Westpac economists have changed their call on likely future moves in official interest rates and they now see no move happening at all in the Official Cash Rate (OCR) before 2022.
The Reserve Bank's latest review of the OCR will be on Wednesday, and while everybody expects the rate to be unchanged at 1.75%, the RBNZ has itself to this stage been forecasting an upward move from towards the end of next year.
The Westpac economics team had previously been forecasting gradual OCR hikes from November 2020. But they've now changed that call, as explained by chief economist Dominick Stephens.
"We are now forecasting no change in the OCR over 2019, 2020, and 2021. That is as far as the proverbial eye can see – what we are really saying is that the OCR outlook is evenly balanced over the foreseeable future, with risks on both sides," Stephens said.
He said the catalyst for the change of call was softer economic conditions than earlier thought (with September quarter GDP growth measuring just 0.3% against an RBNZ forecast of 0.7%) and a "new outlook" for construction.
"Stats NZ has dramatically revised its estimates of net migration, with the effect that the population is smaller, and growing more slowly, than previously thought.
""If the RBNZ has done the same analysis as we have, it will conclude that slower population growth implies less need to build houses and therefore a lower outlook for construction activity than previously forecast. In turn, this would flow on to its GDP and inflation forecasts."
Stephens said the biggest "risk" to the outlook concerns the housing market.
"Our forecast for nationwide house price inflation is 3% this year. That is a balance between low mortgage rates, which are very stimulatory for house prices, and tax changes and the foreign buyer ban, which are restraining house prices.
"If the tax changes end up dominating and house prices drop sharply, the RBNZ would have no hesitation in cutting the OCR."
On the other hand, Stephens said the biggest upside risk is wage growth.
"The labour market is tight and, when one is talking to employers, anecdotes of rising wages abound. On top of that, this year the minimum wage will rise by over 6%. If wage growth really gets going, and translates into rising inflation, the RBNZ would have to hike the OCR – although we suspect this would be a slow process."
Stephens said he expected the RBNZ to follow its US and Australian counterparts this week, and return to a neutral outlook for monetary policy.
"In its last missive, the Reserve Bank said it expected to keep the OCR on hold through 2019 and into 2020. However, it dropped the phrase that 'the next move in the OCR could be up or down', and forecast very gradual OCR increases from mid-2020.
"This week we expect the reintroduction of language very similar to 'up or down'.
"The RBNZ may underscore its change of view with something like: 'We expect to keep the OCR on hold over the whole of 2019 and 2020, longer than previously projected.' And we expect the RBNZ’s OCR forecast will be flat until around mid-2021 instead of mid-2020, Stephens said.
82 Comments
There are a number of possibilities, none of them is a certainty. We have incomplete data, events that are outside of our knowledge, etc.
What is happening in Australia is they are sticking to the lending rules. This is causing a problem as those that previously qualified for loans (that they couldn't afford) now do not qualify. Those that are moving from interest only to principle and interest are either not able to obtain finance or have realised they can't afford the payments. Property is being sold off to avoid ending up going broke.
Some are stuck with negative equity so selling may not be an option, unless they are forced to.
In response people are doing what they always do: have a mortgagee sale, dramatically cut expenses to balance their budget, or find a second job. Of course the private debt is now so large here and in Australia that possible scenarios could include a bank failure or the financial system collapsing (in the worst case).
We may follow in the footsteps of Japan, US and the EU with everything floundering for years. From my perspective it's just a matter of how bad the fallout is, and that I don't know.
The bubble is a figment of your imagination.
But in terms of what will happen in the event of another global financial crisis (which will happen eventually), there are a number of tools available beyond just cutting interest rates https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulleti…
BLSH, from your link "it would appear that a modestly negative OCR could be implemented in New Zealand. The key consideration is how negative the OCR could go before different segments of the financial market begin to hold cash rather than negative yielding securities. At that point the transmission of further OCR reductions to the wider economy would be hampered.
