What the RBNZ's OCR decision means

Property

What the RBNZ's June quarter Monetary Policy Statement means for interest rates, fixed vs floating and house prices

13th Jun 13, 10:53am by Bernard Hickey

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

By Bernard Hickey

The Reserve Bank of New Zealand has again held the Official Cash Rate (OCR) at a record-low 2.5% as expected and has repeated its pledge to keep it there for all of 2013.

However, the bank also slightly increased its forecast track for interest rates from the beginning of 2015, pointing to a surge in economic growth and some inflationary pressures from the Christchurch rebuild and Auckland's booming housing market. It reiterated it was looking at using so-called 'macro-prudential' tools to try to slow down riskier low deposit lending that has risen sharply over the last year.

These tools could include 'speed limits' on the growth of high loan to value ratio (LVR) loans and could be in place before the end of the year. What does this mean for rates?

The Reserve Bank said more relaxed international markets had reduced the funding costs for banks, which was being passed on at least partially to borrowers in the form of slightly lower mortgage rates over the last year.

It forecast the 90 day bill rate to rise by around 1.5% to 4.2% by early 2016, which was about 10-20 basis points higher than in its March forecast. Economists forecast rates will rise around 1.5% to 2% through 2014 and 2015.

Floating rates

Advertised floating mortgage rates have been broadly unchanged at around 5.7% since March 2011 and are likely to stay that way until at least until early 2014, given the Reserve Bank's comments.

However, borrowers can often get cheaper deals through their brokers because the banks are competing hard for business. The Reserve Bank has forecast the 90 day bill rate, which is the basis for floating mortgage rates, will only start rising from mid 2014, and then rise around 1.5% by early 2016.

This suggests a peak for floating rates at around 7%.

Fixed rates

Fixed mortgage rates have been relatively stable in recent months and are now at or below floating rates, making the fixed vs floating decision a tough one.

Fixed rates depend more on wholesale interest rate moves rather than the OCR.

They also depend on the banks' funding costs on international markets, which have been falling. The fixed vs floating decision depends on your outlook for the OCR and your personal situation.

A flat to falling OCR makes floating more attractive, while a fast rising OCR makes fixing more attractive. In my view, the OCR is flat for now. It may rise next year, but not quickly.

What does this mean for the property market?

The prospect of lower interest rates for longer is encouraging many first home buyers and Christchurch to borrow and buy, particularly in Auckland and Christchurch where migration and a shortage of undamaged and watertight buildings is putting upward pressure on house prices. Some new building has started in Auckland, but remains below expected demand from migrants from Overseas and from the rest of New Zealand.

The Reserve Bank forecast annual house price inflation of 11% and 7% nationwide in 2013 and 2014 respectively, but also suggested a scenario where house prices rose 14% in 2014.

Elsewhere in New Zealand, where there is more housing supply and less net immigration, house prices are more subdued, although they are heating up as the Auckland and Christchurch inflation spreads.

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9 Comments

by KH | 13th Jun 13, 1:26pm 1371086798

I'm not Hugh, but I might post here anyway.

Seems to be a very reasonable post Bernard. And your analysis of Interest Rates is a good guide. But it seems to me that trying to predict them is not a game that is very useful. Or trying to predict them and time them for ones benefit very productive either. The rates just have a life of their own it seems.

Often the decision to fix or not is more usefully determined by ones own circumstances. I fixed something about three years because I felt a little cash flow tightness and I needed certainty. Currently with very little debt and because it's disappearing rapidly, I really don't want to fix, as I might just be soon getting rid of the debt altogether. Neither decision rested on which way I thought interest rates would go.

Also it seems to me that if one has a vast debt and little room to move and only able to pay very small amounts off then you are likely to be in that situation for years to come. Fixing is only going to hold off the disaster for a year or three. Maybe the safety and advantage is to seek the low rate, improve cashflow and use that to remove debt. Anything you do there, small as it might be, will be helpful to you. Again more dependent on your personal situation, than the predicted rate.

by powerdownkiwi | 13th Jun 13, 2:19pm 1371089964

Still begs the question as to what to advise youngsters, starting out. Either way they're in that 'hold off the disaster' mode for a long time, and they can't just leave the keys on the table as in the US, here the bank still wants their pound of flesh, plus interest.

