Westpac doubles forecast for 2015 house price inflation to 7%, says financial markets will probably start speculating on potential for OCR cuts

Westpac doubles forecast for 2015 house price inflation to 7%, says financial markets will probably start speculating on potential for OCR cuts

Westpac's economists have doubled their 2015 house price inflation forecast to 7% from 3.5%, with chief economist Dominick Stephens predicting fixed mortgage rate cuts could have a similar impact on the housing market as spiking the punch bowl has at a party, sending the Reserve Bank back to its macro-prudential toolkit next year.

In the bank's monthly Home Truths report on the housing market, Stephens not surprisingly predicts Auckland's likely to outperform even Westpac's upgraded national house price inflation forecast of 7%.

The reason behind Westpac's upgrade ties in with plunging oil prices and subdued inflation.

"Cheaper oil is sure to suppress inflation in New Zealand. We now expect that inflation will drop below 1%, and stay below 1%, until September 2015. As a result it now looks unlikely that the Reserve Bank will increase the OCR in 2015 at all. If anything, financial markets will probably start speculating on the possibility of OCR reductions," says Stephens.

"The Reserve Bank is unlikely to oblige for reasons that will become obvious in the next paragraph. But if financial markets do get the idea of OCR reductions in their minds, wholesale fixed interest rates will fall. And that will drag fixed mortgage rates down. We are forecasting a quarter-percentage point reduction in two-year fixed mortgage rates over the coming few months."

"For the housing market, a further reduction in fixed mortgage rates would be like spiking the punch at a party - things will get raucous, or even a little out of hand. Population growth is booming. The economy is strong. The election has passed. Interest rates are low. Everything points to a housing market resurgence," Stephens says.

Rising house prices will, however, concern the Reserve Bank from a financial stability perspective. But with the OCR high by global standards already at 3.5% and not going up anytime soon thanks to weak inflation, the Reserve Bank's only option to tackle the raucous property party is its macro-prudential toolkit.

"We now expect that at some point over the coming year the Reserve Bank will either tighten its limits on high-LVR mortgage lending, or to enact some other form of macro-prudential restriction with a similar effect," says Stephens.

"The latest data on the housing market has more than vindicated our view that the market would take off at the tail end of 2014. Real Estate Institute data registered a 14.2% increase in seasonally adjusted house sales for the month of November. That was the biggest monthly increase in house sales since 2008. The REINZ house price index lifted 2.4% in the month, which was the biggest increase in a single month since 2005."

"Unsurprisingly, Auckland has experienced the biggest lift in house sales. However, most other regions also saw activity levels lift strongly, with Waikato and Otago the most notable standouts," adds Stephens.

"The REINZ housing market activity data is corroborated by other evidence, such as mortgage approvals data and listings on realestate.co.nz, all of which have surged in the past month or two. On the price front, the the QV measure house price inflation, which is generally the most accurate, is actually still subdued, having registered only a 0.7% increase in house prices over the three months to November. We think it is only a matter of time before the QV measure catches up with the other data, and registers an acceleration in house price inflation."

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Wow, that's an impressive sounding narrative and just what the doctor ordered: Instant wealth via cheaper credit. The only issue with these narratives is that the banks never share their forecast models with us. Now I know that this probably proprietary knowledge and there is no social contract that the banks have to honor. Furthermore, most people probably would not understand the mechanics behind the model. However, for the banks to make such proclamations, wouldn't it be fair that they share the bare bones of how these estimates are reached? Furthermore, if they could tag on coefficients to any drivers of house prices, it would definitely help people make informed decisions or at least lend some support to what they say.
Furthermore, what does Westpac mean when they talk of a "resurgence"? Is the economist referring to Whangarei perhaps? I hear it's been flat there for some time. Surely, her cannot be referring to Auckland. By all reports, it's been surging enough to make a resuregence seem impossible.

I think that picture is there to remind us of the early 1980s. But, guess what happened in 1987.

Irrational exuberance?

Well I don't live in NZ, but here in SEA, particularly in the industry-fest of Singapore, all the NZ and Australian bankers I encounter can see nothing but sunshine.Their positivity is palpable. I always feel like I'm listening to a "not too hot, not too cold, steady as she goes" pitch or something like the Westpac news release. 

