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Interest Rate Outlook for April

It is the first time in three years that the Reserve Bank has lifted the OfficialCash Rate which it moved by 0.25% last month. In isolation this move would havelittle impact on our property market but given it has been laid over the top ofthe LVR restrictions put in place in October 2013 it appears that we mayfinally be seeing a slowing of our property market.

Thevolume of house sales has slowed through the first quarter of 2014, the pace ofprice increases has eased and the average days to sell a house slowed.

Manyeconomists are predicting total interest rate increases in 2014 to hit 1% (soanother 0.75% through the balance of this year) and New Zealand inflationprobably accelerated in the first quarter, keeping on track expectations thatthe Reserve Bank will lift the official cash rate again next week to mitigatethe effects of strong growth in coming years.

Ofcourse we also have an election due in September so rising interest rates anddollar would certainly make government nervous. Although the National partystate that they have no influence over the Reserve Bank and monetary policy.

The flipside to the rising interest rates is the 10 year highs in migration with over22,000 net increase in our population last year which continues to drivehousing demand. To meet this demand, building of new  homes seems tofinally be kicking  in with over 21,000 consents issued in 2013 ( which isthe highest number since 2007).    

Whatdoes all this mean in terms of a borrowing strategy? Yes, variable rates haveincreased and are likely to again once or twice this year. This means sittingon a variable rate probably doesn’t make much sense unless you are looking tomake lump sum principal reductions or repay in full within the next 6 – 12months. However, we also caution against fixing in for too long which doescarry a premium for the additional certainty. The mid-range fixed rates of 18months to 2 years appear to carry the most value at present although if youhave a sizeable mortgage perhaps a split of longer and mid-term fixed rateswould benefit you. It is best to sit down with us to discuss your options.


 

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