Interest rates: A boost for the housing market, but not everyone is a winner

Wednesday, 8 May 2019

What does the official cash rate mean?

OPINION: Just when it seemed like the housing market might be about to start cooling, the Reserve Bank appears to have kicked the mortgage wars back into life.

Just minutes after the Reserve Bank announced it was cutting the official cash rate to 1.5 per cent, the lowest it has ever been, the marketing teams at ANZ and Kiwibank fired out emails promising lower mortgage rates.

If the cuts seemed modest - neither bank has passed on the full cut announced by the Reserve Bank - we need to remember how far we have come in a fairly short time.

Back in March 2017, ANZ's one-year 'special' fixed-rate mortgage carried an interest rate of 4.39 per cent.

Now, it carries a rate of 3.89 per cent. Borrowers have never had it so good. A few years ago, banks earned headlines when mortgage rates on five-year fixed-rate mortgages dropped below 6 per cent; now in some cases they are below 4.5 per cent.

Reserve Bank governor Adrian Orr at a press conference to explain the central bank's decision to cut the official cash rate to an all-time low of 1.5 per cent, which is expected to offer the housing market a boost.

But is it good news? Not for everyone.

Homeowners will be smiling. Amid growing signs that prices were coming off the boil (in Auckland at least), recent buyers will have been feeling nervous that their equity was being eaten away.

A fresh round of mortgage cuts could quickly reverse the decline.

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

It is also bad news for those who are some way off the housing ladder. One of the great deceptions promoted repeatedly by the former National Government was that the best thing the Government could do for housing affordability was keeping interest rates low.

This is true in the very short term, as it allows people to borrow more. But allowing people to borrow more simply pushed up asset prices.

Whether it is house prices or stock markets, the key reason why asset prices continue to climb is that interest rates are low.

For savers, especially those living on their savings, it is more pain. Deposit rates are now getting so low that banks are warning that people may take bigger risks to try to get better returns.

Wednesday's decision was far from a complete surprise. Back in March, governor Adrian Orr indicated that the next move for interest rates was likely to be down.

The move surprised financial markets at the time, as at the time there was no clear sign of what had worsened to cause the bank to shift its stance to indicating interest rates would be lower.

Since then though, the picture has softened. Job growth has dried up, economic growth has slowed and the growth in household spending has weakened.

But this is hardly pointing to a recession, not by some measure. Could this mean the picture is worse than the Reserve Bank is letting on?

The OCR cut 'signals the New Zealand economy is now much weaker than many people think,' former Finance Minister Steven Joyce said on Twitter.

Perhaps, or perhaps we are now seeing the colours of the governor and the position of the committee with which he makes decisions.

Economists have been privately suggesting for months that they believed that Orr was waiting for an excuse to cut interest rates.

HOW LOW CAN WE GO?

What was remarkable was that while the committee was far from committed to cutting interest rates further, the governor seemed completely relaxed about cutting interest rates further if there was a need to.

While many economists believe that the ability of a central bank to influence the economy with lower interest rates diminishes the closer we get to zero - some believe we are already at a point of diminishing returns.

Orr was dismissive, not only indicating that he did not believe cutting rates was becoming less effective, but also running through some of the other tools the bank might use to stimulate the banking sector, from buying assets from banks to quantitative easing, a technique which many describe as printing money.

Only a few years ago the idea was laughable and we are still some way away from paying people to borrow money.

But after close to a decade of growth, which has not yet come to an end, we have a Reserve Bank which seems completely relaxed about cutting interest rates to an all-time low even with unemployment at close to the lowest level in a decade.

Imagine what the bank might be willing to do if things start to get ugly.