OCR Rate Cut – What Does it Mean for the Housing Market and Interest Rates

Our last interest rate article discussed the long term historical average rate sitting below 5%. We now have an OCR rate cut of 25 basis points, providing more evidence that rates will not be rising beyond 5% for the foreseeable future.

What is perhaps more interesting is there is a widely held view that we will get another rate cut before the end of the year if banks don’t adopt the full 25 bps points in their rates. Overnight activity shows cuts up to about 6-14 bps.

And perhaps even more interesting again is what has driven this rate cut. CPI remains on the low end of the 1-3% target, with no signs of moving. GDP is at 2% with no signs of upward movement, due in large part to the bottom falling out of Kiwibuild. So we have slow economic growth, low inflation, and a subdued housing market – a boost is certainly needed.

The irony of all this, however, is the situation is very similar to my son desperately wanting to buy a jet boat. He is 9 and is prepared to pay the money and take the risk of driving the boat….but he can’t get finance for it!

Low-interest rates and zero capital gains tax are great, but if we can’t borrow against our houses to grow our businesses, to pay for the renovation, to buy the next investment property, then how much stimulus will the rate cut provide? Don’t forget NZ is largely a nation of small businesses who typically leverage their homes for business capital.

I maintain that the lever that really needs to be lent on is banks relaxing their serviceability criteria when assessing loans. While they are using a 7.5% rate in their calculations a rate cut of 25 basis points is largely irrelevant.

Something has to give. Kiwibuild is failing (if it hasn’t already), we aren’t building enough homes, and finance is hard to get – but on the other hand the population continues to grow so before it gets easier to buy, rents will likely increase strongly.

Finally on interest rates – I think I’ll float, or fix short term until we hear about the next potential rate cut.