By Bernard Hickey
The Reserve Bank of New Zealand has again held the Official Cash Rate (OCR) at a record-low 2.5% as expected and has repeated its pledge to keep it there for the rest of 2013.
It also repeated it expected to start increasing rates in 2014, but has indicated that any hikes could be later and less than previously expected if the New Zealand dollar stays high and keeps imported inflation low.
The central bank forecast in September it would raise interest rates by around 2 percentage points from early 2014 to early 2016 and Governor Graeme Wheeler repeated that pledge earlier this month, adding it could increase mortgage rates to 7-8%.
But economists said after the latest statement the start to the hikes could be delayed and the amounts could be reduced a bit. The central bank said it was monitoring how its 'speed limit' on high Loan to Value Ratio (LVR) mortgages was affecting the housing market and repeated that it hoped it would slow inflation.
Wheeler said earlier this month the bank would need six months to know how much the limit was slowing house price inflation. The bank has previously forecast the speed limit would help reduce its projected increase in interest rates by about 30 basis points or 0.3%.
What does this mean for interest rates?
The Reserve Bank is slightly less concerned about inflation and economists are interpreting this to mean it can keep official interest rates low for a bit longer and not increase them quite so much.
Most economists still forecast rates will rise around 1.5% to 3% through 2014 and 2015.
Floating rates
Advertised floating mortgage rates have been broadly unchanged at around 5.7% since March 2011 and are likely to stay that way until at least early 2014, given the Reserve Bank's comments.
But there has been a big change in the structure of interest rates in recent months because of the Reserve Bank's new high LVR speed limit. Those borrowing less than 80% of the value of a property can get lower rates than those borrowing more than 80%.
Borrowers can often get cheaper than advertised deals through their brokers because the banks are competing hard for business, particularly for borrowers with more than 20% equity.
Fixed rates
Fixed mortgage rates have been rising in recent months and are now at or above floating rates, making the fixed vs floating decision a tough one. Fixed rates depend more on wholesale interest rate moves rather than the OCR.
They also depend on the banks' funding costs on international markets, which have been falling.
Fixing vs floating
The fixed vs floating decision depends on your outlook for the OCR and your personal situation.
A flat to falling OCR makes floating more attractive, while a fast-rising OCR makes fixing more attractive. In my view, the OCR is flat for now. It may rise next year, but not quickly, which means a mix of floating and fixed may be attractive. The Reserve Bank's decision today appears to shift the balance slightly towards floating rather than fixing.
Here's a way to work out whether to fix or float. It's Interest.co.nz's Fixed vs Floating calculator that compares the cost of fixing and floating, given the potential interest rate outlooks.
What others think
Bank economists are also mixed in their views on fixing vs floating.
BNZ's Tony Alexander said in his last note last week he would fix some and float some.
Westpac's Dominick Stephens said in this note this week he was indifferent on the issue of fixing vs floating.
ANZ's Cameron Bagrie said in this October 22 note that fixing for six months or 1 year looked attractive relative to the interest rate outlook.
ASB's Jane Turner said in this August 29 note that the advantage of fixed rates was fading.
What does this mean for the property market?
The prospect of lower interest rates for longer had encouraged many first home buyers and property investors to borrow and buy, particularly in Auckland and Christchurch where migration and a shortage of undamaged and watertight buildings is putting upward pressure on house prices.
However, the introduction from October 1 of the Reserve Bank's speed limit has restricted lending to low deposit borrowers. It's not clear yet what effect that's having on the property market, although the Reserve Bank has said there are some early anecdotal indications it is working to dampen demand.
Some new building has started in Auckland, but remains below expected demand from migrants from overseas and from the rest of New Zealand. The expected big increase in new house building in Auckland is yet to arrive and economists are concerned about relatively weak building consent growth in Auckland in September.
Migration has picked up in recent months as more New Zealanders come from from Australia and fewer leave, which is increasing demand for housing.
In September the Reserve Bank forecast annual house price inflation of 11% and 7% nationwide in 2013 and 2014 respectively.
Elsewhere in New Zealand, where there is more housing supply and less net immigration, house prices are more subdued, although they are heating up as the Auckland and Christchurch inflation spreads.
15 Comments
"and keeps imported inflation low."
Do we keep inflation "low" or do we mean "deflation"
Isn't it great the way economists, banker's, and others linked to the financial markets abuse the English language.
