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Interest Rate Outlook for September

Quiet housing market focuses on election.Suddenly, everyone is talking about politics and what a potential change of government might mean for the housing market. 

Sales activity continued to cool through July and August and prices are flat to slightly down in Auckland and its surrounds. Many are now waiting for the September 23 election result for certainty on housing policy, which is similar to what was seen in the market before the September 20, 2014 election result.

A John-Key-led National appeared to have won an outright majority for a third consecutive term on that night in 2014, sparking a surge in activity in open homes and auction rooms over the following weeks. Prices rose 30 percent in Auckland over the following two years as fears about Labour’s Capital Gains Tax and New Zealand First’s foreign buyers ban receded from the market.

Up until two month ago, National was widely expected to win a fourth term easily, possibly with the help of a confidence and supply agreement with New Zealand First that left the current policies largely unchanged.

But a series of political dramas have upended that political landscape and increased the chances of a possible change of Government. Firstly, the Todd Barclay scandal weakened Prime Minister Bill English. Then Metiria Turei’s revelations of welfare fraud led firstly to the resignation of Labour Leader Andrew Little after Green support surged at the expense of Labour. Then Jacinda Ardern’s elevation to the Labour leadership coincided with a collapse in Green support when Turei was forced to resign after more questions about her fraud.

The combined effect has seen support for National drop into the mid to low 40 percent range, while Labour has surged above 35 percent and New Zealand First is over 10 percent. There is also the real possibility that the Green Party may not make it back into Parliament if it cannot lift its poll ratings above the MMP threshold of five percent. Also, Peter Dunne has withdrawn from the running for his Ohariu electorate, which effectively reduces National’s ability to form a majority with the minor parties.

All this increases the chances of a Labour-New Zealand First Government, or at least strengthens the hand of New Zealand First in a Government with National. Winston Peters has campaigned hard on banning foreign buyers and slashing migration, both of which would hurt housing demand. Both Labour and New Zealand First want to launch a massive building spree, led by the Government to address underlying supply shortages. National’s building plans are smaller.

Ardern has also said she may introduce a capital gains tax in Labour’s first term if a Tax Working Group she plans to set up recommends such a tax. Her predecessor, Andrew Little, had ruled out such a tax in Labour’s first term. However, Peters is no fan of such a tax and would be unlikely to support it through Parliament.

Politics are also affecting the outlook for the loan to value ratio limits. National Leader Bill English took an unusual step early in the campaign to call on the Reserve Bank to look at removing the restrictions, given house prices have stopped rising so quickly in Auckland and its surrounds. Ardern has also said she would prefer the limits were not in place, but has said it is a decision for the Reserve Bank. English also said he did not favour a limit on debt to income multiples, even the Reserve Bank is still consulting on it. The final decisions rest with the bank and its current leadership want to keep the LVRs and have a DTI limit on hand, but it is recruiting a new Governor who could have a different view.

The electoral result on September 23 that would be most positive for house prices and activity would be the re-election of a National Government in its current form with its three small support partners. The least favourable result would be a Labour-New Zealand First Government. The most likely result remains a National-New Zealand First Government.

The bottom line:

House price inflation has slowed nationally and prices were generally flat in July in the biggest cities. Prices in Auckland and Christchurch were down 2% and 1% respectively from a year ago. Wellington’s annual inflation rate was 10% in July and Napier’s was 19%, while Hamilton was flat and Tauranga was up 2%.

The Reserve Bank has forecast an unchanged Official Cash Rate through all of 2017 and all of 2018. It does not see the first hike until late 2019.

Banks have stopped lifting longer term mortgage rates and now also see the OCR on hold until late 2018 after weak inflation and growth figures.

The Reserve Bank is unlikely to be able to introduce a DTI limit in 2017. It has to do lengthy consultation and it has said it would not use the tool right now even if it had it because of the market’s moderation.

The key variables to watch in 2017 are China’s bad debt situation, Europe’s financial and political dramas, global inflation and interest rates, New Zealand’s election result, and Donald Trump’s twitter account.

Source: NZFSG Update – Bernard Hickey