That's because their wages are isolated from the issues that generate them.

Just as the guy employed as Fonterra's Sustainable Diarying Manager is guaranteed his fat paycheck, even through the farmers he gets to bully around are going broke.

As the CPI trends down below 1% then the RBNZ will be forced to lower the OCR. 
The other problem is, every time interest rates are raised, then disaster hits NZ.   Earthquakes, then milk price plummets. 
Auckland house prices aside, the environment is set for stimulus not forced recession.  

Dairy farmers will need mortgage rates dropped from a globally high rate of 6.5%. And overdraft rates of 10 - 14%.  

A South Canterbury couple who took a $350,000 gamble on a less-productive dairy farm expect to lose up to $75,000 this season.
Mark and Vanessa Shefford have everything on the line in their contract to milk1070 cows near Waimate.
Fonterra's 2015 payout forecast of $4.70/kg of milk solids has left them heavily indebted with little but hope the industry will pick up. Read more
I think the RBNZ needs to investigate inexcusable lending practices. Lower interest rates are not consistent with responsible lending to those dependent on hope to repay their creditors.

current payout forecast of $4.70/kg,
is still a forecast and presently generous
no question up to June at least the lenders have been keen to lend.
with the above example they may have requested a gtee from the sharemilkers farm owner that the sm could have extracted from fo for a fee..

SH, agree with yr 2nd sentence but the post-Brash RBNZ is the fox in charge of the NZ hen house. They have cooked up this debt fueled property/farm price madness to suit their client Banksters and other associated ticket-clippers. No point in looking to them for a cure. It will be an an unforseen shock that will catch them out - there will be Hell to play.

Further strengthens the debate to have different lending rule for Auckland housing and the rest of NZ

So how much extra money will be required to finance this 7% lift in prices? All of which will need to be borrowed offshore yes? And then some with the loss of $6b income from dairy.
Any answers even possible?

I marvel that the disclaimer to Dominick Stephens' Home Truths is twice as long as the article itself. I'm more impressed that the article itself is written in such plain English and the forecast is unambiguous. (Can't say the same for the disclaimer, but I get the gist.)
If interest rates are going to drop, as Stephens believes, why is he telling everyone? Surely these predictions, made public, must cost the bank in profits. The report certainly affects the way I will approach refixing our loan when it comes up for renewal next year -- continue to fix for the lowest rate going, probably for 12 months.

Ha. Was thinking the same thing myself about the disclaimer. However, I think that the narrative is constructed poorly and doesn't explain how we get to the magic 7. If Stephens tells everyone that interest rates will fall, surely that is selling the sizzle to get down to your local Westpac and cash in on the cheap money. 

If OCR drops the banks borrowing rates drop but the margin on their mortgage interest rates remains the same (Profit = mortgage rate - OCR rate). More people will potentially be willing to borrow in this current climate with lower rates meaning a larger number of borrowers and more profits for the banks.

Either the bank is making wrong predictions again, or they are understating the cuts that will be needed next year or so. 
They predicted hikes when the reality was flatlining, so maybe 'small chance of cuts' means significant cuts?  

Either that or QE?

An indirect form of QE could easily be executed by fully funding all our universities, poly techs, hospitals and schools etc to the max. Then getting stuck into all the large roading projects, and getting Chch completed properly. Reopen napier Gisborne railway.  Get nz rail back on its feet and force freight onto rail (saving lives on roads as well).  
this would ensure that govt money does not get diverted into shares, bonds and corporate investments, but trickles vie wages, contracts, business purchasing etc.... 
Unfortunately we have a hands off, globalisation-minded PM who will relinquish the NZ birthright and inheritance. 

Agree, I would target Capital projects and R&D.
Not going to happen though.
Carry on, borrow, spend, try and pay for it with growth and immigration...
Anyhow, someone else's problem in a few years time.

You're basically saying take a leaf from the Japanese. 

Except its been commented on that the Japanese over did it (investing in infrastructure) and it was also pretty corrupt apparantly.

You're basically saying take a leaf from the Japanese. 

