RBNZ's OCR cut unlikely to have much effect on the housing market due to miserly mortgage rate cuts, but savers with term deposits are facing a kick in the guts

RBNZ's OCR cut unlikely to have much effect on the housing market due to miserly mortgage rate cuts, but savers with term deposits are facing a kick in the guts
Photo: Nick Youngson Alpha Stock Images - http://alphastockimages.com/

Anyone hoping the Reserve Bank’s decision to cut the OCR by 25 basis points (bps) will fire up the housing market over winter may be disappointed.

The decision was certainly significant, because it was the first time the Reserve Bank has altered the OCR (from 1.75% to 1.5%) since November 2016.

But in terms of its impact on someone looking to buy a property, the effect is looking rather limited.

The response of the main banks to the cut could best be described as miserly.

Although a flurry of mortgage rate cuts were announced following the Reserve Bank’s decision, they were nowhere near the level of the 25 bps cut (that’s -0.25% in layman’s language) to the OCR.

Most of the mortgage rate reductions so far appear to have been in the 6-16 bps range, and the effect that will have on most mortgage payments is likely to be negligible.

The table below outlines what the fortnightly payments would be for mortgages ranging in size from $100,000 to $1 million.

It compares the payments at the current two year fixed rate of 3.99%, with those at 3.89% (a 10 bps cut), 3.84% (a 15 bps cut) and 3.74% (the full 25 bps cut).

For someone with a $300,000 mortgage, the repayments at the current rate of 3.99% would be around $660 a fortnight.

If a 10 bps cut was applied, reducing the interest rate to 3.89%, the payments would reduce to $652 a fortnight, leaving them with an extra $4 a week in their pocket.

If a 15 bps cut was applied it would leave them with another $6 a week in their pocket. And if the full 25 bps cut was applied, it would leave them with another $10 a week to play with.

For a $500,000 mortgage, the savings from the same reductions would range from $6.50 to $17.50 a week.

But based on the reductions banks have made to mortgage interest rates so far, it seems likely the OCR cut will leave most mortgage holders better off by less than $10 a week.

While every little bit helps, particularly for people on a tight budget, that’s hardly enough to tip the property market back into boom mode.

However one of the most important outcomes of the OCR cut could be the signal it sends the market.

There has been a great deal of uncertainty in the residential property market and that has had a negative impact on sales, particularly in Auckland.

Cutting the OCR could increase confidence that interest rates will remain low for longer and perhaps go even lower. That might convince some potential buyers who may have been sitting on the sidelines to commit to a purchase, which could help stimulate sales.

And while the effect of mortgage rate cuts announced so far may be modest for individual home owners, when all of those small reductions in mortgage payments are added together they become a substantial cash injection for the economy.

But even at that level, the effect may not be as great as you might expect. Because while lower interest rates generally bring down the cost of buying a home, for first home buyers in particular, this improves their ability to service a loan, which means they may simply borrow a little bit more.

So the short term benefit of lower mortgage payments now may be offset by a corresponding increase in debt for some borrowers, which might be a problem over the longer term.

Savers cop it

Another factor to consider is that while the banks have been cautious about how much of the 25bps cut to the OCR they pass on as lower mortgage rates, they have been much more enthusiastic about slashing their term deposit rates.

While mortgage interest rate reductions have been around 6-16bps since the OCR was cut, term deposit rate reductions have mostly been in the 10-25bps range.

So while the banks’ borrowers may not be getting a lot of benefit from the OCR cut so far, depositors have been feeling the full effects, and not in a nice way.

And that means less money from deposit interest being pumped back into the economy, at least partially offsetting the stimulatory effect of mortgage rate cuts.

So while the full effect of the OCR cut on the property market is still unclear, the banks will probably be smiling whichever way it goes.