That said, the RBNZ tool box clearly has its limitations. Just imagine what state of our trading partners will be in and the resulting joblessness! Global interest rates are near ground zero. The next downturn is going to be an "L" shape with each passing year swallowing up the assets of today's dreamers.
BLSH, there are quite of few indicators of a bubble, but as usual most people don’t see them and get carried away with the mainstream narrative and hype that happens in every bubble. As I said elsewhere here, the red flag for me, and a time to reposition, was after Auckland had that plus 20% yoy gain after a series of way above average gains. It’s not the stockmarket, or even a casino, but people are acting like that’s all fine.
The majority of property gains are explained by the drop in interest rates so you arnt looking at growth the appropriate way. First you need to strip out the change in value that is dependent on interest rates because that portion of the change is based on the changed fundamentals.
Laminar, yes it's certainly a credit-driven bubble. Interest rates have been abnormally low for 10 years. 10 years! It's the reason so many asset prices are so high (including stock market), taking a lead from the US Fed. It doesn't mean the fundamentals have changed, many asset prices are artificially high, including housing in NZ, Australia and Canada. As the credit cycle ends, there'll certainly be a price to pay, especially those who've bought property with big mortgages at inflated prices. The long term fundamentals haven't changed, it's very abnormal right now to have such very low interest rates. We've got used to it but it's historically not normal. Also, just remember when people hailed "The Great Moderation" and Greenspan was the hero. Bubble and bust cycles were no more and then wham, the GFC.
Laminar, I'm not quite sure if you are arguing that assets will get revalued down, just as they have been revalued up, but when that happens with the housing market, people still have those huge mortgages they have to pay - even as their asset is revalued down 20%, 30%, 40% (?). Or more in the case of the Ireland housing bubble when interest rate hikes popped the bubble.
It could be something else that squeezes the loose credit and pops the bubble as well. In Australia the banking royal commission has had the effect of tightening credit. The banks are now being stricter with their lending, following the rules rather than flouting them. That will likely add to the -20% falls already in Sydney. Lowering interest rates probably won’t help the market now, although they’ll prob do it anyway.
You are creating reasons to justify a position. The reality is NZ has already improved the stringency of bank lending. The reason Auckland is not dropping as quickly as Sydney is because the markets, while linked, are not equivalent.
Your claim that dropping rates will not help is mathematically absurd, why would making things more affordable not help support values? I dont even believe that you believe that.
Let’s see what happens. It’s too early to say that Auckland won’t follow Sydney and Melbourne down. As for NZ bank lending being more stringent, I’m not sure we really know the details yet, and it’s the same banks. The recent news about the NZ insurance sector (with the huge commissions in OECD terms) doesn’t bode particularly well. Let’s give it a year and see where we are...
Its been my opinion for over two years that Auckland prices are set to fall. I am trying to explain to you that you are not assessing the scale of the rise in prices correctly, and because of that will likely overestimate any corrections.
Big commissions are fine, the review presented almost no evidence that they are harmful and overlooked that big commissions promote a lot of independent advisers. Independent advise in the realm of mortgages were shown to reduce average interest rates and lead to a more competitive environment and spured new entrants, its probably the same for insurance. A reduction in commissions would be a huge win for the established big hitters as it would crush start up insurance companies and stifle competition. The reports main findings of concern where actually providers internal approaches to managing the risk of chasing sales not the customers best interests and they just kinda jammed commissions in to the mix without any clear evidence its a net negative.
I'll be happy if I'm overestimating the size of the correction, really, but at 9 times income, it's just so far out of whack historically, and with almost all of the rest of the world. I don't see how it can not be a big correction this time. I would have agreed with you about not being a big correction if you'd asked me at any point since the 1990s, except for the past few years. However, I think Sydney has been too expensive for about the past 7 years, and they've just kept pumping the market with various measures since then. They really are big bubbles in Australia and New Zealand now. Sydney has dropped back to about 2015 levels in places, but still quite a way to go I think.
