Westpac economists pick no further OCR cuts, say house prices could rise 7% next year

Property

Westpac economists expect Reserve Bank to keep OCR on hold until 2022 and low mortgage rates to push up house prices

11th May 19, 9:16am by Greg Ninness

Westpac's economists have reconfirmed their forecast there will be no more Official Cash Rate (OCR) cuts by the Reserve Bank for the remainder of the year, but expect house price inflation to hit 7% next year.

An update by Westpac's chief economist Dominick Stephens said they believed the Reserve Bank would keep the OCR at 1.5% for the rest of the year, but admitted it was a finely balanced call.

"A follow up cut is possible if the data weakens further," the update said.

"But... we expect an economic pick up later this year to remove thoughts of another OCR cut."

The update also said the bank's economists had previously thought there would be another OCR next year, if a Capital Gains Tax was introduced.

But the Government's announcement that it was dumping CGT, combined with low mortgage interest rates, meant they don't see any further changes to the OCR until mid-2022.

They also believe those factors would see house prices rising.

"There is no longer any reason to think the housing market is going to slow in 2020," the update said.

"Far from it. We now expect house price inflation to accelerate to 7% by mid-2020, due to the recent sharp drop in interest rates."

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39 Comments

by Alter Ego | 11th May 19, 9:22am 1557523379

I want to thank Wetpack for another 7% growth......and of course other bwankers too...and I do not have to spend a penny, not one cent. And I do not have to be a customer at all....which is even more delightful.

by tothepoint - d… | 11th May 19, 9:47am 1557524866

Hi Alter Ego,

Don't blame Westpac, or the other trading banks for the prospect of some growth in house prices......

They didn't lower the OCR.

TTP

by Ocelot | 11th May 19, 10:17pm 1557569842

Australia's OCR is the same as ours, and their prices are still plummeting.

by b21 | 11th May 19, 9:48am 1557524888

This so-called "experts" keep mixing up forecast with their own wishes. Low mortgage rates and falling prices almost always go hand by hand just because the former is a consequence of the latter due to banks trying to recover from profit losses. They just have to look into what's happened after GFC in many countries, but I guess they prefer not.

by tothepoint - d… | 11th May 19, 9:51am 1557525075

Hi b21,

The people in the banks who do the forecasts are economists.

They stand and fall by the accuracy of their forecasts.

Career-wise, there's scant incentive to get things wrong.

TTP

by b21 | 11th May 19, 10:21am 1557526863

Hi TTP,

Any bank would be stupid to fire an economist that does wrong forecasts that benefit them, either being unintentional or moved by their own interests. This means economists do not fall by the accuracy of their forecast but instead they depend on how their forecasts affects their employer. Obviously a forecast that tells prices will rise 7% next year affects people's perception in a way will result positively on banks.

;)

by tothepoint - d… | 11th May 19, 10:44am 1557528282

Hi b21,

Until this week's OCR announcement, Westpac economists had been forecasting weakening house prices - and a slowing housing market in 2020. Was that in the interest of the bank itself?

But since the announcement, Westpac economists have revised their forecasts to take into account the cut in the OCR. That is, of course, rational and reasonable - in a word, professional.

As I alluded to above, no career economist wants to lose his/her reputation on the basis of a poor forecasting track-record - and/or compromised ethics. After all, NZ is a small village.

TTP

by J.C. | 11th May 19, 1:14pm 1557537273

But since the announcement, Westpac economists have revised their forecasts to take into account the cut in the OCR. That is, of course, rational and reasonable - in a word, professional.

Nope. "Professional" is about "sounding rational, reasonable, and professional" to peers and the general public. It's purely subjective.

As I alluded to above, no career economist wants to lose his/her reputation on the basis of a poor forecasting track-record - and/or compromised ethics. After all, NZ is a small village

You mean like Paul Bloxham who labeled NZ a "rockstar economy." If the NZ economy was so rock and roll, interest rates would be going up, not down. Is the NZ public holding Bloxham to account? No. Has he beeen fired from HSBC? No. Is the still a go-to pudit for the media? Yes.