The Effect of Interest Rate Cuts on Fortnightly Mortgage Payments $
Amount of mortgage $ Interest rate 3.99% (current) Interest rate 3.89% (-10bps) Interest rate 3.84% (-15bps) Interest rate 3.74% (-25 bps)
100,000 220 217 216 213
200,000 440 435 432 427
300,000 660 652 648 640
400,000 880 869 864 854
500,000 1100 1087 1080 1067
600,000 1320 1304 1296 1280
700,000 1540 1521 1512 1494
800,000 1760 1739 1728 1707
900,000 1980 1956 1944 1920
1,000,000 2200 2173 2160 2134
Assumes a 30 year term and minimum 20% deposit.

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55 Comments

Banks and fuel companies must be run by the same directors! It's no fricking wonder the NZ operations of aussie banks are highly profitable....we have weak regulators that let the banks charge high fees and high margins. Its time for a banking enquiry and then some direct action to regulate their activities...after all the fanfare of an ocr drop and pronouncements from westpac of "dramatic" impacts and turnarounds this is little more than cheap theatre. Please bring back crusher collins or just wake up Grant Robertson, lets see some heat being applied

If you don't like the product, don't buy it :)

... Sleepy Grant needs an elbow in his ribs ... when the aussie banks tried keeping the OCR drop in Australia 2 and 1/2 years ago, the Oz politicians got into the banks through the media. Our spineless lot leave the big boys alone and start hitting up the mums and dads with ringfencing.

I think you need to realise that govt is the main cause of this slow motion train wreck. It is a fact that pension funds and savers in retirement need 7-8% annual returns to stay afloat. So, whether it is 5 or 10yrs from now, the OCR will have to be at 4-6%. When that happens, govt and councils will be broke, because they won’t be able to service their debt and provide the current level of services. The bank margins are an insignificant issue in the greater scheme of it and the massive distortion of market forces that is happening now. So, if you think that our govt is going in to bat for the working class and the prudent savers among us, then I’m afraid you’re going to be sorely disappointed.

Careful what you wish for.

A banking enquiry would also focus on loose lending standards.
Then we'll be on a fast track to where Australia is... and you'd really have something to whinge about.

I'm glad the cut didn't get passed through.
The RBNZ needs to stop applying the defibrillator and let the market take its course.

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Just yesterday an expert (with vested interest) forcasted based on his experts analysis that house price will go up by 7% based on OCR cut.

Lol

He will probably still be closer than most predictions I see on the comments. Aren’t we meant to have had 20% or even 50% falls by now?
A few weeks ago interest reported that houses in Auckland are now affordable by their definition. This ocr drop will make them that little bit more affordable. So prices could go up (or they could go down - who knows).
It’s not necessarily the amount of the cut but the direction that counts. FHBs probably feeling a bit more comfortable that rates aren’t going up any time soon.

Million dollar is still a million dollar house. How much difference does $8 to$15 means, may be it will if can guarantee that will be fixed at that low rate for 30 years.

If it is for $15 per week x 52 =$780 per year x 3 years = $2340 or for 5 years $3900.

Must be a joke.

Low interest rate does make difference but not from this level where they are already low as any fall from here will be symbolical.

BLT for housing speculators is good enough but no CG is really good for small business and farmers.

People who benefits from property speculators may try to lift but reality is overall market is on the fall, check next data, when announced.

A million dollars was first division lotto 10 years ago!

My Dad (TTP) in his real estate job enjoys quoting house prices like "a bargain at only 2.2".
He said decimal points sound much easier to pay off than "two first division lotto wins".

Who needs lotto anyway. Its easy to earn, and save, 1 million cash these days ... right? They always say your first million is the hardest right ... right?

Although at these interest rates and inflation you are only effectively throwing away 2% or so (any principal and inflation are actually paying off your debt). So on that $1 mil home you would only be throwing away $384 a week compared to $800 or more if you rented.

$800 a week rent for a million dollar home? Nah mate, maybe $600 or $650 per week here in Auckland. Either way it is less than the $974/week it would cost to service an $800k 25y P&I mortgage @ 4%, and thats igniring the other costs of owning.. rates, insurance etc.

Yes although in 10 years time you will still be paying $974 if you buy but if you rent it will have increased. And in 25 years time you will own a million dollar house instead of nothing.

You gauranteeing that houses prices dont fall and interest rates dont rise? Brave man, given that Auckland house prices are already falling slowly.