The media have been reporting their focus on bank LVR's. However since about 2016, there was a very subtle unreported change with bank lending criteria.
Prior to 2016, for most consumer mortgages, the main lending criteria was using asset based lending criteria - (i.e the value of the asset being purchased, and applying an LVR), and the debt servicing criteria was of secondary importance.
This led to an upward price feedback loop - as residential property prices increased in value, property owners with excess borrowing capacity were borrowing on the underleveraged equity of their property and using this as a deposit for their next property purchase. This further fueled the positive price feedback loop.
Then the banks slowly increased the importance and focus of their lending criteria to debt servicing. Improved measures included:
1) getting accurate patterns of actual household expenses to determine debt servicing capacity
2) applying discounts to gross rental income to allow for costs of being a landlord for property investors
3) getting an accurate picture of the total amount of debt of a household owed to all banks.
4) for interest only loans, they starting asking the question of how the principal would ultimately be repaid
5) using stress test interest rates on all borrowings of a household.
I recall how some loan applicants were mentioning lack of personal privacy when the banks were seeking some of the above financial information for their debt servicing assessments.
As a result, many property market commentators were talking about credit restrictions and credit tightening but very few mentioned the underlying causes. The key lending constraint now for many borrowers is debt servicing, not LVR's.
1) getting accurate patterns of actual household expenses to determine debt servicing capacity
This is not correct, they do not generally do this, they asses only fixed costs and some general regular expenses like groceries which would typically be submitted by the client and not teased out from actuals.
2) applying discounts to gross rental income to allow for costs of being a landlord for property investors
This has always been the case
3) getting an accurate picture of the total amount of debt of a household owed to all banks.
This has always been the case
4) for interest only loans, they starting asking the question of how the principal would ultimately be repaid
Correct but largely irrelevant as interest only periods have always made servicing calcs harder not easier because the loan amortization period used for the servicing calc is over shorter period.
5) using stress test interest rates on all borrowings of a household.
This has always been the case
Bank lending criteria have stiffened but were always present. Slightly higher assumed costs, slightly higher safety margins and a generally more stringent approach to loan terms for older borrowers are some of the key factors restraining banks at the moment. Interest only periods are under more control but that is not a driving factor. Your implication that some sort of un-virtuous cycle of revaluation led to today's high prices is spurious. The majority of the change in house prices is the result of a decline in the perception of the long term average interest rate.
Thank you for your feedback and comments.
Not sure where in the property or financing industry you sit (real estate valuer, bank credit officer, bank compliance officer, bank teller, mortgage broker, etc) and what you are seeing. If you are at a bank, your bank may be different to other banks. There is what should happen in theory, and what happens in practice.
I recall talking to a relative who works at a bank - several years ago she informed me that for household expenses, there was a standard level of expenditure assumed based on family circumstances (- e.g no children, 1 children, etc.) Similar to the HEM that was used in Australia that has now been addressed as inadequate for credit lending assessments by the Hayne Royal Commission. Not sure if this is changed now at their bank.
Also please refer:
1) https://www.squirrel.co.nz/blogs/housing-market/no-more-first-tier-asse…
2) https://www.afr.com/business/banking-and-finance/how-westpac-plans-to-c…
3) https://www.stuff.co.nz/business/money/96401149/banks-tighten-home-lend…
Also if you read the reports from APRA and APG23 issued in March 2017 and what they applied to the Australian banks, it seems that the NZ subsidiaries of Australian banks adopted some of the APRA's recommendations.
On the property valuation side of things, there were a number of stories of property investors looking for recommendations of "less conservative " property valuers possibly so that they could get a larger loan from a bank. That is probably why banks moved to a panel system of valuers so that property investors could not influence the property valuation for loan purposes ...
Here's an example of property valuer searching - "Can anyone recommend a good registered valuer for a new build on xxxxxx in Auckland? I received a very conservative valuation on Friday and need a second, less conservative opinion."
And another one - Hi I'm looking for a nice positive valuer to value a house of ours that HNZ are looking at buying in XXX"
And another one - "Any suggestions of Auckland valuers that are more 'positive' in their valuations?"