Furthermore, one constant seems to be the lack of ability of institutional economists and experts to forecast the bursting of bubbles. And why do you think that is? Banks are arguably the biggest benefator of asset bubbles. When the bubbles pop, resources are always available to support the banks. Therefore, there is no incentive for a bank employee, including economists, to do anything more than tow the party line.

by b21 | 12th May 19, 12:12am 1557576733

The other change that also happened this week is that Westpac just reported a drop in their net profits of 24%.

by Yvil | 11th May 19, 5:50pm 1557553819

B21, low interest rates are not a consequence of falling prices as you suggest. Also the banks have not been making losses at all, quite the opposite

by b21 | 11th May 19, 8:31pm 1557563467

They are if you look at the history records and it works as follows: Prices fall -> buyers hold to buy -> less houses being sold -> less mortgages being signed -> drops in banks profits (not losses as you mention) -> banks react by offering lower interest rates to make it more attractive hoping that more mortgages will be signed. Just check what happened to Euribor (to which most mortgages are linked in many European countries) since the housing crashes that happened over there just a few years ago: https://www.homefinance.nl/english/international-interest-rates/euribor…

by alittle | 11th May 19, 10:11am 1557526276

propogonda by vested at best. Anyone to say thathouse price in Auckland will rise is not correct.

It may or not fall but one thing is defenite that not rising in near future. Interest rate has been low for some time and now with .25% OCR cut - Will the home loan interest fall by similar - have doubts and yes their is small fall in floating interest butthan how many are on floating interest. It is good for small business who take loan for business - normally floating against the house but for FHB - doest it matter much ?

Vested interest forcast should be read with caution.

by CJ099 | 11th May 19, 11:03am 1557529394

I'd certainly take this prediction with a pinch of salt. Even with keeping the OCR low at 1.5% for the foreseeable future I doubt mortgage rates would drop significantly enough to enable or even encourage FTB's and local investors to push up house prices. Remember folks property prices are currently falling in NZ (Plus Australia and Canada) due to the absence of mostly Chinese buyers. Prices need to bottom out to affordable levels before 'resident buyers' can afford to slowly push up prices.

Quick history lesson for those with short memories: When did property prices start to fall in the larger cities such as Auckland? Answer - beginning of 2017 property auction results began to decline along with sales and gradually prices.

Why did China stop Capital Outflows in 2017? Mostly due to Trump being voted in and his trade tariff threats.
Since then property markets here, Australia and Canada has gone in to significant decline in their larger cities that were popular with overseas investors.

What these economists are probably really hoping for is that Mr Trump will either be impeached or voted out in 2020, so China can relax its capital controls.

I would be delighted to see Mr Trump voted out, But I really don't want to see us return to a 'false economy' relying on oversea property investment (Mostly money laundering) because that's a road to no where.
Juwai article: Why Chinese buyers are still looking at Australia and New Zealand
https://list.juwai.com/news/2019/01/why-chinese-buyers-still-looking-at…

Article quote: The question for Australia and New Zealand is this.When will Beijing relax the restrictions that make it harder for Chinese families to move more money overseas to buy real estate? When they do cut the red tape, you can expect to see a surge in investment in Australia and New Zealand.

by Alter Ego | 11th May 19, 12:35pm 1557534904

Have a propaganda at what the World is doing, interest rates at the lowest ebb in the entire history of Man-kind. To the Point, I say, when you can talk up a market on heavily borrowed money, I say thanks a million, maybe more, many times over.

So does Jacinda and many, many, many others.
Thank you.

by CJ099 | 11th May 19, 1:25pm 1557537936

Think Mr Key and National inc. are far more responsible for the 'false economy' over the last few years before Labour were voted in. It would have been nice to see National explain why the Housing Market dropped suddenly under their leadership too, since it was influenced by forces far outside of NZ control as we've all seen come to light.