The dollar falls and the cost of imports goes up and that is inflation
The dollar rises and the cost of imports go down and that is low inflation - Go figure
AND
"In September the Reserve Bank forecast annual house price inflation of 11% and 7% nationwide in 2013 and 2014 respectively."
So, if prices rise because of a shortage that's inflation then if there is a glut and prices fall - whats that?
If we believe all this we will be in and out of inflation/deflation several times a day. Just look at the price of vegatables for starters.
Let's not mention "debt" which has negative conotations. Instead at all times refer to it as "credit"
There is no reason why mild deflation should be any worse than mild inflation except for those with large debt which is exactly why the financial powers that be are scared of it
It offers a very important benchmark for floating bank bill interest rates versus fixed term rates - banks can successfully borrow short (say 30 days) and lend the semi annual bond equivalent rate of the steep stacked zero coupon term yield cash curve and hedge by paying fixed and receiving 30 day floating in the swap market.
Its a cruel irony in all this hand wringing over the OCR , LTVR , etc , that ordinary Kiwi families have been removed from the market for houses , thus allowing Chinese who borrow 100% of the purchase price in Hong King or Shanghai at 2,5% and no longer have to compete with those pesky little Kiwis when buying up properties in the 10th most liveable city on the planet.
And of course Asians just love Auckland ... and with an Auckland Mayor who loves Asians , no overcrowding or pollution here , just traffic chaos, and really very very cheap property when compared with Hong Kong
New Zealanders of course dont have the savings for homes , we dont have a savings culture , and the government actively discourages saving and wealth creation by taxing it at the highest rates possible .
The witholding tax on interest is a case in point , after tax and adjusting for inflation , you actually end up with with less in terms of purchasing power after tax
Then the Reserve Bank in its wisdom , by interfering in the only perfect market in NZ have dealt and Ace to the Chinese migrant (or non-resident) purchaser .
So , Kiwis are out , Asians are in , and that grumpy old Rogue, Winston Peters may have the last laugh, when he says 'I told you so" .
Indeed.
And who do we have to thank?
... our Reserve Bank
Boatman - you speak of kiwis and asians as though we are different species. My friend we are one and the same. New Zealand is part of Asia. Kiwis, even white european ones, are Asians. We should embrace this. I think you and Mr Peters should be referring to those northern asians as opposed to us southern ones.
Cheers.
Machiavelli: Kiwis and Asians might well be the same species. But that's where it ends. They treat them differently. Can you migrate to Hong Kong or Beijing, then bring your old's over afterwards, get them a pension after 5 years and offload them into state subsidised housing plus health benefits?
We are one and the same essentially. But we need to think of "New Zealanders" and non "New Zealanders". I don't give a hoot where you come from -- as long as you are committed to this country - you are a New Zealander if you are a citizen.
We need to have some clearer idea of citizenship. And make entry to that list a lot more exclusive.
I am unhappy we are handing over the silver to non New Zealanders.
Boatman is so correct. I'm stunned the numpties in the Reserve Bank are so ignorant of the cause of high house prices I. Auckland. Why are we paying these guys? Attend auctions in Au land, open homes or simply wander around the central city suburbs. Auckland is fast becoming a Chinese city. Len Brown might like that, the Reserve Bank governor should get off his backside and take a proper look.
Yes. It's known as the "Checkout Trance" or more commonly as the "Frog in the boiling Pot". If you are born in Auckland, lived there all you life, you will be multi-culturally desensitised, accepting of what is around you. You won't have noticed it happening. You don't even see it happening. It's done slowly. Nobody notices it.
Have experienced it myself. Some years ago was visiting Sydney with a fellow Aucklander. Standing on the corner of George St and Park St opposite the town hall. Fellow traveller, who is more attuned to these things, said to me, count the number of white faces. I looked around and then said "what do you mean"? I dont see anyyhing. I just see people. Ahah they said, look for the white faces. Looked again. We were the only white faces in a sea of asian faces. And I couldn't see it until it was brought to my attention. Now, bugger it, I see it all the time.
On returning to Auckland got a shock when suddenly for the first time noticing the foreign signs in the shop windows in a language I couldnt understand. Auckland had changed in the couple of weeks I was away
Go to Vancouver (which I have done regularly) one of the most expensive cities in the world to live and its the same. In fact there are whole suburbs where there are no English street names, no English named shops. And no they are not in the French language as you might expect in Canada! Toronto is almost the same. Calgary, Alberta - now that's a different story - Westies - literally. Cowboy country - the Texas of the North.
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