What does a hawkish central bank having its wings clipped by Covid-19 mean for mortgage rates and house prices?
The answer isn't clear cut and hinges on New Zealand’s ability to contain this highly-transmissible Covid-19 outbreak.
But from where we sit, it’s much of the same.
Mortgage rates aren't moving for now, but there’s some scope for longer dated rates to rise. The over-heated housing market also continues to face some headwinds.
Rate hikes already priced in
Let’s go back a step…
Before the Reserve Bank (RBNZ) released its Monetary Policy Statement on Wednesday, financial markets were already pricing in Official Cash Rate (OCR) hikes.
When the RBNZ on July 14 announced it would abruptly stop its weekly bond purchases via its Large-Scale Asset Purchase (LSAP) programme (designed to put downward pressure on interest rates), markets started tightening.
Higher rates in wholesale markets were feeding into higher mortgage and term deposit rates.
For example, ANZ on Tuesday (before news of Covid-19 in the community emerged) again hiked its rates in anticipation of the RBNZ lifting the OCR.
Come Wednesday, the RBNZ was clear it was all set to hike the OCR, and signalled its intention to make steady increases to get the OCR to what it deems to be the “neutral” rate of 2% by 2023. The neutral rate is the level where monetary policy is neither contractionary nor stimulatory.
Once financial markets processed the fact the OCR wasn’t going up, they looked to the RBNZ’s eagerness to hike the OCR as soon as possible.
This has kept the yield curve largely unchanged, if not a tad higher than it was before the RBNZ made its announcement.
Longer-dated rates could still rise
From here, ANZ chief economist Sharon Zollner believes those working in financial markets will be glued to the Government’s 1pm Covid-19 updates.
“It’s the only data that matters for now,” she said.
Westpac’s head of New Zealand market strategy Imre Speizer agreed, and said, “In a nice textbook world, you should not be doing that. You should be taking the RBNZ at face value…
“But markets will look at the most short-term information that they have at hand; the most real time stuff. And what they have is Covid-19 developments, so they’re going to be trading Covid-19 numbers for a few weeks yet.”
He said the part of the yield curve that might respond to any volatility would be short-term rates of less than two years. But two and three-year rates are already priced in.
BNZ’s head of research Stephen Toplis maintained: “The longer dated your mortgage is, the higher the chance that there’s still some upward pressure remaining.”
Speizer said that if this lockdown is short, financial markets will go back to digesting the RBNZ’s hawkish stance and rates will go up.
But again, question marks remain over what’s going to happen with the virus.
Toplis: RBNZ and Govt hellbent on reducing house price inflation
As for house prices, one might be inclined to think the RBNZ missed an opportunity to dampen growth when it decided to push pause on rate hikes.
However Toplis said: “The housing market adjusts on the back of future and expected interest rates and nothing has changed in that regard.
“If anything, from a financial market perspective… the surprise was that the RBNZ was so aggressive with where interest rates will get to.”
Toplis, who has been wanting the RBNZ to raise rates soon, said its decision to hold fire was understandable.
He believed both the RBNZ and the Government were “hellbent” on ensuring house price inflation (not house prices) falls.
“If house price inflation doesn’t fall reasonably quickly, they’ll just provide more policy to ensure it does.
“Whether or not the OCR moved on Wednesday is largely irrelevant in terms of the bigger picture and the message that people need to receive,” Toplis said, which is that the RBNZ is looking to hike rates.
Zollner: OCR to peak at only 1.5% in this hiking cycle
But looking further down the track, Zollner maintained interest rates would remain relatively low.
She believed the neutral rate was in fact below where the RBNZ picked it.
“Currently the RBNZ assumes neutral is 2%, and has forecast hiking the OCR to this level. But we think the neutral interest rate will continue falling, seeing the OCR peak at 1.5% this hiking cycle,” she said.
“Long term trends, including population ageing and declining potential GDP growth, have seen neutral interest rates decline across the globe. New Zealand has been no different.”
The OCR has last as high as 1.5% in August 2019.
42 Comments
Don't worry, the big brains at the RBNZ assured us that they can "mop up" after any asset bubbles they blow.
