The Reserve Bank (RBNZ) has reduced the official cash rate (OCR) from 1.50% to 1.00% – no surprise that they cut; but the size came as a bit of a shock. Clearly, this is supportive for the residential property market, although the pass-through to mortgage rates is likely to be less than 0.50%.
CoreLogic Senior Property Economist Kelvin Davidson comments:
The decision to lower the OCR was universally expected, but nobody was talking about a 0.50% cut (the expectation was for 0.25%). With such a big cut, you’d be forgiven for thinking that this has been driven by fear. However, with the forecasts that the RBNZ has also published today still envisaging decent economic performance, the motivation is likely to be ‘shock and awe’. They’ll hope this keeps the economy ticking over by delivering lots of stimulus all at once.
Clearly, today’s cash rate cut will support property demand and prices, especially when you also consider yesterday’s labour market figures showing that the unemployment rate remains very low. However, we doubt that an even lower OCR will cause the housing market to roar back to life – after all, mortgage rates already seem to have ‘priced in’ the low OCR environment, and the banks will probably also be looking to maintain their margins in advance of any extra capital requirements that could kick in from April next year.
On top of that, as we outlined in this morning’s CoreLogic QV House Price Index release, tight lending criteria (income/expense & serviceability testing), are arguably the biggest restraint on the residential property market at present. This means a lower OCR and/or mortgage rates would have little effect anyway.
Overall, the remaining 4-5 months of the year will be really interesting for monetary policy and the housing market, even if further OCR cuts may now no longer be seen. The key things to watch for will be a probable loosening of the LVR rules in November, but on the other hand, some of that fuel being taken away by scope for tighter bank capital requirements.