RBNZ signals that the OCR has finally peaked. How will this affect the housing market?

Guest Post from Tony Alexander

In my last column on the housing market, I discussed a great number of factors pointing towards the housing market soon turning around. Nothing has happened in the past fortnight to make me less convinced that we are at or close to the bottom of the housing market cycle in terms of the volume of real estate turnover and prices.

Some of the important things in play include recent good growth in the number of jobs in New Zealand, a decline in residential construction which most people still aren't aware of and maybe will be a little bit surprised about once they start learning of it later on this year. The rental market is also tightening up and my most recent survey of residential property investors has shown a further increase in the ease with which landlords are securing good tenants.

We've also got an easing in LVR rules coming along and have clear evidence that banks are generally easing up on their lending criteria as they try to win the relatively small volume of new mortgage lending business which is currently available.

In my last column, I mentioned the likelihood that fixed mortgage rates have peaked and I think we can now take that as written. The Reserve Bank have just met market expectations by increasing their official cash rate by 0.25% so it now sits at 5.50%. But there had been a building belief in recent weeks that they would lift their predicted peak in the rate from 5.50% to perhaps 6.00%.

In fact, the Reserve Bank have said that 5.50% is still as high as they think they will need to take the cash rate.

Even so, they don't envisage cutting it until late in 2024. They noted that there was no discussion of raising the official cash rate by 0.50% and in fact the debate was between 0.25% or no increase at all.

They noted that inflation is tracking lower than they expected, and that even the price pressures they expected from recent flooding events were turning out to be less than expected. They noted that the shrinkage in the economy of 0.6% in the December quarter was not what they were expecting, and it is also likely they did not pick the 1.4% decline in retail spending volumes announced just a few hours before their policy review came out.

What happens now?

If we are at the bottom, does that mean the housing market now suddenly picks up strongly straight away? Or will it sit flat for perhaps three years as a lot of people optimistically believe?

The truth is that in a unique post-pandemic environment we don't really know.

All I can do is emphasise that there is a two year queue of people who want to buy a property but have held off buying initially because in 2021 stocks were low and prices were silly, and then in 2022 prices were falling and people wanted to wait for the bottom. Now, the talk will be all about house prices bottoming out, and the question is how quickly that two year queue of people will be activated.

We don't know. But the potential pay off for those who want to buy from waiting a few more months does not look particularly great, at least in the main cities. In the regions there is a risk of overbuilding and some population flow post-pandemic back to the cities. It is the cities that will benefit most from the boom in net migration inflows.

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