OCR & Market update: Winter is here, but the (slow) thaw is on its way

Housing Market Written by John Bolton, Apr 5 2023

Earlier today, the Reserve Bank made its second Monetary Policy announcement of 2023, opting to push through another double increase, and take our Official Cash Rate (OCR) from 4.75% up to 5.25%. So what does this latest OCR outcome mean?

So, what does this latest OCR outcome mean?

It’s safe to say the markets (including us) did not see this one coming.

The industry had been pretty unanimous in expecting the RBNZ to go with a smaller 0.25% increase this afternoon, in light of growing evidence of the pain that 10 back-to-back OCR hikes are causing for Kiwi borrowers.

That includes Centrix data released this week showing mortgage arrears were up 23 per cent in February, compared to the same time last year, while overall arrears had grown 8 per cent. Meanwhile, our poor Government is $1 billion behind its forecasted tax take.

In other words, all the numbers are increasingly pointing to the RBNZ having succeeded in its mission to break the economy. And more damage is still to come.

But today’s result represents what I’d call a “path of least regrets” approach for the RBNZ.

In recent weeks, wholesale interest rates had started to fall in response to a weaker economic outlook. And that’s the last thing the RBNZ wants at this stage – for interest rates to come down too early, and risk inflation taking off again.  

By playing things as it has, the RBNZ is hoping to bring those wholesale rates back up again slightly, and just hold things where they are.

The flipside for the economy, of course, is the danger of going too hard, and sending us hurtling for a hard landing. The RBNZ knows that with this decision today, the likelihood of that has increased – but it would rather that than lose its grip on inflation again.

The one silver lining here is that signs are still good we're nearing peak rates.

This 0.50% increase was already largely priced into the market – so while floating rates will increase, longer-term fixed rates should stay the same, and shorter-term rates should only increase slightly.

Only time will tell whether the RBNZ has made the right decision by staying the course – and that’ll all depend on the data that comes through in the next six months or so.

What’s happening in the housing market?

It was an extremely quiet end to 2022, after that fire and brimstone OCR announcement in November left most potential buyers feeling completely spooked.

By the numbers, house sales over that period were they lowest they’d been in at least 20 years – or actually even worse on a per capita basis, after factoring in the massive population growth we’ve had in the last few decades.

While all this uncertainty has seen buyers pull back, the fundamental need – to buy, upgrade, downsize, move cities – hasn’t disappeared.

The demand has just been deferred until people have enough confidence in market conditions to start dipping their toes in again.

The biggest factor here I think, again, has been interest rates. People were really terrified that mortgage rates were going to end up at around 9.00% - but now that things are starting to stabilise on that front, and 9.00% looks less and less likely, that fear is dissipating.

Rates are still causing pain for people, of course, but the perceived worst-case scenario has come back a lot.  

Then, between house price falls (by as much as 20% in Auckland and Wellington), pay increases, a still-tight labour market acting as a bit of a buffer against unemployment, there’s a few things driving confidence.

And as a result, we’re starting to see people trickling back into the market again. The market’s not going to suddenly heat up, but buyers are starting to make their return.

On the flip side, increasingly right now we’re seeing sellers pull back from the market.  

Last month, the level of new listings was the lowest it’s been in about 15 years.

It’s pretty typical of the New Zealand market in situations where house prices have fallen, and unemployment isn’t high enough for people to need to sell. Some vendors won’t want to sell at (what they perceive as) a huge discount, so they choose to take their property off the market instead.

With low levels of activity amongst both buyers and sellers, that has frozen the market and that will gradually see the market stabilise.

Eventually, we’ll see more buyers start to make their return, because they have ongoing needs, and then sellers will gradually come back into the market as they see demand increase.

Notwithstanding some crazy, black swan event that changes everything, I think economists' predictions that the market would start to settle around the middle of this year, will probably be about right.

Winter’s here in the housing market, but it’s not the Arctic chill it was at the start of the year  – and there are a few little green shoots starting to come through.

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