You can be almost guaranteed that over the life of the mortgage the average interest rate will be 5%-6%, and that every 10 years house prices will have rise notably. You can also be almost guaranteed that rents will rise faster than inflation on average over the life of a typical mortgage.

You almost almost almost sound like you know what you are talking about. :)

You can be almost guaranteed that there isn’t a pink unicorn behind your couch. I can’t be 100% sure though. But I suggest you make your life choices, financial or otherwise, on the assumption that there isn’t.

I think I'll stick to the actual numbers instead. Which at the moment show it's far better for us to rent and invest the difference into a variety of investment options than over-leverage into a risky property position in an over priced and currently falling market. Frankly Bitcoin looks like a better option than Auckland property right now, and I think Bitcoin is on its way to bubble 2.0.

It is better for today you, but much worse for 30 years time you. Yes, I have a small amount of bitcoin and it is shooting up.

No, it is not worse for 30 year me.. my equity is going up, and my risk is low, and the cost of renting this house is less than the interest cost on the mortgage..

But somehow in your world I'm worse off because I'm not in a highly leveraged losing position. Lol

Based on historical numbers, it's hard to deny that rents have risen over the years along with property prices. Sure, you can bet that they won't be in the future. But you have to accept that this flies in the face of historical evidence.

I've never denied rents will rise over time. And when they do I will reevaluate and if it makes sense look at buying then. In the meantime, i'm building equity until the point the buying actually provides a net benefit. It just doesn't right now, and not likely to in the immediate future.

What circumstances will need to eventuate for you to conclude that "buying actually provides a net benefit"?

Well, when 49 of the worst 50 performing suburbs in NZ on the latest corelogic report aren't all from Auckland and down from -3.4% to -6.8% would be a good start. Most of them $1m+ median suburbs.

*the other suburb making the top 50 losers was somewhere in Porirua btw.

Oh, and TheMAN isn't going to be happy, Christchurch features quite heavily in the top 50 losers outside of Auckland list (although they are mostly only down 1% or so). Going by past records, I expect loud protestations of the fact they aren't dropping at all from the usual suspects.

I ask under what circumstances you would buy and you proceed to essentially tell me the circumstances under which you would not buy. Very telling.

Lolz, watevs :)

"Guarantee" is a really strong word.

No investment professional would be caught dead making the statement's you've just made.

If you think "almost guaranteed" and "guaranteed" are the same thing, you're beyond help.

absolute nonsense - why would rentals increase faster than inflation - and how can that happen for a sustained period

Same reasons as for the previous 30 years.

Great article Greg. I agree with your comments which seem very sound.
Interesting to consider how this is all effecting different cohorts.
The reality is there is a very large group - probably around their forties and early fifties - who purchased their home around 2010 prior to rapid house price inflation have consequently benefited from not only from the capital gain but also what would have been in 2010, surprising very very low sustained mortgage rates.
For those who in retired in the last 7 years or so ago with savings of around $500,000; they would have assumed that they could easily and safely put this in term deposits for a reasonable return but have found that the expected $30,000 a year to supplement their superannuation is now likely to be less than $15,000 per annum. Ones in this category will most likely be having to look to managed funds or using their KiwiSaver as a vehicle for investment in funds with a greater exposure to equities but with higher risk and volatility which they would not have wished for.
Yes, recent FHB have faced the serious issue of housing affordability and perceived risks of housing bubble burst, but as you point out, the signals seem to be at least for continuing low mortgage interest rates and at least some support - although probably minor - for house prices.

Don't discount this group using such money to assist their kids into housing, especially when there's no better return (perceived or otherwise) elsewhere. If the returns are the same, many will prefer to help their kids. This has a substantial effect on propping up housing prices.

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So home buyers and people with mortgages get a few crumbs, savers get the one finger salute, meanwhile banks profit even more by not passing on the entire cut. Sounds about right.

