least debt.
Super City.........the place to be" I wouldnt have said so.....
I pretty much agree with mist42nz....I think its a run to safety.......its probably partially misguided.....time will tell....but as always location.....location....location......you may not stop drops but you might be able to minimalise them.....
regards
"Banks are using new council valuations to call in property loans and change terms, according to mortgage-holders...........
"Great news for valuers as they are going to have to revalue a lot of properties as the banks are taking this as an excuse to call in loans and restrict borrowing," he said. herald
Now what message do YOU get from this piece of info?
Taken along with the news that the building sector is going backward at a pace.....the future looks certain and secure....NOT.
In a little over two weeks you will likely wake up one morning to the news that.....now it's going to be one or other of the following:
a. All bank deposits have been frozen and only limited funds will be available to account holders until the debt crisis is resolved.....or
b. GST on all new building and building related labour charges and materials and services have been slashed to 10%. The govt expects this move to result in the creation of 170000 new jobs and boost the govts revenue figure before 013....
Nope...the news will be either nasty in the extreme as in A or an about face to try to achieve what Bollard's ocr game has failed to do. I suspect the gst cut because it is easier to cook up the spin and humbug in the media to present the change as a great piece of govt....remember NA....National have just 3 years to pull a Rabbit from the hat....
But on its own the gst cut will not be enough...it must come with a massive slashing to the state splurge and that has to start with those half million dollar men in the senior positions taking haircuts to their bloated salaries( that goes for the SOEs as well)....Slashed across the State sector the savings would push past the 300 million per year. The useless depts have to go. That's another 500 million. The landlord subsidy needs the chop..that's 1.1billion a year..the number of mps...cut it back to 60....When push comes to a boot up the bum, the govt could save 2 billion a year.
A or B would crash the property market, which you yourself rightly note is not in the interests of either the political/influential class nor the country, generally. Who'd buy a second hand house if their savings were either frozen, or the new-build was cheaper? But we know this. LT SD or RF would just continue the slow-ease in property that will go on for years. A much better outcome for all.
Yes to A but NO to B.....NA.....boosting the new build and reno market will have very little impact on values of existing 'houses'. Let's leave out the land aspect here.
The gst hike was ill considered..it was rash policy for political point scoring...we cut paye to give you more choice...while making your choices more costly...and we are too dumb to realise you would decide not to build a new house as a result....and we will compound that stupid policy move with our very own OBR idiocy because we want to encourage you to shift your savings to Australia where it is guaranteed up to a point....we think this is good govt....doh
Look carefully at the roll out of policy NA...look at how the paye cuts sat alongside the Kiwisaver scam...which proved to be too much to swallow even for English..KS was to be where the paye cuts were to go...as 'savings' but in reality nothing of the sort...that capital was redirected from the KS fools into the managed funds to feed a demand for fee income because that elite group know better than the average peasant where best to invest capital.( govt opinion)
Meanwhile the gst hike began to eat away at the demand for not just 'stuff' but also for activity and enterprise in the building sector...that damage is now showing up as falling tax revenue and increasing sector unemployment. In this regard the chch events were seen by Cabinet as a gift from above...it would save the sector from their stupid policy and allow them to claim good govt...nothing of the sort.
And while you are at Wolly it means test National Super to stop the double dipping greedies who have two hands out: one to employer and other to State.
If they don't like it then they can stop working and move some of the unemployed and other benificaries into their jobs.
Save heaps then!!!!
I cant see a land tax myself......ring fencing, yes looks probable.....I know ppl I work with reduce their tax by 50% odd so I think that will be stopped.....Professional PIs I assume wont be effected much.......thats core National supporter votes.
I think the banks can see the EU is about to blow and nothing can stop it.....so are calling in the worst loans if they can IMHO.....reduces their exposure...do it now before its too late.....
regards
Agreed SK - absolutely zero prospect of a CGT or LT or any other property attacks while National in power and as far as Wolly with his a) and b) scenarios - wake up mate it's just a bad dream.
Back to the topic "where interest rates and house prices are headed over the next couple of years"
Floating mortgage rates to remain sub 6% for the next two years.
May even be a period of 6 to 12 months where floating rates are sub 5%
OCR to drop by 0.25 maybe up to 0.50 and never get above 2.75% over the next 2 years
House prices to hike by at least 10% over 2011 then another 10% through 2012
House price rises of 10%...LOL....more day dreaming....More like that in drops.....just who will pay? speculators buying off speculators in certain areas....maybe some 3 to5% gains which is on par with inflation......if you cant see the risk involved in that game of musical chairs....
National will win that's pretty close a given IMHO....but that means you just buy another 3 maybe 6 years......probably 3....Labour and the Green's seem to have this as a core policy....so its likely at some stage it will happen....
regards
The growth in income equality in NZ is driving the property market. The wealthy live in a bubble which makes them blissfully ignorant of a changing world.
The well off live in enclaves (count the Polynesians in Remuera or Devonport sometime) and send their kids to private schools where they only meet other wealthy people. They think their life is normal. The only poor people they know are their cleaners and they don't talk to them - they're working or at the gym when the house is being cleaned.
Throw into that mix NZ's inward looking provincialism, an over-optimistic government, a main stream media that puts stories about the GFC on page 7 together with the extra cash from John Key's tax cuts burning a hole in their pocket and they're buying again like it's 2007.
Frankly it's a a recipe for a disaster. It reminds me of those pyramid games from the 1970's. Sell now while you can still get off the bus.
Right...so we've settled that then...the economy is soundly based thanks to decades of high quality govt and some seriously prudent behaviour in the financial markets, with a population of thrifty well educated hard working Kiwi determined to improve productivity and a number of banks that remained well managed and not profit driven parasites as in other countries.
How lucky we have been. We might have ended up on the edge of total collapse, crippled by private debt and suffering under endless shoddy govt with a fraud saturated financial system and living like serfs working to fatten the profits of a few powerful banks, knowing that our reserve bank existed for their protection. Crikey we might have had the added burden of vast numbers of unskilled poorly educated people dependent on handouts from govt managed wealth transfer rorts aimed at keeping in power the very same grossly incompetent..while also being trapped into a property scam that had driven the cost of housing to double or more what families were able to afford.
How lucky we are!
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