OCR expected to drop. What will happen next?

The OCR is expected to drop in November 10 (after the US election).

This will be the eighth and last time this year the RBNZ reviews the OCR.

A lower OCR generally hurts savers, and usually makes the NZ dollar weaker relative to the US dollar.

What impact will it have on the property market?

It all depends on what banks do.

If banks pass on the rates onto borrowers, then it continues to drive property demand and support the property market.

If banks decide to keep the margin and not reduce mortgage interest rates, property demand will still continue at it current rate fuelled by other factors such as immigration and population growth.

Why is the Reserve Bank reducing the OCR?

On the subject of why the Reserve Bank is lowering the OCR, just remember the usual policy response is to increase the OCR and mortgage rates during a property boom. This normally dampens demand but it takes a few years to kick into effect.

So why the Reserve Bank is lowering the OCR during this property boom? Since 2009, OCR has fallen from over 7% to 2%.

As interest rates fall, households are encouraged to take on more and more debt. Up to a point, where if interest rates were to rise (even by 1 or 2%), many households would have difficulties servicing their debt. Apparently, the Reserve Bank is facing what the Federal Reserve faced in the US. During the recession, the Federal Reserve kept lowering interest rates and encouraging people to increase their appetite for debt. Unfortunately, people’s incomes haven’t increased that much. So if the Fed  increased the interest rate (or Fed rate), many households will feel the pain. If the Fed doesn’t increase the Fed rate, certain sectors of the economy are seeing high rates of inflation.

In some ways, this is what has happened to NZ. Urged on by lower mortgage rates, households have taken on larger mortgages to serve increasing house prices and consumption (new cars and holidays). Now someday, or shall we say, one day, when interest rates were to rise, people who have overleveraged themselves may find themselves struggling to service their debts. The RBNZ recognises this, so is lowering interest rates to keep mortgage repayments more affordable. At the same time, it has introduced borrowing criteria so fewer people qualify for mortgages. This is the RBNZ’s solution to containing the property market without increasing interest rates.

But should the RBNZ increase the OCR one day, you don’t want to be caught in a situation where you can’t met your mortgage repayments.

That’s why our recommendation at Property Guide 360, is to buy carefully. Avoid overleveraging and overpaying for properties if you can.

 

 

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