Official Cash Rate – go figure - Jenny Murray

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
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
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
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
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
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
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
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
Longer terms offer greater protection, but
come at a significantly higher cost. Borrowers
need to be cautious when fixing for longer
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.