I do reckon it's time we discussed weaning ourselves off banking. Sure, you have to ask 'why', and many folk ;) baulk at doing that - but if they are non-productive (and in the real/physical sense they are not) then why not? On the way down, the issuance of new money requires a negative amount of work, other than shredding perhaps.

Few seem to comment on just how much goes in usury. I remember being paid in stapled-together notes, which I could directly exchange for goods/services. Now it has to go into a bank account, incurring fees, and they get the use of it as loan-collateral until you extract it. The diffo between fixed and floating is nothing compared to what house prices would drop to, without banks permanently sucking on the straw.

by DMode | 13th Jun 13, 3:39pm 1371094750

Any time I see 'could' in an article I don't waste my time reading it.

Next.

by SK | 13th Jun 13, 4:32pm 1371097920

Could we please not use the stupid euphamism:

macro-blah prudential blah tools.

When it is actually - oh no - the dreaded:

MARKET REGULATION

Wonder if journos actually called a spade a spade - the general public could cut through rbnz spin?

'The RBNZ are considering tools to regulate the housing market'

'The RBNZ have been given tools by the NATIONAL PARTY to use to CONTROL THE MARKET'

'To INTRODUCE MARKET CONTROLS'

by Wolly | 14th Jun 13, 4:57am 1371142653

Good luck with that SK...the situation is already out of control...

by SmoKey | 13th Jun 13, 7:43pm 1371109393

Check the Alex cartoon in the Business Secion of the NZ Herald today.

by KH | 13th Jun 13, 8:13pm 1371111189

I'm an early adopter PDK, The technology is called "Cash' Every few weeks I go to the bank and take out my money in tin a big wad of this paper stuff. And it's easy to get rid of it. Shops are very happy and it's super quick. And I don't have to do the pin number thing.

And after the energy armageddon, I can burn wads of it in the boiler of my steam car. Wonderful.

by Plan B | 13th Jun 13, 10:25pm 1371119149

I think that maybe New Zealand is suffering from massive inflation and does not actually know it. Or we do know it but we do not call it inflation, we call it house prices going up. So maybe the correct response when inflation is high is to queue up with your wheel barrow and buy bread. Except bread for us is houses and the wheel barrow is Australian banks printing NZ Dollars by way of loans against housing. So are house prices going up and up or is our money going up and up in quantity and down and down in value- what it can purchase. Because so much of the money created is locked in houses/property in general it is kind of harder to see. Trouble is it does not matter we all have to queue up with our wheel barrows to buy bread, I mean houses. There is no alternative.

With an RB that has completely lost its way as to what its job is- maintaining the value of the NZD. It has lost its way because , It likes being lost, everyone else is lost. It is measuring the wrong stuff, all of the above?

How would it even measure the value of NZ Dollars? It does not really know. It has this CPI thing - but that gets wacked about so much in a small open economy like NZ because we buy so much stuff from other countries and all that stuff is in the CPI. Yet the RB cannot, should not try to do anything about other countries or the relative strength of the NZD in relation to other currencies.

So maybe it should only measure stuff here.

Stuff like costs/prices of stuff generated in NZ ( Kind of like the Big Mac index- remember the BMI only works because in most places the inputs to a Big Mac ) Instead they include other stuff from other places and leave out stuff from here- ie houses.

Wierdlt the RBs idea of what it does is this>

has three main functions:

operating monetary policy to maintain price stability;
promoting the maintenance of a sound and efficient financial system; and
meeting the currency needs of the public.

It does not actually mention directly maintaining the value of the NZD. Items 2 and 3 seem reasonable but item 1 is a mess. If the role of the RB was really to maintain price stability , then price stability of what? Houses and land? Doesn't seem like it does it.

by KH | 14th Jun 13, 9:03am 1371157435

I think thats really interesting Plan B. " We are suffering massive inflation without knowing it."

I will think about that all day I think.

How to measure inflation. Well first we should actually include housing. Why would we exclude that. I do think it has to be done in New Zealand dollars though, as a purchase might be all, part, or minority sourced from overseas. But the point is that a good or service I might want is purchased in NZ dollars. And the 'inflation' measure works to understand how effective my dollar is.