Market update, OCR Cut.


Official Cash Rate cut bombshell reverberates through to rates.

The Reserve Bank shocked lenders and borrowers alike with it's big August Cash Rate cut sending the market into a spin and lenders scurrying to outdo each other on rates in a mortgage rate battle that could leave buyers with a smile on their face. 

OCR Shock

The dust is still settling from the Reserve Banks shock 50 basis point (bps) cut to the Official Cash Rate (OCR) in early August. 
It was double what the market was expecting, such large cuts are rare and have usually followed major global or domestic events such as the 9/11 terrorists attacks, the GFC and after the Christchurch Earthquake.

The Reserve Bank justified the cut because of slowing GDP growth and rising economic headwinds with the aim of keeping inflation within their target band of 1-3% and maintaining strong employment.

Rates

Borrowers would have been smiling at the size of the cut and the shock move caught lenders off guard. In the hours and days after the announcement there was a flurry of press releases and rate reductions.

Floating rates moved first and furthest,  while fixed rate reaction was a little more mixed with some banks making some smaller cuts and others leaving several key fixed rates as they were initially.

As we moved past ground zero, lenders found their feet, more cuts followed and things have certainly become more competitive over the last few weeks. Also, for the first time in a few years lenders are dropping their assessment rates, some by as much as 0.80% which has a significant impact on how much you can borrow.

The situation is fluid and we are keeping a very close eye on what's on offer. If you’re trying to make sense of the various rate offers, please get in touch and I can provide a clear picture of where things stand daily and who has the sharpest pencil when it comes to cutting a deal.

Where to next for rates?

Most commentators see business confidence remaining low, inflation sitting within its target band and ongoing global uncertainty around Trump's trade war with China, meaning there will be continued downward pressure on the OCR and home loan rates.

ASB chief economist Nick Tuffley was forecasting a further 25bp cut to 0.75%, in November, stating Global risks around US-China tensions and added Brexit uncertainty.

However there are limits. New Zealand banks need to raise 75% of their funds domestically from deposits to lend back out to borrowers and that means they need to offer at least some sort of carrot to savers in the form of an interest rate. This is a bit of a hand brake on future interest rate falls.

What if I’m renting?

It’s a bit of a mixed bag for renters. Rental increases, while still up year on year, fell month on month which could finally indicate a slowdown after years of steadily increasing rental prices. Lower interest rates provide an opportunity to make the jump into home ownership, but at the same time meager returns on savings will see deposit growth slow. The kiwi dollar dropping on the back of the OCR announcements won’t help with the cost of imported goods and services so buying power could decrease, making it harder to save also. 

What’s happening in the market? 

July’s positive sales numbers added some energy into the property market which should be further bolstered Augusts big OCR cut. 

Volumes

Residential property sales increased by 3.7% in July year on year to 6,118 (up from 5,897), the highest for the month of July in three years, according to the Real Estate Institute of New Zealand (REINZ).

The regions led the charge on volume lifts, with Nelson’s 25% increase boosting sales to the highest July number in four years. Gisborne was second with a 14.9% increase and Canterbury bounced up by 14.6% in July 2018.

Auckland’s numbers were impressive given its recent sluggishness, with sales in July increasing by 6.6% year-on-year (to 1,894 up from 1,777). 

The West Coast, Tasman and Southland all bucked the trend recording significant drops in properties sold.

Values

Median house prices are still trending up nationally, despite being flat in Auckland. Much of this is being driven by a continued catch up effect being experienced in regional New Zealand, which is seeing the strongest growth in median prices. 

Nationally median house prices increased by 4.5% in July to $575,000. Due flatness in Auckland market median price increases for New Zealand excluding the City of Sails were even stronger, recording a  6.1% increase on last year to $485,000.

July was also a month of records in the south, with Otago’s 21.7% increase to $505,000, and Southlands 20.0% increase to $300,000 setting all time high median house values for these regions.

 Its wasn’t all one way traffic with values decreasing or remaining flat in six regions, led by a steep 24.4% fall on the West Coast and more modest decreases of 5.9% and 4.0% in Marlborough and Taranaki.