I periodically review many of the banks lending criteria, most notably because of its impact on the rate of growth in debt. The fundamental approach to servicing is still to assess against a standardized base cost. If client fixed and basic costs exceed this level then you use the higher. The responsible lending code does not require the bank to analyse the actual client expenditures. Banks will mostly semi-diligently check fixed expenses which will include things like childcare which use to often be ignored. This is nto the same as a clients spending pattern though and it shouldn't need to be as you pay your home loan before you go to McDonalds and not after.
The articles you posted are mostly not relevant, one is a blog post from a broker, another is Australia and the last is in relation to older borrowers and is correct.
Valuation services are not impartial, im in agreement with you on that, but it is not the case that house valuations are driven by valuation services miss-stating prices, house prices have in large part been driven by the drop in interest rates.
Servicing criteria have tightened up, they where never as lose as many suspect though. But if you tighten up servicing say 5%, all of a sudden no one can buy what they thought they could and everyone has to drop their expectations by 50K odd, that causes discomfort and will have contributed to locking up this market.
Perhaps I may be too cynical. There are many games that people play when there is lots of greed. Not sure how pervasive this behaviour is, but this could just be the surface. Typically, these people get caught out when prices fall.
1) https://www.stuff.co.nz/business/106013217/real-estate-agent-guilty-for…
2) https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11…
3) https://www.interest.co.nz/property/83156/how-auckland-house-flipping-c…
4) http://www.stuff.co.nz/national/24568/Another-agent-implicated-in-alleg…
5) https://www.interest.co.nz/news/95071/jury-finds-property-developer-and…
Yes there are always the scams, the incompetence, the negligence etc that take place but for the most part loan assessment in NZ has always been decent and now id consider it very good. The problem in Auckland was not loan assessment, there is a genuine shortage of housing which has created stretched valuations but even so the vast majority of the gain in prices is derived from the drop in interest rates.
In August 2017, a mortgage broker was telling potential borrowers about a subtle change in the debt servicing calculation at one bank which would reduce the overall borrowing capacity. They started to apply stress test rates to existing borrowings at other banks - something that they had not done up to that point. Here is what that mortgage broker wrote at the time
"Currently investors can borrow a lot more at BNZ in comparison to other banks for investment properties, however by the end of August the difference you can borrow between BNZ and the other banks will be a lot smaller due to the major change in servicing calculation.
It is looking like BNZ will no longer consider your existing repayment on existing loans as your expense, instead they will look at how much loan you have and use an "AIR" rate(likely to be 5 year carded rate) + a margin on a principal & interest repayment to calculate your expense. Please refer to diagram. "
Very few people are trained or experienced to know how to recognise when there is a significant increased risk of a price bubble. That is why most people get caught out. In residential property, price bubbles are very infrequent - say once in 50-80 years?
There are lots of signs of a potential price bubble and vulnerabilities in residential real estate, if you know what to look for. In the late 1980's, the property price bubble was in commercial real estate in New Zealand.
Look at the number of people who got caught out in:
1) 1987 stock market crash
2) 2001 internet price bubble
3) 2007 Irish property price bubble
4) 2008 US property price bubble
5) 2018 Bitcoin price bubble and other similar initial coin offerings (ICO)
There are many others ....
Those who fail to learn from history are doomed to repeat it ...
Many professionals in the investment industry are sales people distributing a financial product and receiving a commission. (financial advisors, stock brokers, etc)
Many of those who are on the investment side are compared to a benchmark (say for US equities, the S&P500 index). The benchmarking makes these institutional investors focus on relative returns as that is what they are compensated on. That is the game that they play. They are not paid to focus on avoiding price bubbles - if they were it would change their focus.
Could be. But that will be no consolation for those that have gone broke in the meantime.
That's what an asset correction does - it shakes people out of their positions, no matter what they are. And when that happens, they've probably lost all chance of reentering the market again, even if they see an obvious upward trend.
