The five things you need to know about the housing market this week.
1. Reserve Bank gets on with the job
Many commentators, myself included, expected the Reserve Bank to hold the Official Cash Rate at 2.25% last week, but instead it took the OCR to 2.5% -the first OCR rise in over three years. Of course, the rise wasn’t a complete surprise. After all, the Reserve Bank had signalled, even before the Iran war, that it would raise the OCR this year.
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The decision – for which all six monetary policy committee members voted – seems to have two key motivations. First, the OCR was below "neutral", so the committee may as well get on with the job of increasing it. And second, the committee felt that financial conditions had loosened a bit too much recently (such as the lower exchange rate and falls in wholesale market interest rates), so there was a need to push back on that with a higher OCR.
The committee noted that the future path for the OCR was highly uncertain and data-dependent. I expect there will be at least two more increases this year. Will mortgage rates react? Not directly, because some OCR increases are already priced-in to longer-term fixed rates – although we’re now obviously all watching the latest bout of US-Iran uncertainty closely.
2. Borrowers are still locking in for longer
Speaking of uncertainty, many mortgage-holders are still looking to skirt around the risks by taking out longer-term fixed rates. Indeed, for the sixth month in a row, around 50% or more of new lending in May was done on fixed rates of more than one year, with the two-year rate the most popular, but 18-month and three-year fixes are also getting some focus. Around 20% of new lending is still being done on a one-year fix, but this is a low share by past standards. In an uncertain world where inflation may prove sticky and interest rates are probably trending slowly higher, getting some insurance with a longer fixed rate seems to be a decent strategy.
Cotality chief economist Kelvin Davidson: "Mortgage-holders are still looking to skirt around the risks by taking out longer-term fixed rates." Photo / Peter Meecham
3. Some risks are being accepted in exchange for affordability
On another note, however, some risks are being downplayed by property buyers. We’ve recently taken an in-depth look at how flood-affected properties in Auckland and Hawke’s Bay after weather events in recent years have performed relative to other dwellings. It was no surprise to see that they were initially ‘discounted’. But it was perhaps a bit more surprising to see that subsequently the affected properties have still been in demand and their values have actually grown faster than others. In other words, the risk is being shouldered in exchange for better affordability.
4. Migration still too low to be a real factor?
Looking ahead to Tuesday, when Stats NZ will publish net migration figures for May, which could show a continuation of the recent, gradual upwards trend, as arrivals pick up and departures slow, partly because the appeal of Australia has lessened. But the net balance remains below normal, so at the moment migration is still not really a big source of population growth or pressure on demand in the housing market (especially for rental property).
5. The next inflation measure rolls around
Then on Friday, we’ll get June’s selected price indexes data from Stats NZ. Given ongoing concerns at the Reserve Bank about inflation potentially sticking around for a while, this monthly measure (which covers about 45% of the benchmark quarterly CPI) will be intriguing. To be fair, it tends to relate more to tradable/external items such as fuel (which has dropped recently), but even a subdued result for June may not provide too much comfort, especially given the latest US-Iran flare-up.
- Kelvin Davidson is chief economist at property insights firm Cotality
