Reserve Bank Announcement and Beyond: The Good, The Bad and the Downright Ugly

Thursdays announcement from the Reserve Bank was all-in-all fairly true to economists expectations, that said, it’s ramifications could be somewhat indecipherable to the lay-person.

The Official Cash Rate
The Good: The long forecasted rise in the OCR looks to have been delayed, with the Reserve Bank stating “we expect to keep the OCR unchanged [at 2.5%] through to the end of the year”.
The Bad: Eventually it has to rise for the sake of the Nz economy, and when it does so mortgage prices will rise too.

Housing and the NZ Economy
The Good: It’s looking increasingly certain that the New Zealand economy is on the mend. Graeme Wheeler recently stated “growth in the New Zealand economy is picking up” and that this is “becoming more widespread across sectors”.

The Bad: Unfortunately, this national recovery is at being driven by the housing booms in our major cities. While this may initially help our economy, it’s a massive barrier for those looking for their first foray into the housing market.

The Ugly: Some estimates predict that the inflation of house prices may reach 14% in the next year- locking thousands of New Zealanders out of market in favor of foreign investors.

The Global Situation
The Good: It also looks as if the US, Australian, Chinese and Japanese economies are strengthening also. Considering that these are our four largest trade partners, and all are large drivers of our tourism sector, this will likely have positive ramifications for the NZ economy.

The Bad: Unfortunately, as the US’s economy improves, their Federal Reserve is considering abandoning their macro-prudential tools earlier than previously forecast. The result of this- more expensive lending for New Zealand banks, and therefore more expensive mortgages for all of us.

The Ugly: The Federal Reserves “anticipated exit” from its quantitative easing measures is already having an effect. Speculative bankers have been already hiking the prices of mortgages as a result of this for the last month or so, partially driving the recent upward trend in mortgage prices. This is set to increase even further in the event that the quantitative easing measures are abandoned in the near future.

What was left out?
Prior to this, the Reserve Bank had been advocating for ‘speed limits’ to be put in place to help control the burgeoning housing market that is saturated with low LVR loans. So why was it not mentioned?

Critics have had various theories- ranging from that currently they are not necessary as banks have responded and started self-regulating to that the government is holding off implementing these measures for as long as possible with an election year looming. Either way- they are likely going to come into effect sometime soon, and just add even more difficulty for those looking for their first home.

What this all means for mortgagees and those who will be in the near future?
Overall house prices are rising, and demand has skyrocketed- needless to day it’s not the ideal time to be looking to break into the housing market. That said, whether it will get any better in the future is largely uncertain.

If you are already in the market, or determined to be, it’s likely that interest rates are going to rise. Between the US Federal Reserve’s measures and our own Reserve Banks’ todays rates may be the cheapest we’ll see for a while yet.

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