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If the NZ economy were stalling because of 10% mortgage rates then yes, reducing rates would cause a resurgence. The problem is sky high prices and locals limited financial clout to sustain it. Chinese authorities efforts to constrict the outward flow of precious capital has been highly successful. This has to have much longer term consequences to our housing market. If you consider the serious imbalances within the Chinese economy itself, its these imbalances that led them to take such measures in the first place. I think the current housing slowdown will deepen (go nationwide) and will go well beyond the fairytale 2021 recovery the Spruikers have rested their finances on.

So true. I was concerned about what Adrian Orr said about symmetry in that a movement down from 1.75% would be as impactful as a movement up from 1.75%. Interest rates are just a lever to influence human behavior. If interest rates were to be set ridiculously high so as to create a society of 100% savers or ridiculously low so as to create 100% spenders, then in either case human behavior can no longer be influenced unless the rate of movement is a movement back to the centre, and we would be living in an impossible hypothetical dystopia. So it makes sense that a movement in and around a more centered, balanced rate like as you say 10% would be more impactful than movements that take us closer to an impossible dystopia as Orr did this week. It seems Adrian Orr has dismissed the law of diminishing returns. They might have to cross it out of high school text books. We live in Orwellian times, or Adrian Orrwellian times.

I'd imagine if the OCR was put back up 25 points at the next assessment, things would reverse. Mortgage rates up by 10-25 and Deposits by 6-16 at best.
I'd save more money by cancelling my Spotify premium, X box live, Netflix or weekly lotto ticket.

Yes Greg. Exactly.
How Westpac can claim that this cut might restart the housing market - simply beyond me.

While the OCR cut by itself might not amount to much reduction in bank lending rates, the CUMULATIVE effect of the OCR cut and the ban on Capital Gains Tax might be sufficient to provide a modest stimulus to the housing market........

And we can't rule out anther OCR cut in the not-too-distant future.

First-home buyers are relatively active in the market right now - and there's some indication that investor activity is starting to gather momentum.

Nonetheless, in my view, the major concern should be with term deposit holders - many of whom are pensioners and others with modest means. They're being fleeced! Those who have made a bundle from property should spare a though for them........ How about making a cash donation to an NGO that supports the less-privileged people in our communities.

TTP

TTP
Let's reverse the logic. Do you not think that the threat of a CGT might have been lifting market activity up till April, ie. getting in before it potentially came in?

Hi Fritz,

Even if CGT had been embraced by the Government, one can't assume the effective date (for calculations) would have been in April 2019.

The back-down on CGT and the KiwiBuild fiasco will be long-remembered as Labour's housing legacy. Hardly what one expects from a socialist political party that campaigns on equity, equality and so forth.

TTP

I thought the plan was for it to commence in 2021, and not to apply retrospectively. I think that was a fairly safe assumption.

'We expect to keep the OCR at this level through 2019 and into 2020" Mr Orr , November 2018 MPS statement.

The RBNZ is worried. The May MPS makes reference on eleven occasions to slower household consumption,slower house price inflation since 2016, the effects on GDP and the related benefits of a lower OCR.
Oddly, in terms of house price inflation only two regions of New Zealand have not seen a new historical median( REINZ ) high in the past 6 months), Auckland ,and the mighty West Coast. Surprisingly the West Coast is one of the few regions to see increased housing sales.
The Auckland housing market has stalled, housing turnover is the lowest since 2008, prices have stagnated and have failed to pass previous highs ( at least the dreaded median ) The May policy statement makes mention of Auckland, albeit fleetingly. Auckland , of course is the most indebted household region on any measure. An increasing number of mortgaged Auckland households would now be underwater, particularly if they have purchased since 2016 .
The OCR, since the March 2017 quarter, the average interest rate across all mortgages has dropped from 4.77 percent to 4.48 percent, 29 bps, while at the same time the average 2 year fixed rate has fallen from 4.8 percent to 3.97 percent , 83 bps. Its all about stock and flow.
Our Australian banks are making out like bandits and will continue to do so.
In effect, the lowering of mortgage rates over the past two years ,like for like , sees annual mortgage interest payments drop around 12.45 B to 11.68B , which sees New Zealanders have an extra $410, per household per year. However, aggregate scheduled mortgage repayments have barely budged in the same time frame, which makes sense as interest only loans are being reset.
Of course , not every household has a mortgage , nor does every household own their own home. Unfortunately,and sadly on the flip side, when looking at household consumption, one only needs to see what increasing rents are doing to those that do not own their own home, having to pay higher rents, because "investors' took on increased debt as a result of increasing house prices. $410 per household , suddenly looks like chump change.
As the RBNZ states in its May statement, house price inflation and population growth has increased GDP, amazing how things work in reverse. When the REINZ release their monthly figures, the important number in focus are sales, without turnover , prices will not rise in Auckland, and eventually it will hit the regions and New Zealand. This OCR cut may indeed not give any bang for buck.
Any external event that sees a prolonged OCR increase, would take house prices and New Zealand back a decade or two.

