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OCR equals Market Upturn

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

Thursday 8 August 2019

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…………

Continue reading this article at the original source from Landlords.co.nz




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