Interest Rate Outlook for August

The housing market is slowing but will Spring refloat the boat?

Sales volumes eased 0.3% in June to be down 9.0% in the quarter. Volumes are down 17% since the high-LVR speed limits were introduced last October. Rising mortgage interest rates and the LVR speed limits appear to be impacting on demand, with the REINZ commentary noting a downward trend in sales activity, in conjunction with a lengthening in the median days to sell to 38 days, the longest since February 2012.

We are hearing that there are many vendors waiting until Spring to list their houses - so watch this space. Residential consent numbers slipped in the most recent statistics but if the volatile apartment component is removed this fall was reversed, with the core series up 4.6%. Residential consent numbers in Canterbury continued to hit record highs. In Auckland annual consent issuance firmed, but remained below historical averages.

There was another strong net migration inflow of 4,270 persons in June, the highest monthly gain since February 2013 and the sixth consecutive monthly inflow above 3,000 persons. This will flow through to an increase in demand for houses.

Despite the “flattening” in the mortgage curve, which makes it relatively less expensive to fix for longer terms, heavy discounting of the 2 year fixed rate still makes it a very attractive proposition. The 6.09% rate (for borrowers with at least 20% equity) is 0.25% higher than it was a month ago, but it is still well below the floating rate, and significantly lower than the 18 month and 3 year rates. As was the case a month ago, it is not the cheapest rate. But it’s only slightly higher than the cheapest rate, and as its term is 4 times longer, that seems a small price to pay in a rising interest rate environment.

For those looking to fix, the question is, as always; is it worth opting for a longer term, especially with the 5 year rate now at its lowest level this year? In our view, the short answer is that it is unlikely to be worth fixing for longer. Our breakeven calculations indicate rates like the 2 year and 3 year need to rise by +1.72% and 1.20% over the next 2 years for someone to have been better off fixing for 4 and 5 years respectively. That’s a stiff jump in rates given that the RBNZ has already delivered three OCR increases, and given our expectation that the next few years will be punctuated by pauses in the rate hike cycle, not an ongoing series of back-to-back hikes. We are also mindful of wider considerations such as the moderation in housing, falling dairy and forestry prices, the lack of an inflation smoking gun, and the high NZD.