Why homeowners are having to wait for another OCR cut

1. A temporary hold on rates

The main economic news last week was the pause in the Reserve Bank’s cutting cycle, with the Monetary Policy Committee voting unanimously to keep the OCR at 3.25% - for now. The RBNZ is worried about lurking inflation pressures and wants to see a bit more data before deciding what to do next. Note that the official inflation figures for the second quarter of this year are released on July 21, and that the next OCR decision is a month later on August 20.

All going to plan, it seems more than likely that the OCR will be cut at that meeting by another 0.25%, with the record of last week’s decision also setting out the RBNZ’s expectation that the tariffs and changes in global trading patterns will tend to restrain economic growth and eventually bring inflation back down again.

For the housing market, all of this is fairly neutral. Mortgage rates have already fallen a long way from their peak, and even if a fresh bout of competition among the banks did re-emerge in the near term, the scale would be smaller than the falls in rates we’ve already seen. And the greater focus in the housing market at the moment seems to be on the other side of the ledger anyway – the price restraint being enforced by the abundance of listings and labour market uncertainty.

2. Construction costs are at least helping the inflation fight

One area of the economy where inflation isn’t much of an issue at present is the house-building sector, with Cotality’s Cordell Construction Cost Index showing only a 0.6% rise in Q2 and a 2.7% annual increase, both well below their long-term averages. That’s consistent with extra capacity in the industry in the aftermath of the downturn over the past three years.

Cotality chief economist Kelvin Davidson: "All going to plan, it seems more than likely that the OCR will be cut at that meeting by another 0.25%." Photo / Peter Meecham

With our population still growing and mortgage rates down, things should look better for construction over the medium term, but the overhang of existing property listings may need to fall quite a bit further yet before households will more seriously switch back to new-build projects again.

3. Borrowers are still hedging their bets

Meanwhile, the latest breakdown of mortgage lending data from the RBNZ showed that new borrowers kept a pretty even spread of loan terms in May, with 34% floating, 40% fixing for 6-12 months, and 26% fixing for longer than a year. There seems to be a bit of a balance going on: putting some of the mortgage on a floating rate in the hope that better deals come along, but also locking in a bit of certainty with a longer-term fix of 18 months to two years.

4. More disappointing economic activity data?

Quickly looking ahead, this week we’ll get June’s Stats NZ electronic card spending data and the Performance of Services Index from BNZ-BusinessNZ. Both have probably stayed pretty soft, further confirmation of our struggling economy.

5. Another timely look at inflation

Also this week we’ll get June’s selected price indexes data from Stats NZ. In light of the RBNZ’s call to hold the OCR, this week’s data will be really interesting. This monthly measure relates to about 45% of the benchmark quarterly CPI and has recently been trending higher due to components such as food and household energy, albeit housing rents have been slowing steadily.