Will the declining OCR spark a housing revival?

Real estate companies have reported sales increases over the past month - are these the first green shoots of a housing market revival? 

The development comes as the official cash rate (OCR) was surprisingly slashed by another half per cent this week, down to 1.0 per cent. 

As the OCR and interest rates continue to drop - “There’s scope for fixed mortgage rates to fall further before the end of the year,” says Westpac Chief Economist Dominick Stephens. 

“When you drop interest rates the housing market responds.”  

“This could spark a housing market revival,” he said. 

Core Logic says property sales across New Zealand in June were 7% higher than a year earlier, however, the total for Q2 as a whole was 3% lower than the same period last year. 

Auckland real estate company Apartment Specialists say they have seen a rise in sales over the last month and are bullish on a revival. 

“I don’t see this trend changing any time soon, last month our sales increased by 40%,” Director of Apartment Specialists Andrew Murray said. 

“Money is cheaper now than it was in 2008 before the global financial crisis.   

“Borrowing $1 million for a mortgage in 2008 is the equivalent of borrowing around $400,000 today,” Murray says. 

This is all down to low interest rates and the low OCR, which some analysts are forecasting to decline even further by November. 

Despite the positive outlook though, New Zealand was listed as having one of the most unsustainable housing markets in the world, according to Bloomberg. 

“Canada and New Zealand seem to be on the most unsustainable path, with the cost of housing compared with wages the highest in the world in both countries. 

“There’s a risk that a global round of monetary easing may fuel housing bubbles.  While central bankers are focused on avoiding a global economic downturn, looser monetary policy could sow the seeds of the next crisis,” economist Niraj Shah said. 

Barfoot & Thompson have also seen their sales figures move in an upward direction though. 

“Sales were up week on week for July.  The OCR may have been a factor but add to that low rates, migration to Auckland and other factors that have been consistent for some time,” Barfoot & Thompson’s Managing Director Peter Thompson said. 

A standard two-year home loan at the moment is around 3.79% and the current OCR is 1.0%. 

“We’ve long expected the Reserve Bank to cut the OCR in August but now we’re looking at them moving again in November, which would take the OCR to a new low by the end of the year,” Westpac’s Chief Economist Dominick Stephens says. 

Stephens says that New Zealand has entered a search-for-yield environment where low interest rates are sparking higher asset prices down the line. 

However, the economist says that the closer to zero the OCR is, the less of an impact it has on mortgages. 

But there is a wider impact on the New Zealand economy on a whole.   

“Low business confidence has been causing a lack of investment for some time and it’s spilling over to the labour market,” Stephens says. 

“There’s been a sharp drop in online job ads, and that could suggest some higher unemployment to come. 

“The exchange rate has also risen which won’t help exporters,” he said. 

It is possible for the OCR to go below zero, but the lower the OCR goes, the less impact on actual interest rates such as term deposits rates or mortgage rates is has. 

As the OCR falls, the average interest rate the bank is paying on deposits does not fall one-for-one. 

Consequently, banks can’t reduce mortgage rates one-for-one when the OCR falls to very low levels, Stephens says. 

“When the OCR gets close to zero, we would expect the Government to do more than try to achieve 2% inflation, by borrowing and spending. 

“By this stage the interest rate on Government debt ought to be very low, so it would make sense for the Government to borrow,” he said.