Let's also not forget that even with all the 'recovery' in property prices in places like Ireland the USA and Spain, there are STILL borrowers who are underwater on their loans. They are the 'survivors'; the ones that hung on. What for?! I know! "Maybe in the next 10 years my property will have gone up. It's almost guaranteed" Right?
Carlos, prices might be back to where they are now in 10 years but I’d rather buy more in a trough than near the peak of a (boom bust) cycle. Prices are down 25% already in some places In Sydney. It’s 10 years after the bust in Spain and prices are not back where they were yet. The red flag for me was when Auckland had that YOY 20%+ year after a series of very strong years before that. That was time to reposition, it was insane. No need to be greedy and risk losing all that, it was more than enough on the upward side of a bubble.
"If the tax changes end up dominating and house prices drop sharply, the RBNZ would have no hesitation in cutting the OCR."
Why?
Lower interest rates will only do ONE THING. Keep financially distressed property owners solvent. It won't attract 'more buyers' and so save prices from falling further - just the opposite. 'Buyers' will have been scarred by the drop in prices and won't want a bar of what they see has happened to other New Zealanders.
Perhaps that's what Stephens means, in which case - he's right on that score. But I reckon 'his' call on- change until '22' is way off the mark!
Agree bw. Our property market has become “too big to fail” and our major political parties are heavily invested in keeping it propped up. Interest rates are not going to rise/can’t rise in any significant way for a long long time (unless there’s some sort of reset catastrophe).
Everything’s political, the RBNZ’s outcomes are dictated by policy target agreements set by the government.
Simple economics is interesting as well. If it was simple how did we end up in a position where we will need to drop rates to “stimulate” the economy only to end up in the same position but with higher debt?
What a pickle. Imagine having rates at historically low levels, at what would’ve been termed “crisis levels” not so long ago, still 10 years after the GFC. And now we’re staring a housing/debt bubble in the face. Same situation as the RBA in Australia, which is still refusing to acknowledge there is even a problem with this, even as the housing market is seriously tanking there. It’ll be difficult to not lower rates further as the housing market slides. Not a great situation.
What a pickle. Imagine having rates at historically low levels, at what would’ve been termed “crisis levels” not so long ago, still 10 years after the GFC. And now we’re staring a housing/debt bubble in the face. Same situation as the RBA in Australia, which is still refusing to acknowledge there is even a problem with this, even as the housing market is seriously tanking there. It’ll be difficult to not lower rates further as the housing market slides. Not a great situation.
Yes, we still have post-GFC "emergency settings". No inidication of rate normalization, which would be higher based on long-term reversion to some central measure. Net h'hold worth relative to GDP has never been higher if you were born at the right time and on the right side of the tracks. Nevertheless, the "everything bubble" is a global thing and history shows that the gap between the growth in bubble-driven weath and growth in GDP eventually converge. Right now, that gap is far wider than it was prior to the GFC.
Kind of self serving comments from a bank to be honest, they are throwing petrol on the fire with statements like this. No way they can see out to 2022 but it sure fuels more mortgage lending at these crazy low interest rates that are clearly "Here to Stay" according to the "Experts".
Agreed. Less immigration and thus demand side adds to housing looking more down side. We must continue to be supported by OCR at life support or our profits could take a hit. Must continue to send inflated market profits to Mummy in Australia to prop up their fines.
How long would stagnating prices have to remain for the last 10 years gains in HPI to be reduced to zero in real terms. I calculate around 100 years assuming inflation at 2%.
https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-house-price-va…
They wont go back to prices of ten years ago, but they will probably go back to meet where the longer term inflation trend would have put them.. so it would probably take 15 years of sideways movement if inflation stays at 2%. However I doubt we'll have 15 years of stable 2% inflation and house prices just going sideways.
As I said above, inflation wont stay flat at 2% for 15 years, so you can go put that strawman back where you found him.
