OCR cut could prompt housing market upturn

Thursday 8 August 2019

The Reserve Bank’s decision to slash the Official Cash Rate (OCR) by 0.5% to a historic low of 1.0% has shocked the financial community, but what could it mean for the housing market?

By Miriam Bell

In the run-up to Wednesday’s OCR announcement, economists were unanimous in their view that the Reserve Bank would be delivering another cut to the OCR.

Many were also expecting further OCR cuts to come down the track a bit.

But no-one anticipated that the Reserve Bank would slash 50 basis points off the already low OCR of 1.5%, effectively delivering two cuts in one.

It was a move described as “stunning” by Westpac chief economist Dominick Stephens and one which has sent financial commentators into overdrive.

The focus of most of the commentary has been on what the cut means for the economy, both now and going forward, but it’s agreed the goal of the cut is to jumpstart spending and growth.

Banks started to drop their interest rates immediately, with ASB, BNZ, ANZ and KiwiBank all announcing cuts to home loan rates.

This begs the question of how the currently slowing housing market might respond. Will it be stimulated to take off again?

The summary of the Reserve Bank’s monetary policy committee discussions reveals some division, with some members saying lower mortgage rates could contribute to a stronger pick-up in house price inflation but others taking a different view.

Westpac chief economist Dominick Stephens is firmly of the camp that is picking a housing market upturn on the back of Wednesday’s cut and, potentially, another cut in November.

He says that recent house price weakness seems to have led the Reserve Bank to abandon its previous forecast that house price inflation will accelerate to 5%, thanks to a ditching of a capital gains tax and low mortgage rates.

“Rather it has drawn the conclusion that other factors will keep house price inflation subdued, particularly the combination of slowing population growth and ample construction activity.

“We disagree with the Reserve Bank’s conclusions on house price inflation. We were already forecasting 7% house price inflation next year, and the risk to that call is now to the upside.”

That’s because there has been a recent pickup in seasonally adjusted house sales and a drop in houses available for sale and these suggest the market will pick up later this year, Stephens says.

“Additionally, New Zealand is in the grip of a search for yield environment and we think it is only a matter of time before Kiwis turn their attention to houses in this environment.”

KiwiBank economists also think that lower interest rates should help to simulate activity in the housing market and the investment in homes that is needed.

CoreLogic senior property economist Kelvin Davidson takes a different view. He says that the OCR cut will clearly support residential property demand and prices, especially given recent positive labour market figures.

But he doubts it will cause the housing market to roar back to life –as mortgage rates already seem to have “priced in” the low OCR environment and banks will be looking to maintain their margins in advance of any extra capital requirements that could kick in next year.

“On top of that, tight lending criteria are arguably the biggest restraint on the residential property market at present. This means a lower OCR and/or mortgage rates would have little effect anyway.”

The remainder of the year will be interesting for monetary policy and the housing market though, even if further OCR cuts may now no longer be seen, Davidson adds.

“The key things to watch for will be a probable loosening of the LVR rules in November but, on the other hand, some of that fuel is being taken away by scope for tighter bank capital requirements.”

Read more:

OCR decision revealed 

Banks slash rates after historic OCR cut

Comments from our readers

On 8 August 2019 at 11:05 am BigD said:
The banks are not passing on the rate decrease so no change will occur. They have made a change to floating rate that no one is using right now as the long term outlook is flat or lower. In Australia the banks tried the same trick but the main stream media hot them hard and told them they were ripping everyone off, so they made changes quite quickly. In NZ the mainstream media are idiots or are in the pockets of the banks... its a joke
On 8 August 2019 at 11:31 am Property Leader said:
Nz does not exist in a bubble of its own. Daughter currently buying first home in London uk. She can earn 5 % gross on nice modern flat Ian’s her floating interest is 3.8% or fixed 1.8% fixed two years.
On 8 August 2019 at 12:08 pm Chatterbox said:
Oz banks will thump NZ for capital ratio demands by simply tightening up on lending for any reason at all. NZ is a gravy train for Oz and the banks got used to it. They will teach NZ Govt. a lesson. When lending dries up, then economic downturn is inevitable. RBNZ tries to drop rates to change prevent what will happen, but that does not stop the Oz hates NZ in the usual Oz vs NZ the banking and insurance sector. Who suffers? The NZ market ! The biggest mistake ever was allowing this sector to become self-regulating and consolidate funds back to Oz which has legislation which requires all banks and insurers to treat Oz first ahead of NZ at all times. Where are the NZ legislatures with the protect NZ rules? NZ is just two south pacific islands with a bunch of incompetent politics more worried about their career and incomes than the economy.

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