I'm going to stick my neck out and say that I think that there is a strong probability that they can't, contrary to what Ms Arden, Robbo, and the sheeple think. Furthermore, the 'big brains' have done nothing to guide people on how to deal with the potential fallout (I know, it's not in their mandate). The black swans are everywhere. You just can't see them because they're lurking in the shadows.
The comment is correct. There are more things to consider.
https://www.youtube.com/watch?v=9oVTHKzC7TM
Well worth the watching. More things, indeed......
Im sure you are great fun at dinner parties with other small business owners who have been closing shop since our incompetent government cant even get an "elimination " strategy right on a deserted island of 5M surrounded by bodies of water.
What an insensible comment.
But here’s the spanner in the works. Looking further down the track, Zollner believed interest rates would remain relatively low.
She believed the neutral rate was in fact below where the RBNZ picked it.
“Currently the RBNZ assumes neutral is 2%, and has forecast hiking the OCR to this level. But we think the neutral interest rate will continue falling, seeing the OCR peak at 1.5% this hiking cycle,” she said.
“Long term trends, including population ageing and declining potential GDP growth, have seen neutral interest rates decline across the globe. New Zealand has been no different.”
Exactly - how does that extend efficacy to the canard low interest rates "stimulate" when in fact the opposite has been staring at us in plain sight since 2008 (2001 in Japan)?
Interest Rate Fallacy:
Low Yields = TIGHT money
Bank Reserves don't matter,
QE not money printing
Curves Need No R-star; Economists Need R* To Decode Curves
R* is just the plugline or balancing factor that attempts to make sense of why neither ultra-low interest rates after the dot-com recession nor QE in the aftermath of the Great “Recession” failed to work as they “should” have. For policymakers, policy rates went low and lower but since no great recovery resulted, especially from the QE’s, it is merely asserted that R* must have been that much lower still. From this view, QE was surely powerful “stimulus” but it didn’t appear to have worked, therefore R* was just that much lower than QE got the policy rate to. If “real” policy rates had been pushed down to -10%, the still lack of recovery would have left Fed officials claiming R* surely was -10.01%.
I think it is pretty clear that inflation is driven by and anchored to the main input costs of an economy - in the 70s in the US that was oil (hence the runaway inflation), and in NZ and many other service economies it is labour. Govt effectively sets the price of labour with the minimum wage, and the uberisation of the workforce across the developed world constrains wage growth more widely. When you add this to the growth of a highly extractive (parasitical) financial and real estate economy, which channels wealth to the very few, you get inflation pushing towards zero (the natural rate) and inequities increasing at a rate that Govt policy cannot mitigate. Welcome to the 2020s.
It's still oil - or at least, energy - but this time we've plugged the widening gap with exponentially-increased amounts of keystroke-issued debt.
There was a decreasing amount of energy-underwritten home for that debt. so it flowed into bubbling the 'values' of existing stuff (like houses). But the debt-issuance was unrelated to anything, so Jenee's question is Boolean Algebra; attempting to read tea-leaves in a very dark room. At night. There will be increased bidding for a decreasing real resource-stock, and some will find they have more chips, some less. And some will be regarded as invalid. What we've lost control of, is the 'value' of money; what we weren't smart enough to do, was reference it to something real.
We lost that debate, when the neoliberal/Samuelson diagram got put to the congregation, who all said amen. Or maybe it was Hallelujah..... Whatever, the vast majority believe. And that's what will pop. And that kind of pop can take hours. The real diagram had inputs and outputs, and complied with the Laws of Physics. Who knew?
What exactly was "hawkish" about the RBNZ?
They were practically dragged kicking and screaming to acknowledge inflation and we're check mated by low unemployment. They begrudgingly accepted that interest rates would "probably *sigh* have to rise." Most vegetarian hawk ever.
ANZ ( Australia ) have adjusted their forecasts by a further 6 months, and see no rate hikes in Australia until the second half of 2024. It may as well be 2074. Rates will going negative in both Australia and New Zealand, unless the currency falls over first and that's just as possible .
ANZ NZ pushed rates up regardless of OCR to make more money for it's Aussie shareholders. The Aussie banks are negotiating mortgage holidays for people struggling in NSW and Vic. Need to make more money on NZ.
There is zero accountability for anything these bank economists are saying. They have a master and vested interest. Would be nice to get more airtime from independent economist and not people like the ANZ economist.
