WARNING FOR HOMEBUYERS: 67% of experts say an OCR increase will slow property growth

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PHOTO: OCR Increase. GETTY

Press Release: Finder

News highlights:

80% of experts and economists believe the OCR will increase in August
4 in 5 feel negative about housing affordability
58% agree with implementing mortgage lending limits to cool property prices

16 August 2021, New Zealand – An increase to the official cash rate (OCR) could slow both property growth and inflation, according to experts.

In this month’s Finder RBNZ Official Cash Rate Survey, 15 experts and economists weighed in on future OCR moves and other issues relating to the state of New Zealand’s economy.

The majority of experts surveyed (80%, 12/15) predict that the OCR will increase in August.

Of these economists, 75% (9/12) think it will increase by 25 basis points (from 0.25% to 0.50%), while two forecast an increase of 50 basis points (from 0.25% to 0.75%).

Angus Kidman, Finder’s editor at large in New Zealand, said mortgage holders should start preparing for a higher rate.

“While the anticipated cash rate change will be welcome news for savers, those with mortgages should stay alert to any changes in interest rates as it could mean higher monthly repayments.”

Michael Gordon of Westpac, who expects the OCR to rise by 25 basis points, said with the economy running hot, emergency-era policy settings were no longer appropriate.

While Debbie Roberts of Property Apprentice is expecting an OCR increase, she is only expecting it to rise by 10 basis points.

“The economy is still very dependent on our ability to keep COVID under control, and as we are a long way off having the majority of our population vaccinated, our economy continues to be at risk because of this.”

Negative sentiment on housing affordability reaches 79%

Finder’s Economic Sentiment Tracker gauges experts’ confidence in 5 key indicators: housing affordability, employment, wage growth, cost of living and household debt over the next 6 months.

While the vast majority (79%) of experts are negative on housing affordability, many believe an OCR increase could see property prices stabilise.

Two thirds of experts (67%, 10/15) agree that a raised OCR will slow property growth, and 79% (11/15) say it will slow inflation.

According to the Real Estate Institute of New Zealand’s (REINZ) Million Dollar Price Report, nearly 15,000 homes sold for more than NZ$1 million during the last 12 months, compared with just 5,500 in 2020.

Overall, house prices increased by 25.2% over the past year to hit a record high in July.

Kidman said many Kiwis were understandably worried about affordability, and getting ‘priced out of the market’.

“Any relief to soaring property prices will be music to first home buyers’ ears,” Kidman said.

Michael Reddell of Croaking Cassandra economic commentary blog, who is predicting a 50 basis point rise, said the most significant upshot of an increased OCR in the near term should be the stabilisation in house prices.

More than half of the experts who weighed in (58%, 7/12) agree with the New Zealand central bank implementing further mortgage lending limits to cool property prices.

Alfred Guender of the University of Canterbury, who expects the OCR to hold for the rest of the year, said lending limits were an appropriate tool for keeping a lid on property prices in the short to medium term.

“It gets at the root of the problem,” Guender said.

Here’s what our experts had to say:

Sharon Zollner, ANZ (Rise of 25 points): “Inflation pressures are rising, the labour market is exceptionally tight, and financial stability risks are significant. Starting hiking too late will make these problems worse and increase the odds of a hard landing.”

Saten Kumar, Auckland University of Technology (HOLD): “There remains a lot of uncertainty on the macroeconomic outlook of New Zealand. Although the economy is doing well, the growth trend to continue is difficult to predict.”

Kelvin Davidson, CoreLogic (Rise of 25 points): “The evidence is now undeniable –- inflation above target and employment high. Why wait.”

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Michael Reddell, Croaking Cassandra economic commentary blog (Rise of 50 points): “Core inflation is now a bit above target, and the unemployment rate in June was probably already at the NAIRU. Some monetary restraint is appropriate, but done cautiously given (a) the uncertainty and (b) 10 years of undershoots.”

Donal Curtin, Economics New Zealand (Rise of 25 points): “Inflation is a bit higher and perhaps a bit more persistent than previously thought [and the] labour market is strong, hard to see case for keeping monetary policy on previous level of support.”

Brad Olsen, Infometrics (Rise of 50 points): “We expect the Reserve Bank will increase the OCR by 50 basis points in August, to 0.75%. Inflationary pressures are building further, the economy is likely operating beyond maximum sustainable employment, and the necessity for the current levels of super stimulatory support doesn’t exist. Supply is constrained, but just as importantly demand is incredibly strong, and we’re worried we might be overcooking the economy. With the COVID-19 Delta variant surging globally, and the economy still recovering, there’s still need for support. Just less support than what we currently have. It’s time to wean the New Zealand economy off the morphine and onto the Panadol. We also think RBNZ might make changes to FLP to further reduce monetary support from “super supportive” to “very supportive” levels.”

Jarrod Kerr, Kiwibank (Rise of 25 points): “The economy has proved resilient enough to remove policy accommodation. And the housing market gains remain unsustainable.”

Debbie Roberts, Property Apprentice (Rise of 10 points): “Following the stronger than expected CPI, it is highly likely that the RBNZ could increase the OCR this month. I would be surprised if it is anything other than a minimal increase though, as the economy is still very dependent on our ability to keep COVID under control, and as we are a long way off having the majority of our population vaccinated, our economy continues to be at risk because of this.”

Leonie Freeman, Property Council New Zealand (HOLD): “International pressures indicating interest rate rises.”

Jen Baird, REINZ (Rise of 25 points): “Stronger than anticipated economic conditions, signs of banks starting to lift interest rates. House prices have remained strong.”

Oliver Hartwich, The New Zealand Initiative (Rise of 25 points): “The economy is clearly overheating, not least due to previous monetary stimulus. Urgent measures are needed despite previous guidance.”

Robin Clements, UBS NZ (Rise of 25 points): “Labour market at maximum sustainable employment, plus building underlying inflation pressures, mean a start to removing COVID-19 emergency cut is imminent.”

Alfred Guender, University of Canterbury (HOLD): “There is no evidence of sustained inflation yet or of unhinged inflationary expectations. Besides, the NZ economy is not out of the woods yet. Other central banks have put monetary policy on hold, too, because of the uncertain outlook.”

Mark Holmes, University of Waikato: (Rise of 25 points) “Inflation has recently breached the target. The larger than expected fall in the unemployment rate further points to increased tightness in the labour market. Despite the various measures put in place, house price inflation remains too high. This is all pointing towards the RBNZ nudging up the interest rate.”

Michael Gordon, Westpac (Rise of 25 points): “The economy is running hot, and emergency-era policy settings are no longer appropriate.”