Cooling the housing market? ASB makes the year’s first rate rise as media and experts predict house price growth will be contained

Reserve Bank: OCR remains unchanged at 0.25%; prolonged monetary stimulus is needed
 
With the pandemic creating economic uncertainty, the Reserve Bank of New Zealand confirmed last Wednesday that the OCR would remain at its record low of 0.25%. It would also continue its NZ$100,000,000,000 bond-buying programme to provide liquidity support for the economy.

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The Reserve Bank said prolonged monetary stimulus was necessary to address the economic impact of the global pandemic.

Economists said the new Monetary Policy Statement was broadly as expected, with no changes to policy settings. The Reserve Bank’s report noted that economic activity in New Zealand had proved more resilient than previously anticipated. However, border restrictions were hampering trade and the movement of people, adding uncertainty for regional economies and industries. Future economic activity would continue to depend on controlling the pandemic.

Economists predict that current policy settings will remain unchanged until the Reserve Bank is more confident of achieving its goals of 2% inflation and maximum sustainable employment. The decision to keep the OCR at 0.25% was therefore expected.  

 
International credit rating agency: New Zealand’s recovery is strong as the dollar reaches a peak against the US dollar
 
Did those of you living in New Zealand notice the New Zealand dollar reach a peak of 4.74 against the renminbi last week? It also rose against the US dollar, with NZ$1 buying US$0.7338. The exchange rate rise followed an upgrade to New Zealand’s sovereign currency rating by international ratings agency Standard & Poor’s last week. The announcement pushed the New Zealand dollar to a 34-month high against the US dollar. 

The agency also said in its article that New Zealand’s economy was recovering well and developing steadily. Its economic performance during the past year’s global pandemic had exceeded expectations, with effective pandemic control enabling a faster recovery than in most economies worldwide.
 
In its first Monetary Policy Statement of the year, the Reserve Bank of New Zealand said the economy had recovered, but risks remained until the population was vaccinated. The statement said: “The economic outlook remains highly uncertain and depends largely on future restrictions under the pandemic alert levels.” 

The Reserve Bank’s latest forecasts show economic activity will remain below pre-pandemic levels this year before rebounding to those levels in 2022. Westpac’s chief economist said further lockdowns were possible, and a mild nationwide recession could not be ruled out.

 
Reserve Bank and mainstream media: the return of LVR restrictions will curb house price growth

According to Newshub’s latest report, house price growth is expected to slow this year as the Reserve Bank reinstates strict lending restrictions for home buyers. Under the LVR rules, banks will offer first-home buyers a mortgage lending proportion of no more than 20%, while investment property buyers will need to pay the bank a lending proportion of 30% or more. The Reserve Bank said the policy would curb the current rise in house prices. Tighter LVR rules will take effect from 1 May, raising the investment property deposit requirement to 40%.

Several major New Zealand banks, including ANZ, ASB, Westpac, BNZ and Kiwibank, have already reduced their investment property lending ratios to 60%, with other banks set to follow.
 
As is widely known, LVR policy is regarded as one of the Reserve Bank’s macroeconomic tools for managing cyclical financial market stability. It was formally removed last year to maintain financial market stability during the pandemic and prevent a house price correction. Instead, data from New Zealand’s Real Estate Institute shows house prices unexpectedly rose 19% over the past 12 months amid the global pandemic. In December last year alone, bank lending to first-home buyers and investors reached a record US$9,600,000,000, the highest figure ever recorded.

Low interest rates have made Auckland’s housing market attractive to investors and first-home buyers, driving an unprecedented surge in sales. Last week, the New Zealand Government publicly expressed its hope that the Reserve Bank would introduce policies as soon as possible to curb house price growth.

 

Cooling the housing market: ASB makes the year’s first rate rise

Today, ASB announced it would raise deposit rates across all terms, lifting its five-year deposit rate to 1.75%, while other banks’ five-year rates remained at 0.9%.

ASB said the deposit rate increases were intended to give savers competitive investment options.

 

In our view, however, this rate rise is linked to the Government’s stated aim of curbing house prices. The hope is that it will encourage investors to allocate their portfolios more sensibly, rather than focusing solely on the current high-risk housing market. ASB’s first rate rise of the new year today also suggests other banks will follow with increases.
 

Mainstream media: returning LVR restrictions and lower net migration will curb house price growth
Newshub reported last week that, with LVR restrictions returning and continued border closures reducing net migration, investors would gradually feel the effects of the lending restrictions. These combined effects were expected to curb house price growth.

Reserve Bank: house price growth will slow to 5.6% by 2023
The Reserve Bank said over the past week that a series of policies targeting house prices was expected to slow future growth. By 2023, house price growth would fall from the current 19% to 5.6%. Economists had previously forecast that Auckland house price growth would rise from last year’s 19% to 22% by the middle of this year.

From 1 March, LVR restrictions will reduce high-risk borrowing, particularly among investors. Their full effect is expected to become evident in house price trends over the coming months.

 

Economist: stricter assessment rules could apply greater weightings to high-risk loans
Kiwibank chief economist Jarrod Kerr said more needed to be done, as record-low interest rates and a shortage of affordable housing had fuelled the property frenzy. He said risk weightings could be applied in high-risk lending assessments to support lower interest rates for first-home buyers and owner-occupiers. Kerr said: “We need to charge higher interest rates to investors and those who simply want rate rises … while offering lower rates to first-home buyers.”

Interest rate outlook: rates will remain low for a long time.

Releasing ASB’s quarterly economic forecasts last Monday, chief economist Nick Tuffley said rising inflation and a faster-than-expected recovery had brought forward the bank’s expectation for a cash rate increase by a year, to August 2022. Tuffley said: “For now, the OCR has not really changed, uncertainty remains, and interest rates will stay low for a long time.”

Given the current housing market boom, we believe the likelihood of further interest rate cuts is virtually zero. Once the economy recovers rapidly, raising interest rates will become the Reserve Bank’s top priority.

Kiwibank chief economist Jarrod Kerr expects the OCR will not begin rising until November 2022, as keeping interest rates low remains a priority for businesses and first-home buyers.

 

Unemployment to peak mid-year as inflation continues rising in the short term
The Reserve Bank expects unemployment, currently 4.9%, to peak at 5.2% in the middle of this year before falling to 4.6% by March 2024. Inflation is expected to peak at 2.5% in the short term, then fall in 2022 before rising to 2% in 2024.

 

New Zealand’s economy showed exceptional resilience during a difficult past year, and economies are recovering as global vaccination gathers pace. In the new year, we have seen the Government and Reserve Bank’s determination to curb house price growth. We will watch to see how the formal reinstatement of LVR restrictions next month affects future house prices and the economy.