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Interest Rate Outlook for November

AltA housing El Nino? Or just a fantastic summer?

New Zealand's farmers are bracing for a long, hot and dry 'El Nino' summer and have already had an early taste with record high temperatures during 'Hotober' in parts of the South Island. The question is how hard it will hit farmers and for how long.

In many ways, the housing market in Auckland is also bracing for some summer crosswinds in the form of new reporting rules for foreign investors from October 1 and new borrowing rules for Auckland landlords that hit on November 1.

There are early anecdotal signs of a cooling of demand in Auckland auction rooms through late September and early October, but it has yet to show up in the sales and volume figures. If anything, the boom in Auckland is spreading and lower interest rates are acting as a handy windbreak for the market.

The Reserve Bank's loosening of its high Loan to Value Ratio lending speed limit for areas outside of Auckland is helping fan the flames of Auckland investors leaping into the likes of Hamilton and Tauranga.

Real Estate Institute figures showed the national median house price hit a record high NZ$484,650 in September, which was up 15.4% from a year ago and up 3.5% in seasonally adjusted terms from August.

Auckland was far from cooling in September's figures. Volumes rose 6% to 3,158, up 37.8% from a year ago and the median price hit a record high NZ$771,000, up 25.4% from a year. The median for New Zealand excluding Auckland rose 8.3% to NZ$365,000.

REINZ also reported the joy in Auckland seems to be spreading, both south and north.

"There is continued evidence of Auckland investors and first home buyers spreading to other regions causing a 'halo' effect, most notably in Northland and Waikato/Bay of Plenty," said REINZ CEO Colleen Milne.

Northland sales volumes in September were up 69% from a year ago and the median house price was up 26.2%. Waikato/Bay of Plenty volumes rose 84.8% and the median house price was up 16.9% from a year ago, including an 11% rise in seasonally adjusted terms in the month of September alone.

But will it last?

The surge of enthusiasm and prices in Auckland over the last year depended on a perfect storm of factors coming together at once – the election result killing the prospect of a capital gains tax or foreign buyer limits for at least three years, net migration surging to record highs, a shortage of 25,000 houses, solid employment growth in the construction and services industries, and a 1% fall in interest rates to record lows of nearly 4%.

Migration to Auckland is forecast to fall back from more than 2,000 a month in 2016 as Australia's economy slows down, but that has been forecast without success for the last two years.

Auckland housing consents have more than doubled to over 900 a month over the last two years, but that's barely enough to cover the new migrants, let alone the natural population growth of over 1,000 new people every month. It's certainly not enough to eat into the existing 25,000 shortage.

An extra million people are expected to be living in Auckland by 2040 and the current forecasts are that Auckland will need to build an extra 400,000 houses by then. The trouble is that the current planning rules and infrastructure forecasts are likely to mean only an extra 160,000 houses can be built, the Property Council estimates.

Meanwhile, interest rates are expected to remain low, and possibly even fall further into 2016. The Reserve Bank could cut its Official Cash Rate again as soon as October 29, with most economists expecting another cut by December 10 at the latest.

Inflation remains very weak and well below the Reserve Bank's target of around 2%. Dairy prices bounced through September and October, which may take some of the pressure off the bank to cut, but the currency also bounced sharply to over the bank's estimates, which sucks some inflationary pressure out of the economy.

Auckland's housing market may get a buffeting in November and December as buyers adjust to the new tax and lending rules, but there are plenty of other factors supporting the market. Most cities beyond Auckland are sailing along nicely in its slipstream, although Christchurch remains subdued after its surge of new building activity in the last two years.

The bottom line:
• Auckland house price is inflation running at over 20% and it's spreading to Tauranga, Hamilton and Northland. Early signs of cooling have yet to show in the figures.
• Most economists now expect the Reserve Bank to cut the Official Cash Rate to 2.5% by the end of the year as inflation remains well below the bank's 2% target. Fixed mortgage rates could fall below 4% in early 2016 if the central bank is forced to cut the OCR to 2%, as some expect.
• The Reserve Bank's restriction on 70% LVR lending to Auckland landlords applied from November 1, while the Government's two year 'bright line' test for taxing capital gains applied from October 1. The Reserve Bank's speed limit for high LVR lending outside of Auckland was raised from November 1.


Source: Bernard Hickey