At least Jacinda is taking steps in the right direction of trying to build a real economy and not rely of the supposed free money coming in from abroad that has now abruptly stopped.

by Fritz | 11th May 19, 12:10pm 1557533441

More garbage from bank economists.
Flawed logic. Low interest rates do not equal automatic lift in the property market and values.
The rates are low for a reason - a weak-ish economy that will keep a lid on housing demand.
Affordability is stretched to its limits.
Also, rates in NZ have been low for a while, and that has done little to bolster housing.
These bank economists are either dumb or totally biased.

by Houseworks | 11th May 19, 3:26pm 1557545205

Fritz Are you still sticking with your guesses of negative prices by year end? The "dramatic" ocr fall must have some spinoff effect you must admit.

by Fritz | 11th May 19, 5:54pm 1557554082

That's not a 'dramatic' fall at all. It's one small cut after a period of stability.
I think I said -5% in Auckland this year. I stick to that.

by brisket | 11th May 19, 7:47pm 1557560828

I'd be willing to bet on negative prices for the year in Auckland.

There is no one out there who will look at a 0.25% (less after being digested by the bank) fall in interest rate and decide that they can now afford to buy a house. There are a few FHBs around who will decide they can afford the slightly lower prices - and a few Chinese buyers looking for a bolthole for capital who are willing to take an actual loss on their investment in exchange for having the capital dispersed - but not nearly enough to make up for the massive, and predictable, fall in turnover.

Prices are still absurd relative to economic fundamentals. And if they were to increase, it would only be setting us up for a worse fall later on.

by Glitzy | 11th May 19, 12:55pm 1557536108

Back in the day when most people had floating rate mortgages cuts and rises in the OCR had very significant and immediate impact on affordability. This is no longer the case.

Fixed mortgage rates are determined by longer term government bond yields and swaps rates not directly by the OCR.

If you look at what's happened in the govt bond market at the long end of the curve (10 yr now well under 2%) over the past nine months there have been massive moves lowering longer term yields. This has fed through to lower fixed rate mortgages and lower depo rates.

Despite these huge moves the general consensus is that the Auckland market is drifting lower and notably higher priced property is seeing a large reduction in liquidity. This implies the FBB and new AML requirements having the desired effect of slowly making house prices drift lower.

I can't see why OCR being cut 25bps would have any effect on this trend.

by Houseworks | 11th May 19, 1:07pm 1557536870

Bank economist forecasts often undershoot the final result but in this case it seems optimistic. Are westpac picking growth for Auckland or not? I would be interested to see a breakdown of Auckland v the rest, one national figure is too general these days

by Kakapo | 11th May 19, 1:56pm 1557539819

Yes, and monkeys could fly out of my butt.

by Justa comment | 11th May 19, 1:57pm 1557539861

Australia has had lower rates than NZ, and Sydney house prices are down 14.6% fron their 2017 highs.

by CJ099 | 11th May 19, 4:12pm 1557547926

Yep totally agree with you. Here's an article from the Financial Review that also shows that despite price falls and interest rate drops, Sydney and Melbourne still remain unaffordable to salary earners. But you know this is what happens when you let money launders run rife, it gradually destroys your real economies by drastically increasing the cost of living in those cities, pushing out new industries particularly in high salary Tech industries.

Though thanks to Labour we're doing a bit better on our Anti Money Laundering strategies than Australia which may explain why they've been so badly hit by China clamping down very successful on their capital outflows.
Real Estate: dirty money laundered through Australian housing | ABC News: https://www.youtube.com/watch?v=-A_lH4S3ufA

Australian Financial Review article: Australian property still world's most expensive despite sharp falls
https://www.afr.com/business/banking-and-finance/australian-property-st…

by Retired-Poppy | 11th May 19, 4:00pm 1557547222

CJ099, I think you meant to say " Sydney and Melbourne still remain (unaffordable) to salary earners" :)

by CJ099 | 11th May 19, 4:10pm 1557547858

Yes sorry typing too fast. :)

by GenerationXY | 11th May 19, 3:26pm 1557545181

*Google's how to short Westpac shares*

by Retired-Poppy | 11th May 19, 3:58pm 1557547112

In 2012, BNZ economist reckoned the NZ housing market was overvalued by 25% because of artificially low interest rates. Based on this, does BNZ believe its currently overvalued by 50% driven along by even lower borrowing rates? https://www.interest.co.nz/property/60320/bnz-economist-craig-ebert-say…

