Housing and Interest Rates Update May 2017
Market Cools in Auckland as Winter Nears – By Bernard Hickey
The Auckland housing market continued to cool slightly through March and April as the effects of tougher lending rules and higher fixed mortgage rates continued to affect sales volumes.
Values in Auckland fell 0.4 percent in the three months to the end of April, QV reported, while Barfoot and Thompson reported volumes in Auckland fell to their lowest level for an April since 2008.
But volumes and prices were healthier elsewhere as Auckland’s halo effect from 2015 and 2016 continued to spread through the country. Wellington values rose a further 3.4 percent over the last three months, taking them 21.2 percent higher than a year ago. Values continued to rise in Whangarei, Hamilton, Tauranga, Central Otago and Dunedin, but fell slightly in Christchurch where extra supply is dampening price inflation.
Meanwhile, interest rates stabilized through April and May as global interest rates retraced some of their spike in the months after Donald Trump’s election as US President. Bond markets had initially seen Trump’s election triggering massive infrastructure spending and tax cuts that would blow out budget deficits and push up inflation. It was called the Trump ‘reflation’ trade.
But Trump’s first 100 days have instead revealed a President unable to convince his own Republican Party supporters in Congress to back his plans, including on health care and tax reform. He would need to agree on tax reform before he can unleash the infrastructure spending or the big tax cuts, and that is just as controversial as healthcare. Economic growth in the United States, the world’s largest economy, also slowed a bit, and China’s economy is cooling somewhat.
That has meant global bond rates, which are the basis for New Zealand fixed mortgage rates along with the Official Cash Rate, have edged lower in the last two months. Banks have stopped putting their mortgage rates up and ASB actually cut some of its fixed mortgage rates in early May.
Meanwhile, the underpinnings for high house prices remain firmly in place. Net migration hit a fresh record high of nearly 72,000 in the year to March, while building consents fell 1.8 percent in March. Banks are being more cautious about lending to developers because regulators on both sides of the Tasman are warning them to avoid riskier projects. That is preventing a flood of new housing supply hitting the market, along with skill shortages and rising construction costs. Housing shortages, particularly in Auckland, will be a fact of life for some time to come.
The interest rate outlook also remains benign. Inflation in the March quarter rose to 2.2 percent, but is forecast to remain around the middle of the Reserve Bank’s 1-3 percent target band for some time yet. Wage growth remains weak at around 1.5 percent, thanks to the arrival of plenty of low wage temporary workers from overseas. Oil prices fell to a six-month low below US$45 per barrel in early May and the New Zealand dollar remains solidly firm around 70 USc, keeping imported inflation at bay.
The Reserve Bank is likely to be happy with the moderation in house price inflation since late 2016, giving it few incentives to push ahead with any plans for a Debt To Income multiple limit. That is currently parked until well after the election while the Reserve Bank does an analysis.
The political debate is also not expected to change the equation much. Even if there is a change of Government on September 23, Winston Peters is shaping up as the ‘king maker’ and he is opposed to a Capital Gains Tax.
The bottom line:
- House price inflation has slowed and prices fell a bit in March and April in Auckland, but not much elsewhere.
- The Reserve Bank has forecast an unchanged Official Cash Rate through all of 2017 and all of 2018. It does not see the first hike until late 2019.
- Banks have stopped lifting longer term mortgage rates and some are tightening lending. They have pulled back from lending to developers.
- The Reserve Bank is unlikely to be able to introduce a DTI limit in 2017. It has to do lengthy consultation and it has said it would not use the tool right now even if it had it because of the market’s moderation.
- The key variables to watch in 2017 are China’s bad debt situation, Europe’s financial and political dramas, global inflation and interest rates, New Zealand’s election result, and Donald Trump’s twitter account.
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