ANZ NZ pushed rates up regardless of OCR to make more money for it's Aussie shareholders. The Aussie banks are negotiating mortgage holidays for people struggling in NSW and Vic. Need to make more money on NZ.
There is zero accountability for anything these bank economists are saying. They have a master and vested interest. Would be nice to get more airtime from independent economist and not people like the ANZ economist.
As I was saying yesterday, Young Kiwis should be making their plans now to leave the country as there is absolutely no hope that most of them will ever be able own a home in NZ any time within their working let alone reproductive life. The ones that are worth considering in Australia are.
Perth price to income ratio 4.8 Really nice city with nice people. Very prosperous with heaps of great opportunities.
Brisbane ratio 5.3 great geography and weather, pity about the Queenslanders, but you will find plenty of Kiwis and other immigrants to make up for that.
Adelaide 4.8 Very pleasant city and surroundings. Reminiscent of Christchurch as it was also developed by the Wakefield group.
There is a hell of a lot more to Australia than just Sydney and Melbourne. They are the last places that you should move to in Australia.
https://www.huntergalloway.com.au/brisbane-property-market-2021/
People should very seriously consider West Australia. The reason that it is so prosperous is that it generates 46% of the nations exports and has less than 11% of it's population. So the opportunities abound. I lived there for almost a year and among other things, I was struck by how young couples appeared prosperous, more mature and were really getting on with life; far more so than Kiwis of the same age. Unfortunately the young ones here are so frozen out of the economy, that they live in some sort of grey zone of suspended adolescence. Stuck. Little wonder many of them give up and go off the rails.
Head West young man and woman.
Plus a whole heap of other cities and countries around the world
I can see the hosuing market in NZ turning at some point. But it all comes down to how much of the population we will import over coming years to keep demand strong. Apart from interest rates, these crazy price rises are based on lack of supply. Certainly more houses are being used as weekenders, holiday homes, bolt holes etc and more maybe empty. To rply on power companies and councils for finding out what the number of possible vacant houses there are IMO is nuts.
We could use the lockdown to actually find out home many houses are unoccupied. In my own town, in the evening there are many houses that are not being lived in.
Yes you are correct. I have for a long time been hoping for a correction to the insane state of affairs that is the NZ housing market and associated cost of living, but I am now resigned to the fact that this will not end......it will never be allowed to end bar a global conflict or similar.
My wife and I have tried to do the right thing, work hard, save, invest wisely, pay down debt and for moral reasons not be a part of the disgusting narcissistic game of property speculation. The whole thing has been so normalised nowadays that people openly gloat about how much money they are making off property every month like they are some sort of highly intelligent investor, with absolutely zero consideration for anyone else or the damage being done to NZ. Its horrifying to think back to what this country and its people were once like, not that long ago.
I once joked with a mate years ago that our kids will be paying $500,000 for their first homes and he laughed at me. I have had to review that to $1.5m :-( Thank god my kids have Aus passports (and a chance at a future) is all I can say.
Just look at the swap rates: they clearly point to an environment of rising interest rates, and they have hardly moved after Orr used the Covid excuse to delay the inevitable. Actually, some of the longer terms rates have moved slightly higher, as the markets know quite well that the raise has just been postponed by a few weeks, and that kicking the can down the road is just going to force the RBNZ to raise rates higher later on.
So the banks will not reduce rates. ANZ has only been the first one to acknowledge reality.
Another example of working class people making millions in this property market bonanza
https://www.oneroof.co.nz/news/west-auckland-neighbours-share-39m-jackp…
This covid outbreak is the perfect catalyst for house prices - politicians too busy doing 1pm new conferences to worry about house prices, not to mention I can't see the OCR rising at all this year.
Mr Orr will be gun shy until vaccination rates are sufficient enough to eliminate lockdowns.
This covid outbreak is the perfect catalyst for house prices - politicians too busy doing 1pm new conferences to worry about house prices, not to mention I can't see the OCR rising at all this year.
Mr Orr will be gun shy until vaccination rates are sufficient enough to eliminate lockdowns.
This covid outbreak is the perfect catalyst for house prices - politicians too busy doing 1pm new conferences to worry about house prices, not to mention I can't see the OCR rising at all this year.
Mr Orr will be gun shy until vaccination rates are sufficient enough to eliminate lockdowns.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.