In 2018 Westpac warned that houses nationwide would fall by 5% over the following four years, with larger falls in Auckland. Policies such as ring fencing were mentioned but not CGT. Being economists, they would have factored in some RBNZ stimulus response based on this gloomy forecast. Why the sudden change of heart now? https://www.stuff.co.nz/business/100586473/westpac-warns-house-prices-s…

realestate.co.nz listings for Auckland back up to 14,191. Mortgage rate reductions are not going to relieve price pressure in the upper brackets. Vendors are voting with their feet regardless. In the absence of the cashed up undiscerning foreign based buyer, locals aren't filling the gap as they are not confident to borrow up on the million dollar plus price bracket.

by fat pat | 11th May 19, 5:48pm 1557553682

Totally agree – When you’ve got streets and suburbs priced around 2 million dollars, how will lowering interest rates backstop those prices. Perhaps it’s more about preventing or delaying defaults. I’m sure the RE industry will conceal the upper quartile Auckland bloodbath with aggregate reporting, just as they concealed the upper quartile hyperinflation from 2012-2016.

by CJ099 | 12th May 19, 12:13pm 1557620016

Yeah some how I don't feel sorry for those Paper Millionaires in the more expensive regions. If they didn't have the good sense to sell up during the height of the dodgy money gold rush during 2012-2017 then they've only got themselves to blame.
Funny, I've just been reading about Canada's money laundering activity and how it massively pushed up prices in their Greater Toronto Area and it's sounds very familiar as to what has been happening in Auckland, especially in regards to Trust/Shell companies. If you take a look at websites such as and look at the Suburb info for the more expensive areas of Auckland it's kind of shocking. www.oneroof.co.nz/suburb
Canada's report; Why Criminals Love Canadian Real Estate (And How to Fix It) : http://www.transparencycanada.ca/wp-content/uploads/2019/03/BOT-GTA-Rep…

by Fritz | 11th May 19, 11:03pm 1557572586

What's changed? Nothing other than they are getting more desperate for business.A Miniscule interest rate cut doesn't count.
Bank economists independent? Independent my ass!!!!!

by tony.everitt | 12th May 19, 12:58am 1557579504

Interestingly Auckland housing stock on realestate.co.nz has leapt +15% more than this time last year. Seems vendors are indeed excited about a possible market recovery, but would-be buyers didn't get that memo.

by b21 | 12th May 19, 9:07am 1557608830

Right the opposite, this is a sign that houses don't sell and accumulate over time increasing the stock as you see.

by northman46 | 12th May 19, 8:06am 1557605185

So why wouldn't our best and brightest not just go to Aus or Europe?

by Wrong John | 12th May 19, 2:17pm 1557627467

I'm wondering whether this Westpac change of heart is not inter company. Their Australian cousins have taken a bath recently with the Royal Commission & all that. I'm thinking this might be as much for our (Westpac) boys & gals to up the ante over their Australian owners. A quick jab to the ribs. Anyhow, who remember bank economist forecasts two days later? Not me.

by Simon | 13th May 19, 10:10am 1557699042

BOOM

"There is no longer any reason to think the housing market is going to slow in 2020," the update said.

"Far from it. We now expect house price inflation to accelerate to 7% by mid-2020, due to the recent sharp drop in interest rates."

by Chairman Moa | 13th May 19, 10:19am 1557699571

Excellent news! that 7% increase yearly would double the house you paid for in 10 years! That old say of your house will double its value in 7-10 years is correct according to Wespac.
Buy now, especially in CHCH.

by Voiceofreason | 13th May 19, 11:20am 1557703241

What they mean is "we hope this happens", so our profit doesn't start dropping like it is in Australia (22%).

by K.W. | 13th May 19, 4:47pm 1557722852

Wow, so a 0.25% cut to interest rates is going to push house prices up 7%. If only countries like the US had known that, they could have slashed interest rates in 2007 and completely avoided the whole GFC thing. Oh wait, they did ....
https://money.cnn.com/2007/09/18/news/economy/fed_rates/index.htm