Interest Rate Outlook for August

Rates cut and LVRs restricted for Spring.

The traditional re-awakening of the housing market over the spring and early summer will be anything but traditional this year.

Housing markets have continued to run hot around much of the country throughout the winter, at least in terms of prices if not volumes. Real estate agents reported shortages of listings through July and early August as house price inflation hit annual rates of well over 20% and average numbers of days to sell kept falling.

The Auckland halo effect continued to spread through the winter to markets from Tauranga to Hamilton and Whangarei, and to as far afield as Queenstown and Dunedin. Annual inflation rates ranged from 20-40% in most of these markets, with little Kawerau experiencing 41% inflation in July.

The Reserve Bank's mid-July announcement of a new nation-wide requirement for a 40% deposit for rental property investors was introduced almost immediately for new loan approvals by banks, but there remains a substantial number of pre-approvals banked up and still grinding through the system. The Reserve Bank announced in mid-August it would delay the introduction of the new 40% Loan to Value Ratio (LVR) restriction from September 1 to October 1 to allow the banks time to process those pre-approvals.

It's too early to say if the restriction is affecting the market. Some agents and mortgage brokers say some deals have fallen over and up to 50% of the houses being sold in and around Auckland were being sold to rental property investors before the introduction of the rule so there could be some impact, although previous restrictions have only temporarily slowed the market.

However, August also saw life get marginally easier for borrowers to increase their bidding at auctions because the Reserve Bank cut its Official Cash Rate (OCR) by 25 basis points to 2.0% and forecast at least one more cut later this year or early next year. Some economists are forecasting a 1.50% OCR by early next year, with a few outliers seeing it drop as low as 1.0%. That's because the New Zealand dollar remains much higher than the Reserve Bank's previous forecasts, which is dragging down on inflation.

The bank is supposed to keep inflation around 2%, but it hasn't been near that mid-point target of its 1-3% range for over five years and has been under 1% for more than year.

The problem for borrowers – but not necessarily for savers – is that the banks are not passing on most of the OCR cuts to floating rate borrowers and have yet to pass it on to fixed rate borrowers too.

Banks passed on an average of just 10 basis points of the 25 basis points of OCR cut on August 11 by August 15. Fixed mortgage rates have also not dropped over the month to mid-August, despite drops of around 25 basis points in wholesale 'swaps' rates.

ANZ led the way in retaining almost all of the OCR cut. It was followed by the other major banks to a lesser extent. The biggest bank also actually increased some of its term deposit rates and CEO David Hisco came out with some unusually strong statements that the housing market was "over-cooked" and that the bank was changing its approach.

"We are sending a strong signal today to New Zealanders that at a time of record low interest rates, it is more responsible to pay down home loans and save, than borrow more," he said.

"Dramatically lowering lending rates would only throw fuel on the fire in an overheated housing market. That would be irresponsible and negate any economic benefit to New Zealand and drive up the country's debt as banks seek expensive offshore funding for increasing home loan books. While this may mean we write fewer investment loans, we believe it is the right thing to do."

So the lending-assisted surge in house prices over the last year may be losing some of its fuel, but it is still getting plenty of help from record high net migration and economic growth running at between 3-4%.

The housing market will find out over Spring and Summer whether the Reserve Bank's latest moves and the banks' decisions to dial back on the lending actually cools the market while the weather is heating up.

The bottom line:

House price inflation ran at 26% nationwide in the three months to July as the Auckland housing 'halo effect' spread around the country.

The Reserve Bank delayed the introduction of its nationwide requirement for a 40% deposit for rental property investors by 1 month to October 1 to allow banks to work through pre-approvals.

Under pressure to both ensure inflation pushes back up into its 1-3% target band and get the Kiwi dollar down, the Reserve Bank cut its Official Cash Rate to 2.0% and said it would cut it at least once more.

Some economists forecast the OCR could fall as low as 1.0% early next year, although most see it dropping to 1.5%.

Banks withheld most of the OCR cut from floating rate mortgage borrowers and some actually increased their term deposit rates in an effort to increase savings and reducing lending growth.

Source: Bernard Hickey


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