I don't believe there will be a bubble pop (unless driven by events outside of NZ), the govt will throw all hands at the pumps to stop a bubble pop if they can. But prices will not keep rising in real terms, there is simply no more to extract at the bottom end of the market, so until wage inflation picks up prices are going to stagnate, and with demand dropping due to immigration restrictions and building at a good pace there might even be a gradual decline in nominal terms.
Or do you think even a national govt will not realise that taxing the middle class to redistrubute money to landlords (indirectly via accommodation suplements) is becoming a massive vote losing idea?
So is inflation going to be more or less than 2% on average for the next 15 years? Better to say what you think it will be rather than what you think it won't be.
National will likely stay on the same course, it's worked well for them so far (polling in the mid to high 40% range)..
Hell no HeavyG thats a "Crash" according to some people on here. Property is a terrible market to be in according to most people here, you should know that already. They do all sorts of math and then tell you it has not gone up in real terms over the last 20 years but somehow they can no longer afford a house.
I can afford a house - though granted, not a very nice one. It'd be a long to commute to somewhere where there's six figure incomes to be had - but still workable.
But why would buy at at time when house price to income ratios are at historic levels? Do you think this will continue forever? This isn't San Francisco. This isn't Hong Kong. This isn't New York. It's bloody NZ.
interest may be low, but so is wage inflation. Buying now is not the great deal one-eyed specuvestors try and make it out to be - especially when house prices are 8 times median income.
A lot of one eyed, one trick ponies here. The investment world has more in than property, and the real estate world has more in it than the city you live in.
“The Man” has up until now always been correct with his predictions, but I am a wee bit worried now.
If economists have now changed their minds to what I have been saying then I could be in trouble!
The problem at the moment is this absolutely incompetent government that we have still got for the next year and a half!
Twyford who has been instrumental in building absolutely no extra houses since he has been Minister now reckons he can get MORE than the 100,000 houses built in the ten years????????
Funniest most incompetent politician of all,time bar none!
Time he was demoted out of cabinet seriously!
I hope they don’t build anywhere near that many, given the shortage of housing seems to be not dire at all (unaffordability, yes that is dire). They just overbuilt in Sydney and Melborne and it’s disastrous for the fast-declining market, now down average 22-23% in western Sydney.
Of course cheaper homes are a good thing, it’s the bubble and bust scenario in Sydney that’s brutal, rather than the so called “soft landing”. It’s the human cost I’m most concerned about. Already a lot of people are in negative equity and domestic violence stats are rising in the suburbs where mortgage stress is greatest in western Sydney. 20% isn’t that dire but the decline has been accelerating. It’s fine for potential first home buyers wanting to buy in the future, yes, but brutal for all those people sucked in to large mortgages by the criminally unscrupulous banks (see Royal Banking Commission). This is the main reason I’m wanting to warn about the same thing happening in NZ.
Phil needs to bite his tongue as he just continues to talk absolute dribble!
There are just so many in the current cabinet that have no business acumen or common sense.
Seriously, we are in major trouble as a co7ntry until this lot are out next year.
Mickey zmouse could lead the National Party and get back in!
Phil needs to bite his tongue as he just continues to talk absolute dribble!
There are just so many in the current cabinet that have no business acumen or common sense.
Seriously, we are in major trouble as a cou try until this lot are out next year.
Mickey Mouse could lead the National Party and get back in!
Jacinda is looking more and more rattled everytime she speaks and knows that they will not deliver on any of the things that they campaigned on!!!!!
Eh? Not the numbers I got. Akl TM listings went from 12819 to 12831, houses +21 to 7663, Apartments -5 to 1404, Townhouses +2 to 567, Units -4 to 330. Definately trendng up, but not 210 on a Monday.
RE.co.nz
Listings/Houses/Apartments/Townhouses/Units
13320 / 6758 / 1754 / 606 / 359 Tonight
13314 / 6753 / 1753 / 603 / 362 Yesterday
13040 / 6453 / 1744 / 576 / 343 on 4/2/2019 (1 week ago)
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