Westpac either has no idea or is just talking things up! It's no wonder they are talking up the markets at the moment though given the huge losses they are facing in Australia. Last thing they want is that to happen to their NZ business as well.

The central banks, like all government agencies, like to portray themselves as very important, which they are; and as useful, which often they are not.

The Bank of International Settlements, the Banker's Bank, points out that:

the effects of interest rates on residential investment are twice as large during housing booms than during the busts, and are clearly stronger when interest rates are rising than when they are falling.

https://www.bis.org/publ/work726.pdf

More of a signal to the market than actually having any current effect. You can still get 3.25% at the BNZ in a short term TD so this is unchanged after the OCR announcement. I think its going to be a blip, all the mortgage rate cuts will creep up again.

It all depends on which rates/terms you look at. Some of the major banks decreased their term deposit rates (especially for longer terms) in the two weeks prior to the OCR announcement - from 3.6% to 3.25% - a larger decrease than the OCR cut. As the article says "the banks will be smiling". Depositors may smile less in being advised by Mr Orr to put their money into higher risk investments.

There is always a solution to theft and greed by Banks, Real Estate Agents, Politicians and the like....Vote with yer feet....when feeling threatened.

I have always used the Mantra, if ya cannot keep a good customer happy....ya lost me.....and forever.

And Banks can go stuff emselves with other people's munny......till the end of time. Orr not.

A lot of huge debt around, a lot of infinite wisdom, gone west and flowing East, but keeping the good customers you used to have and now losing willy nilly......a definite, infinite...Tui. One prick and its gone.....Bubbles are always a popping.....Clear as day, but not as bright.

Have you seen the Bitcoin effect....but more importantly the Ripple effect too. ...Have to click on Crypto in below link....when you have done it.

Win some...lose some....

https://www.marketwatch.com/

Which does no say much about the state of the economy.....

Screws savers and drives them up the risk spectrum in their investments.

It's because there is a net upward pressure on supply rates, due to lower levels of volume activity in property.

Demand / turnover creates a higher level of new loanable deposits.

You'll be seeing the money supplies slow/contract as property falls. Thus lower demand causes supply scarcity in a downcycle in prices.

Savers, what are they? Why in this age of mixed asset classes is anyone 'saving?' Learn how to put your money into bonds and stocks and get far better returns that way! No tenants to worry about either....

Extra $4 a week? That's nearly an additional coffee a week, or half a smashed avo a month for these ingrate millennials!

I'd be interested to see how OCR changes affect business borrowing rates... not at all in my experience. Just imagine if residential investor/speculator mortgages were perceived as high a risk as business borrowings... might change the playing field somewhat.

I agree whole heartedly with this article. Going further monetary policy is not working. Inflating assett prices by lowering interest rates and rescuing banks with public money got the world out of trouble in 2008. But it came at a cost. The cost was borne by savers. Which means households. Young ones saving for a home deposit. Middle ones saving to pay the house off or trying to get one with off street parking and and guest room. Old ones trying to live on savings. They paid and continue to pay the price of the bailout. When their most important assett or aspiration zooms out of reach (for a better one) or when hard earned and saved savingings are made worthless. Housholds save and consume. They are what the economy should serve. It turns out Central Banks loyalties are with the other banks. Should we be surprised?