Director’s Commentary – No Change to the OCR

No OCR change Image

 

A 25 basis point drop in the OCR from the Reserve Bank was largely expected and so we were surprised there was no change. Why did we expect one? Because the NZ economic growth rate is slowing, inflation is at the lower end of the target range and worldwide interest rates continue to recede as a result of tricky economic conditions.

 The decision to do nothing is therefore curious and in essence appears to be along the lines of “we know the economy is slowing, we know that globally there are issues that could have a negative impact on NZ – but it’s early days since our big OCR drop from last quarter and we are only just seeing signs of that starting to stimulate the economy in certain sectors and therefore we would like to see what happens for another quarter.”

Though, is it that the Reserve Bank is keeping their powder dry for a rainy, stormy day when they really do need to drop the rate. Keep in mind that once the OCR is at, or close to zero they are out of ammunition.

For those of us with lots of debt across our portfolio – that’s disappointing. However, in terms of impact on property prices, we believe the announcement is of little consequence. Don’t forget that leading up to the GFC interest rates in NZ were in excess of 8% and that didn’t stop property prices going up. We’ve always said that interest rates are a lesser driver of demand compared to population growth and availability of credit.

Which leads me to the topic of credit. Our view is that bank capital will flow away from riskier lending to less risky lending in anticipation of new capital adequacy rules. That’s because they’ll need to hold less capital on their balance sheets for less risky lending.  Property is not as risky as business lending. There is some evidence of easing lending criteria – our mortgage team reports that the banks’ serviceability criteria are slightly less stringent.

 But…it’s all a bit around the edges really. I’d suggest it was easier to get money during the GFC than it is now. Yes, a bit more money for property – but at the same time, the Australian parent banks aren’t happy about the capital adequacy rules and are sabre rattling about turning off the tap for NZ.

 So looking ahead to 2020, we are likely to see some growth in property prices – but I doubt it will be the exuberant FOMO buying we’ve seen previously because banks just aren’t throwing money at investors at the moment.

 What would I do if I was floating? I would suggest fixing for 1-2 years at the most as rates are not going to hike in the next 12 months and you want to have the opportunity to refix at a lower rate or know where the market is going at the other end of the 1-2 years. I probably wouldn’t fix super long as I doubt rates are going to go back up in a hurry. In fact the Reserve Bank thinks global rates will remain low for some time.

Don’t hesitate to get in contact with us should you need help fixing or restructuring your mortgage. Email Wendy Ryan Kidd at Wendy@erskineowen.co.nz and if you have decided now is the time to invest fill in the form below or email Toby Hunn at thunn@erskineowen.co.nz