Mortgage rates are set to keep rising over the coming year, even as the Official Cash Rate (OCR) remains on hold at 1.75%, according to the New Zealand Institute of Economic Research (NZIER).
Meanwhile, house prices may not be set to fall away like some are predicting, as supply struggles to keep up with increasing demand driven by population growth, NZIER principal economist Christina Leung told interest.co.nz.
And in good news for exporters, pressure should come off the New Zealand dollar with the US Federal Reserve looking to raise interest rates before the Reserve Bank of New Zealand (RBNZ) does.
Mortgage rates to rise
Banks look set to keep passing on rising funding costs to borrowers as lending growth outstrips local deposit growth, Leung said at a briefing in Wellington on Thursday. NZIER is forecasting the Reserve Bank will keep the OCR on hold until mid-2018.
The central bank will want to have confidence that annual CPI inflation has settled back around 2% before it makes its next move, Leung said. So it should hold even as inflation heads back towards that target mid-point later this year, she added.
One helping hand for the CPI is petrol price cuts a year ago will fall out of the annual calculation, Leung said. NZIER is also forecasting the CPI to be boosted by the non-tradeable side of the ledger: construction cost inflation looks likely to stay high through the next year as acute capacity pressures remain in the sector, she said. Auckland construction cost inflation ran at 8.2% last year.
House price pressure, migration to stay high
Some pressure will come off house prices, particularly in Auckland, as investors and home owners look to cash out and move money elsewhere, Leung said. The market may also see “fairly muted” effects from the Reserve Bank’s macro-prudential measures like loan-to-value ratios, she added.
But pushing back against this will be population growth and housing supply failing to keep up with demand. NZIER is forecasting net migration to stay elevated as New Zealand’s labour market remains relatively more attractive than Australia’s and those in other developed nations.
Dairy boost to rural confidence; Pressure to come off NZ$
Rising dairy prices sit alongside migration growth as adding to economic activity, Leung said. Fonterra’s $6/kg payout forecast with 50c retained earnings looks favourable to Dairy NZ’s average break-even price of $5.05, she said.
Farmers have been cautious with on-farm investment as the payout forecast rose, but could be set to spend more on capital goods like farm machinery over the next year. Rural confidence appears to be rising, Leung said.
Farmers should be further helped as pressure comes of the New Zealand dollar, Leung said. As the US Federal Reserve in particular looks to raise interest rates before the RBNZ, this should make the US dollar more attractive. Inflation pressures are also picking up elsewhere, including in Europe, with global deflation risks having receded, she noted.