Interest Rate Outlook for June

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

The Reserve Bank must be taking heart from the slowdown evident in the latest real estate sales data. Sure house prices haven’t been reined in as much as they’d like, 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 their darndest to keep the demand-supply balance out of kilter.

Advertised home loan interest rates have seen a number of changes in the past month, with the bellwether 2 and 3 year fixed rates falling as competition in the mortgage market 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 fixed rate specials, which is back to December levels and now close to the cheapest rate on the curve. Breakeven analysis suggests there is lesser value in fixing for longer terms of 4-5 years, with these rates already higher in anticipation of the RBNZ tightening cycle.

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