Boost for housing market as OCR cut helps keep loan rates at historic lows

Wednesday, 8 May 2019

Here's how to get on top of your mortgage.

Interest rate cuts have left borrowers 'sitting pretty' and that is likely to mean a boost for the housing market, economists say.

On Wednesday the Reserve Bank's new monetary policy committee announced the official cash rate (OCR), which influences other domestic interest rates on loans and savings, was being cut by 25 basis points to 1.5 per cent, the lowest ever.

ANZ and Kiwibank both moved quickly to introduce reductions on their home loan rates by up to 15 basis points. Westpac cut its floating and one-year rate by 16 basis points.

ANZ's and Westpac now have a one-year rate of 3.89 per cent. Westpac's two-year rate dropped four basis points to 3.95 per cent.

Rates so low make higher prices easier to service and there are predictions it could give national property prices a second wind.

Property researchers CoreLogic said, for the property market, the situation was 'one-way traffic'.

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'Competition amongst the banks is already strong, rate wars are frequent, and a lower-for-longer official cash rate also bodes well for mortgage rates over the next one to two years at least.

'In this environment, borrowers are sitting pretty. Property sales volumes and prices should hold up relatively well, especially since the prospect of capital gains tax has now been taken off the table.'

At Kiwibank, chief economist Jarrod Kerr said there had been a quick impact on interest rates from the OCR cut. The two-year swap rate dropped from 1.64 per cent to 1.54 per cent.

'Banks use these wholesale rates to offer fixed-term mortgage rates. Competition for fixed-rate mortgages is likely to heat up following today's cut.'

Westpac chief economist Dominick Stephen agreed. 'We think the consequence will be an upturn in the housing market, starting in the second half of 2019.'

But Infometrics economist Brad Olsen was unconvinced that borrowers would get the full benefit.

'Interest rates are already low, and so the issue for borrowers is still getting a large enough deposit given high house prices, and how borrowers will afford their mortgage in five years when interest rates are higher.

'Fixed mortgage rates have already fallen significantly, due to lower long-term bond rates, themselves driven by a weaker outlook for global growth. This will have a larger impact on the housing market, with a larger fall in fixed rates than the shift in floating interest rates after the OCR cut.'

He said subdued confidence levels meant it was unlikely borrowers would get into a situation where they took on too much debt.

ASB chief economist Nick Tuffley said his projections included some extra strength in the housing market over the next year on the expectation that interest rates would head lower.

'We expect prices outside of Auckland to have a brief bounce, or to maintain strength for longer in those areas that are currently experiencing strong growth.

'For Auckland we expect that lower interest rates will prevent pricing from falling slightly later in the year, and that prices will be flat beyond a soft start to the year.'

The bank expects annual house price growth of 3.9 per cent this year, from 3.8 per cent last year, and 5.5 per cent next year for the country as a whole.

Cameron Bagrie, of Bagrie Economics, said the housing market was going through a major structural adjustment.

'Areas with affordability issues and low yields are going to struggle the most,' he said.

'Strong performing regions are showing early signs of running out of puff, too. A lower OCR will help, but at the margin. Loan-to-value restrictions might have eased but its generally a tougher environment to get credit as structural changes take place within the banking industry, demands for more responsible lending take hold and New Zealand sees the flow-on from across the Tasman, as well.'

But while it's good news for borrowers, it's not so good for savers.

Kiwibank's variable rate deposit products, Notice Saver and Online Call, decreased by 15 basis points.

ANZ is also cutting what it pays on term deposits by between 15 basis points for the 90-day rate and 15 basis points for the 60- and 120-day terms.

Westpac reduced its 90-day and four-month rates by 15 basis points. Its five-month term will drop by 20 basis points and term deposits between six and nine months drop by 10 basis points.

Its savings accounts were also affected.

Tuffley said more cuts were likely.

'We do not see inflation sustaining around the 2 per cent target mid-point without getting further stimulus.

'Moreover, employment growth has slowed, creating a growing risk that the Reserve Bank may not achieve its maximum sustainable employment objective.'

The proposed requirements for banks to hold more capital against their lending would also require an 'offsetting move' in the OCR, he said.