Rising house prices glossed over in MPS

New Zealand’s housing market is rebounding strongly but the Reserve Bank barely mentioned it in Wednesday’s Monetary Policy Statement (MPS). That’s left one economist asking why.

Thursday, February 13th 2020

In its latest MPS this week, the Reserve Bank’s Monetary Policy Committee kept the Official Cash Rate (OCR) on hold at its record low of 1.0%.

It also took a more upbeat view of on economic growth, saying it is expected to accelerate over the second half of 2020 and that the outlook for the economy was brighter amid increased infrastructure investment from the government.

Despite the potential economic impact of coronavirus, the Reserve Bank’s forecast OCR track now has no further cuts pencilled in and has a hike forecast for 2021.

The general feeling among economists was that the Reserve Bank might be underestimating the threat posed by coronavirus.

But for Westpac’s chief economist, Dominick Stephens, it was the lack of reference to the housing market that stood out.

“What surprised us was that the Reserve Bank studiously avoided mentioning house prices in the press release or the Summary Record of Meetings – to the point of awkwardly dancing around the topic with phrases like ‘rising household wealth’.”

This was a glaring omission and could be because it fears copping criticism for rising house prices, Stephens says.

“The recent turnaround in the housing market is the most obvious consequence of lowering interest rates and is a key channel through which monetary policy is currently working.”

The Reserve Bank does mention that stronger-then-expected house price inflation will drive higher consumer spending, and upgrades forecasts for both, in the MPS.

Stephens says this is presumably a key reason for the upgraded OCR outlook, yet it was not mentioned up front and there is no record of the Committee discussing it.

Westpac believes that the housing market will heat up more than the Reserve Bank expects, he says.

“The Reserve Bank is forecasting peak of 7.7% house price growth, but it continues to forecast an unrealistically rapid cooling in the market.

“That is not going to happen as long as mortgage rates remain low. We expect a slightly higher peak rate of house price inflation, and a longer-lasting period of rising prices.”

However, this would not be enough to deter the Reserve Bank from cutting the OCR in an environment of weaker global economic sentiment, Stephens adds.

“The Reserve Bank expects to keep the OCR on hold this year, unless coronavirus blows up into something severe for New Zealand.

“Despite that, we are forecasting an August OCR cut based on our view that the Reserve Bank will be surprised on certain aspects of the economy.”


On Friday, February 14th 2020 1:30 pm Winka said:

Mmmmm, like everyone else. i cannot predict the day of "Armageddon" re our economy nor the Global economy. However, there is a general agreement that a "big bankg" correction is overdue. Are investors (property) best to take (a) the option of holding current porfolios (or even adding to it?)and reaping a 7% growth or (b) cashing out (or cancelling any further additions) and missing out. Fear & Greed are the normal factors to take over. DEBT is the ever present problem now...Globally. And that includes household DEBT. Household DEBT has increased in recent years because the "other half" has joined the workforce to help service the extra DEBT taken on by plucking some of that extra equity to buy a Fiji holiday (even while we are suffering a scorching heat here approaching 30 degrees) plus a new Haines Hunter, and a new Ranger to row it. This is what people have decided to enjoy...instead of decreasing their mortgage loan. So...when is this inevitable financial Armageddon going to happen I reckon exactly 5 months give or take 7 days That is approximately 27 days after Coronavirus has kicked into a full blown global pandemic affecting between 63% to 64% of world population (as predicted by qualified European authorities 3 days ago). There you go. A prediction nearly to the day.....unheard of agree? Now let's read any other opinions as they come in??

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