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Interest Rate Outlook for June

The property market has slowed in response to rising mortgage interest rates andthe LVR speed limits imposed last year. However, the low sales activity has yetto fully translate into a moderation in house price inflation, although thefirst signs are starting to appear.Withrising net immigration and an inadequate inventory of houses keeping pricessupported, and the broader economy strong, expect another tap by the ReserveBank on the real estate market brakes – increasing the OCR.

TheReserve Bank must be taking heart from the slowdown evident in the latest realestate sales data. Sure house prices haven’t been reined in as much as they’dlike, but with the expectation that another OCR hike is just around the corner,this is just a matter of time. Meanwhile, strong migration gains are doing theirdarndest to keep the demand-supply balance out of kilter.

Advertisedhome loan interest rates have seen a number of changes in the past month, withthe bellwether 2 and 3 year fixed rates falling as competition in the mortgagemarket heats up (to around levels that they were being discounted too anyway),while shorter-dated fixed rates continue to lift in line with a higher OCR.Borrowers with at least 20% equity will find it hard to go past two year fixedrate specials, which is back to December levels and now close to the cheapestrate on the curve. Breakeven analysis suggests there is lesser value in fixingfor longer terms of 4-5 years, with these rates already higher in anticipationof the RBNZ tightening cycle.

Thedemand and supply for housing in New Zealand is broadly in balance. However,there are clear regional differences. Auckland, Christchurch, Wellington andthe Bay of Plenty have a shortage of stock; conversely the rest of New Zealandhas a surfeit of supply. While Auckland has a clear housing shortage, updatedestimates using last year’s Census figures are not as dire as previouslythought and help explain, in part, why the rental market has not followedgeneral house price trends and gone ballistic.



 

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