April 2014 Official Cash Rate – go figure From ANZ chief economist Cameron Bagrie A well-flagged rise in the Official Cash Rate is now a reality and you can expect more. House sales had been cooling since the introduction of loan-to-value (LVR) lending restrictions and credit growth has showed signs of easing. Jenny Murray D (06) 868 5188 M 027 5566 046 E [email protected] MacPherson Morice Limited, Bayleys Licensed under the REA Act 2008 But the bigger plan has always been to return interest rates to more neutral levels. With migration rising strongly, clear demand pressure on the housing market remains. Sales volumes fell 5.7 percent in February, the third monthly decline since the high LVR speed limits were introduced last October, leaving sales volumes 11 percent lower since. The regional breakdowns showed widespread moderation in sales volumes, with most regions reporting less than last year. Eventually slow sales volume growth will start to impact on prices, but evidence to date is mixed. Annual house price inflation lifted to 8.2 percent. Regional differences remain evident, with Auckland and Canterbury showing double-digit annual increases, and continuing to outstrip price rises elsewhere. The Reserve Bank raised the OCR by 25 basis points, and the main trading banks responded by raising mortgage lending rates. Our central scenario is for three 25 basis points hikes in the first half of this year, with more to come in the second half and into 2015. A lot of uncertainty surrounds the flow-on effect from higher rates to the household sector – so we’ll be watching our key proprietary indicators for turning point signals. All up, the Reserve Bank has flagged a total 250 basis points of tightening going forward, though this is subject to economic conditions evolving as expected. January residential consents fell by 8.3 percent, which follows a series of strong rises. In the three months to January, the number of dwelling approvals increased by16 percent, with the year to January figure touching a 5½-year high. Residential consent numbers in Canterbury continued to hit record highs with the number of Auckland consents issued well below historical averages. These figures show that construction-cost inflation remains high. February saw a permanent and long-term (PLT) net migration influx of 3,470 people, the largest arrivals gain in over ten years. Net PLT arrivals over the last three months accelerated to 9,520 people, and annual net PLT immigration rose to 29,022 people, both the highest in 10 years. Following a 4.7 percent decline in January, the seasonallyadjusted monthly volume of mortgage approvals rebounded 5.2 percent in February – lifting to its strongest level since August. Data for the first half of March indicates this trend is continuing with the monthly figure rising to a 10-month high. Mortgage lending increased 0.4 percent in January, mirroring the lift recorded in December. The three month annualised rate of change slipped to 5.0 percent, its lowest rate of increase in 13 months. Census sheds light on NZ property . Mortgage borrowing strategy From ANZ chief economist Cameron Bagrie The RBNZ has signalled its intention to lift the OCR by 200 basis points over the next two years if economic and inflation conditions pan out as projected. This could see carded floating mortgage rates approach 8 percent in 2016. In contrast, ANZ expects a slightly more muted rate hike cycle. ANZ’s carded floating rate increased in March in response to the Reserve Bank’s increase to the Official Cash Rate. The latest census data is being released in tantalising nibbles by Statistics New Zealand over the next 12 months. The data on households and housing makes interesting reading. With further increases in mortgage rates likely in 2014, there are few places for borrowers to hide. The headline grabber that has been capturing attention is the fact that in 2013 the proportion of the population that occupy a property that they own or partially own as their usual residence has fallen to below 50 percent. Breakeven analysis indicates it makes sense to weight most of your borrowing needs towards 6-18 month terms which offer the lowest rates on the curve. So there are now less people living in their own home than renting. This is a trend that has been accelerating over the past decade. The number of people living in their own home grew just 1 percent between 2006 and 2013 whilst the number not living in a home they owned (or partially owned) grew 16 percent. Longer terms offer greater protection, but come at a significantly higher cost. Borrowers need to be cautious when fixing for longer periods. So just to be clear; just less than half the total population now live in a home they own, whilst just under two thirds of all households own their own home. From this we can also infer that the average household not owning their own home consist of more than the average 2.9 people per household. Expectations of further increases in short-term fixed rates strengthen the case for fixing for longer terms. Borrowers need to carefully weigh up the lower cost of fixing for shorter terms, versus the certainty gained from fixing for longer terms of 3-5 years. Of somewhat greater significance is the age disparity of property ownership. In 2013 the proportion of people aged 20 - 29 years that are living in a property they own dropped to just 27 percent - 12 years ago in 2001 that figure was 47 percent. A significant drop was also seen in the 30 - 45 year age bracket - down from 84 percent in 2006 to 75 percent in 2013. The total number of dwellings has risen 7percent since 2006 - 10 percent were classified as unoccupied and a further 0.5 percent of those properties were under construction. This growth in the number of dwellings is lower than the growth between prior census periods, further demonstrating how the shortage of new house building has affected the property market. Finally the composition of the housing stock is gradually changing. The predominant type of property is a standalone house representing 76 percent of all occupied dwellings. Apartments and townhouses represent 17 percent of all dwellings. Locking in a portion of your mortgage for a longer term may turn out to be more expensive if the RBNZ fails to deliver on current market expectations, but households who do will gain more certainty over mortgage servicing costs. Longer-term fixed rates remain at the mercy of shifts in global bond yields and we expect these to gradually lift in coming years, adding to pressure for higher mortgage rates.