Westpac economists say an Official Cash Rate reduction could cause mortgage rates to fall even further, increasing the risk of 'stoking' the housing market

Westpac economists say an Official Cash Rate reduction could cause mortgage rates to fall even further, increasing the risk of 'stoking' the housing market

Westpac economists are cautioning that if the Reserve Bank does cut the Official Cash rate there is a chance this could refire the housing market.

The economists say in their NZ Weekly Commentary that they are expecting now that the RBNZ will cut the OCR (from the existing 1.75%) when the rate is next reviewed on May 8.

"The big risk with cutting the OCR is the housing market," they say.

"An OCR reduction could cause mortgage rates to fall even further, increasing the risk of stoking the housing market which is already booming in many regions beyond Auckland."

The economists say that in switching to an easing bias, the RBNZ was clearly getting nervous about the global economic outlook.

"The fact that foreign central banks are moving towards more dovish monetary policy stances has been particularly important. If New Zealand fails to follow suit, the RBNZ is worried that the exchange rate could rise, putting downward pressure on inflation which is already struggling to reach the 2% mid-point of the RBNZ’s target band."

Which "option to go with" was a matter of judgement. But with nationwide house price inflation currently at 2.6% and inflation flagging, "it is now looking more reasonable to opt for a modestly lower OCR than it looked last year".

"When it cuts in May, the RBNZ will leave the door open to a follow-up cut," the economists say.

"There is a risk that they follow through on that, but more likely they will keep the OCR at 1.5% for the remainder of 2019.

"By the second half of the year the New Zealand economy will be showing clearer signs of improvement due to fiscal stimulus, lower petrol prices and strong construction activity in Auckland and sentiment about the global growth outlook should be improving.

"In addition, the sharp fall in interest rates we’ve seen in recent weeks is set to put downward pressure on mortgage rates which will be a very large stimulus for the housing market."

The economists say they don’t think a second OCR cut in 2019 will be justified.

They believe, however, that by the early 2020s the introduction of a capital gains tax, the end of the construction boom, and slowing population growth will likely see that change, justifying a lower level of the OCR.

"We have pencilled in a second cut for May 2020, which would take the OCR down to 1.25%."

The economists note that the RBNZ is becoming increasingly doubtful that New Zealand GDP growth will accelerate to the extent it is forecasting in 2019.

"Recent data has on that has been mixed. Consumer spending and construction data has been strong but last week’s Quarterly Survey of Business Opinion was weak.

"Not only did headline business confidence fall to within cooee of September’s 9-year low, but there was also a broad-based deterioration across most of the key activity and investment indicators. Profits are being squeezed by rising costs and a perceived inability to pass these on to customers, increasing the chances that weak confidence will become self-fulfilling. The survey suggests March quarter GDP growth is likely to be around 0.5%. That’s weaker than the RBNZ’s forecast of 0.8%, and is consistent with an economy that is ticking over rather than picking up."

The economists not that the May OCR decision will be the first made by the RBNZ’s newly formed Monetary Policy Committee, making this something of a “blank slate” decision.

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No doubt the RBNZ have done their modelling but for us Joe Citizens guessing the impact on the housing market comes down to one gut feeling and weighting we put on the factors involved.
For me it will give a little more certainty and advantage with lower mortgage rates for FHB. However, for investors the poor yields, slim likelihood of capital gains, high LVR, and the effects of the likelihood of CGT (although I think this based more on emotion of a tax rather than the relative significance of it) they are unlikely to be particularly active.
The net effect is that this will tend to provide some support to downside risk in the Auckland market and off-set a little of the seasonal downturn. The regional markets are slowing and when the optimum price differential to Auckland is reached they will at least plateau.
I have long posted that I see the RBNZ offering support to ensuring a stable housing market - a collapse is not in the interests of the wider economy. Despite the DGM, I would pay a lot more attention to Adrian Orr's comments about 6 to 9 months ago when he saw the medium term outlook of the property market as likely being stable with some growth of around 2%.
If the property market does significantly take-off as is suggested in the article, my bet is that one will see some change in the LVR.
I think that RBNZ is doing a great job in trying to ensure a stable market and I think that the timing of the proposed cut in the OCR is very significant - when there has been soem uncertainity in the short term local and global economic outlooks and the onset of the winter season for the housing market and potential risk for some cumulative cooling of it.