Except these are then permanent inflationary injections, which you dont want (not arguing the social aspect here btw, just fiscal).   So if you want to boost the economy but not cause long term inflation you do it via one off projects like new buildings  or say renewable power stations.
The rest is really just throwing money at the problem which has to be paid back.
More roading is only needed when you have more cars, post peak oil, no.  Now if we electrified our main trunk line(s), yes.
Forget Chch its a basket case IMHO, pointless spending large amounts on such infrastructure on such a scale. Some, yes leaving chch to its fate like they are isnt acceptable by central Govnernment...but that's what the people voted for.
"this would ensure that govt money does not get diverted into shares, bonds and corporate investments, but trickles vie wages, contracts, business purchasing etc"
Yes that looks to be the best way to do it.

not seeing where the banks are getting their profits from in your scheme...its doomed

""Cheaper oil is sure to suppress inflation in New Zealand. We now expect that inflation will drop below 1%, and stay below 1%, until September 2015."
Hence why energy costs should be ignored, while the opposite effect (oil prices rose) this graph and comment shows why,

Cheap oil is deflationary isn't it? retiring baby boomers are deflationary too.  Collapsing manufacturing and low PMI's in china are deflationary.  If someone could buy silver at 500 NZD/kg (silver dipped below 600NZD for a few minutes just after thanksgiving) why then would they pay 1.4 M for an Auckland house, which three years ago was worth a third less.   I don't mean to single out silver, I'm just saying that deflation in commodity prices, and other hard asset classes could make Auckland houses look pretty overpriced.

That depends.
If that fixed cost reduces and releases money for spending on other things. The poor whos energy costs are a substantial part of their income now have more income left over and will spend it elsewhere. So no it may not be deflationary past the short term dip it causes.  In fact that pterol money that was going overseas and hence out of our economy now gets churned inside it.   What it will do is cause a drop in Govn revenue on the petrol as its a % I believe.
I posted a link above to the opposite effect the Paul Krugman graphed and the Fed ignored that bump in inflation and that proved the correct determination.
Personally I think houses  in NZ arre x2 over-priced. Auckland and centres maybe even 2.5x to x3 but you have to live somewhere in something.
The problem I have with trying to use commodities as benchmarks is they are also over-speculated in that I think they are over-priced (though silver maybe under-priced, hard to know).
Im saying this but not in regards to you here so pls dont take offence it isnt meant to be. So, I  guess it comes down to ppl will use whatever benchmark they want to show that their point of view is correct, even if its blindingly obvious to the other 95% they are talking horse poo.  So we have no inflation, "oh yes we do look at house prices, I was right I tell you right!!!"  run for the hills!!! gold is goign to $3000! no wait $5000 we'll make a killing buy, buy, buy!!!
The ones who made the $s in gold were the salesmen like Glenn Beck (I wont call him a journalist).
Spot the tulip mania, 30% losses.....oh dear.  Hasnt stopped them promising inflation sometime in the future of course, 2017 seems to be the new goal. 
I think not.
Oh and oil drops, well watch the oil majors share prices,
"ConocoPhillips (COP) became the first major U.S. oil company on Monday to reveal that it is slashing spending for 2015. There are expectations that more energy companies will follow."
EIA, bless their wild guess work,
"World oil demand next year is now expected to grow by 880,000 bpd, the agency said on Tuesday. It had previously forecast the year-on-year increase at 1.12 million bpd."

Yes that all makes sense.  The increase in the "workers share" that you speak of is a pretty temporary boost to the economy.  When oil goes back to 120 -> 160 -> 180 -> 220 $/b they'll be decimated along with our economy.    Coming back to silver (and other hard assets), I guess it goes without saying that the cost of production depends on the cost of the petroleum energy required to extract and process the ore and or raw materials.  Now the fear index is still pretty high so when the dollar price drops people will just hoard more than ever, and they'll probably do it with borrowed money.    Its foreign money in the nice suburbs of Auckland and Kiwis are either giving up or borrowing massive amounts to compete.  Wheeler doesn't help saying he wants the kiwi dollar to drop significantly.   It just all points in one direction.    

Double peak boom. 

I've been predicting this (literally) for years, just sayin.

Foreign investors pushing up the property bubble

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