Official Cash Rate unchanged but Reserve Bank signals further cuts may happen

Following on from the Reserve Bank of New Zealand’s (RBNZ’s) announcement yesterday afternoon that it was leaving the Official Cash Rate (OCR) unchanged at 0.25 percent we thought you’d appreciate our opinion again on where interest rates might be heading now for borrowers.

With the full economic impact of the COVID-19 lockdown yet to be felt the Reserve Bank is attempting to stimulate as much economic activity as possible. They are implementing a $60 billion quantitative easing programme buying central and local government bonds from existing investors, with money that the Reserve Bank essentially creates on its computers. The goal is to lower interest rates and free-up cash for private sector investment. They have also left the door open to future reductions been made to the OCR if needed. The Reserve Bank acknowledged yesterday however that further reductions to the OCR will not necessarily see home interest rates reduce further. This is because banks need to hold a certain amount of money on deposit to lend money in the first place. If deposit rates get too low depositors will take their money out of their bank looking for a better return elsewhere. The Reserve Bank meanwhile wants our banks to have much greater amounts of capital to what they are currently required to hold. They have put the first round of bank capital increases on hold now until July 2021 but banks know they will ultimately have to meet these new requirements which are been implemented incrementally over a 7 year period. The Reserve Bank signalled yesterday that it expects the banks to reduce their interest rates further now to borrowers admitting that depositors will be disadvantaged. Whilst the likelihood of interest rates reducing further seems likely it will take a significant cut to the OCR into the negative rate territory + other stimulus to see home loan rates get as low as 2.50% p.a. By this stage we believe most depositors would be actively shopping for alternatives to their banks as deposit rates would become highly unattractive.

Meanwhile in other news the LVR restrictions have been removed by the Reserve Bank for the next 12 months. To date the banks have shown little appetite though to approve more higher LVR loans. Whilst we expect first home buyers will find it slightly easier to secure a mortgage with less than 20% deposit banks are all been extra cautious now when it comes to new mortgage approvals. The likelihood of people losing their jobs and property values potentially reducing means banks are vetting mortgage applications very closely irrespective of the LVR. Investors hoping that their bank will lend them more now on an investment property may need to temper their expectations. Banks know that the likelihood of the Reserve Bank re-introducing the LVR restrictions in 12 months’ time is high. Banks also have to hold more capital for investment mortgages so these types of loans are more expensive for them to approve.

There has been a lot of predictions made by pundits about what impact COVID-19 will have on house prices in New Zealand. It is important to remember that overall New Zealand has a severe shortage of housing stock available and the current demand for houses outstrips supply. With the Government wanting to get their “shovel ready” infrastructure projects underway asap to boost the economy we could well see a shortage of builders occur in the near future, adding extra delays to new homes been constructed again making the demand for housing more critical. Without been too optimistic we do not believe that houses prices in the $450-$800k price range are going to experience significant reductions in price. There is simply too much demand currently for housing in this sector of the market. Higher value properties been sold may experience a correction in price going forward but this was probably overdue anyway. The key influencer on whether we ultimately see house prices fall will be if significant numbers of employers lay off staff and unemployment increases significantly. The Reserve Bank has already forecast 150,000 job losses over the next six months.

With the above in mind borrowers should consider carefully their own financial circumstances before deciding on any new fixed rate term for their mortgage. There are some very attractive longer-term rates now on offer to borrowers with 20%+ equity. Whilst interest rates of 2.99% p.a. for 12 or 24 months are making all the headlines, historically been able to borrow money as low as 3.59% p.a. for 5 years is highly enticing. These kind of interest rates for these longer terms will not be available forever.

In conclusion if you are at all concerned about the possible direction of interest rates and the rate that you are currently sitting on with your bank please contact us.

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