“I have long posted that I see the RBNZ offering support to ensuring a stable housing market”

Fine line – are they perhaps trying to stabilize an inherently unstable market at these levels – throwing the kitchen sink (ok, not really) at a market whose underlying fundamentals cannot support stability on their own would seem a little short-sighted.

I would have thought let the gentle correction continue – otherwise the risk of further destabilization down the road?

By “stable market” I don’t exclude some correction. I don’t see a sudden and significant bubble burst, rather I see Orr’s comments and actions supporting a flattish market for the medium term (three to five years) with some slight - especially seasonal - downside which will bring the fundamentals of wage increases/ some inflation resulting in improving affordability for FHB. By cutting the OCR and holding LVR for investors the RBNZ are supporting FHB, avoiding the risk bubble burst, and ensuring investors dont drive house price inflation. A fine balancing act but not immune from any significant global implications.

Appreciate the response and in a general sense - agree.

Manipulating markets for the "better good" can be a tricky and sometimes perilous business.

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This rate cutting is absurd. it has achieved nothing more then encouraging people into debt. Wasn't the original idea of it to give people/business a breathing space to repay debt and get themselves into a stronger financial position?

Nope rastus, the original idea was not to get people to repay debt, it is to get people and companies to borrow to spend and invest, to keep money circulating, that's what keeps the economy going

That may have been the original idea, but it has not achieved that outcome. Share buy backs and asset bubbles abound. Yet they persist with this can kicking nonsense. The longer they delay the day of reckoning the worse it will be.

Companies borrow and invest when they see that existing capacity cannot meet current demand. Sadly demand is not in that buoyant state due to stagnant incomes for the majority and a government running excessive surpluses. The interest rate is less important than the prospect of increased sales. So cut away. The effect will be like pushing on a string in terms of real investment.

More hopeless commentary. Far too bullish on construction in Auckland. What planet are they on?

"By the second half of the year the New Zealand economy will be showing clearer signs of improvement due to fiscal stimulus, lower petrol prices and strong construction activity in Auckland and sentiment about the global growth outlook should be improving."

If we know how to use fiscal stimulus to improve economic growth we might want to tell the rest of the world our secret as it doesn't seem to be working for them...

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"By the second half of the year the New Zealand economy will be showing clearer signs of improvement due to fiscal stimulus, lower petrol prices "
Wait, What? 2 cuts in the OCR is going to reduce petrol prices? Riddle me that one Batman.

Property starting to sell at 2016 prices. Need to drop the interest rate some more to keep thing going.

https://www.trademe.co.nz/property/insights/address/Auckland/Henderson/C...

2019 - 738,000
2016 - 730,000
RV 2017 - 710,000

Yes, I think we all really know it’s about trying to engineer a rare (if ever, anywhere?) soft landing from the big bubble we’ve had, and Australia is not managing that so far. They’d never admit that’s the situation though, as we’d start to panic.

The current property cycle uptrend has run it's natural course, a drop in the OCR will not rekindle a strong increase in property values, it will probably just soften the decline a little

Hmm, seems inevitable to me. They want inflation. So they will keep force feeding debt down our throats, or at least try to.

There is such a thing as a business cycle. At the point we are at, we have low unemployment and skill shortages in some areas, so there is upward pressure on wages. Upward pressure on wages means downward pressure on profits. Downward pressure on profits means downward pressure on investment in productive assets.

The question is, if they reduce interest rates, where will the money flow? Housing? Maybe, maybe not. It could blow a bubble somewhere else this time around. They have put in place a lot of things that throttle the housing market that they cannot remove easily or quickly (money from China, money from lax credit standards, money from investors in rentals).

A bubble in commercial property? A bubble in the stockmarket?

do we end up with consumer type inflation but no capacity to use interest rate hikes to control it? Oil is up.

I thought that Orr & co might be a good thing not so long ago. I'm beginning to waiver on that. We've pumped up our main domestic asset to levels we can hardly afford & now we want to keep it going at the first sign of a leveling off. Come on people, stand up & be strong here. Stop sounding like the wusses that run the rest of the world. The whole thing needs leveling off & we'll just have to guts it out. There's more money in the global system than ever before & we want to stimulate things? Give me strength!

"Stoking the housing market". You mean how the 3.39% rate in Canada is stoking the Vancouver market at the moment, or the 3.59% rate in Australia is stoking the Sydney market?