As low as they'll go: Interest rates and Auckland's housing market

The Reserve Bank cut its official cash rate by 0.25% on December 10 so it is now back where it was in March last year before 1% worth of increases to fight expected inflation. The inflation never came. In fact rather than reaching a predicted 1.6% inflation fell away to just 0.4% courtesy of a firm NZ dollar, falling fuel prices, and factors unexpected by the Reserve Bank.

These unexpected factors include technological changes undercutting existing providers of goods and services, excess global manufacturing capacity courtesy partly of the slowing in China’s growth rate, and consumers being far more price conscious since 2008.

The chances are that interest rates will not be cut again, though one can’t rule it out given the lack of any decent rebound as yet in dairy prices, and some new strength in the NZ dollar. Generally the higher our currency goes the lower the prices of imported goods go, therefore the lower the overall inflation rate.

Nonetheless, from the point of view of someone borrowing to buy a house, it is probably best to assume that this is as low as interest rates go – unless a fresh round of intense competition breaks out between the major lenders. That cannot be ruled out, but it is certainly not what the Reserve Bank would like to see.

While they feel interest rates are at levels which better suit the country’s pace of economic growth and overall inflation, they are definitely too low for purposes of stability in the housing market and minimisation of risk associated with any shock scenario causing a fall in house prices.

What this means is that the lower interest rates go, the higher become the chances that our central bank will use non-interest rate means of suppressing house price rises. As noted here previously these measures have included the loan to value ratio rules and minimum 30% deposit requirement for buying an investment property in Auckland. And as noted here last month, if the regions power ahead then that 30% rule will probably be spread to non-Auckland parts of the country.

NZ monetary policy is clearly central to where NZ mortgage rates go. But another key factor relevant mainly for fixed interest rates of two years and beyond is the stance of United States monetary policy. It is widely expected that US interest rates will rise through 2016 and that this will tend to increase the cost to us banks of borrowing money to lend at fixed interest rates, and therefore those fixed rates will go up.

It is impossible to predict how rapidly fixed borrowing costs will rise because no-one has great insight into how the first bout of rate rises in the US since 2006 and the first policy change post-GFC will affect the US economy. In fact if the experiences of NZ, Australia, Sweden, Israel, Canada, South Korea, and the European Central Bank are anything to go buy, come 2017 US interest rates may be on the way back down again.

There are no special implications of this very uncertain interest rates outlook for Auckland as compared with the rest of the country. Confusion will reign everywhere. But three things to keep an eye on of relevance to the Auckland housing market are these. First, migration flows. These remain massive and as yet there is no sign of any sustained easing in the high net inflow. Auckland is the main beneficiary of net inflows thus will continue to enjoy population growth faster than the rest of the country through 2016 and 2017 we believe.

Second, Auckland has a physical shortage of houses which the rest of the country does not, and that shortage continues to grow. Third, eventually the housing cycle phase of investors going to the regions will pass. If this coincides with Chinese buyers becoming comfortable with IRD number and bank account rules, and restrictions on taking money out of China easing, then the Auckland market will again spark into life – probably before the end of 2016.

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