OCR 28/04/2016

 OCR unchanged at 2.25%

With a further reduction being suggested.

Reserve Bank Governor Graeme Wheeler today left the Official Cash Rate unchanged at 2.25 percent.
 
He cited his main reasons as:

  • The outlook for global growth has deteriorated over recent months.
  • Prices for some commodities, including oil, have picked up but remain weak.
  • Domestically, the economy is being supported by strong inward migration, construction activity, tourism, and accommodative monetary policy.
  • Dairy export prices have improved slightly, but are below break-even levels for most farmers.
  • The exchange rate remains higher than appropriate given New Zealand’s low commodity export prices.

On housing:

  • There are some indications that house price inflation in Auckland may be picking up.
  • House prices remain at very high levels and additional housing supply is needed.
  • Housing market pressures are building in some other regions.

On the possibility of further rate cuts:

  • The main domestic risks relate to weakness in the dairy sector,
  • the decline in inflation expectations,
  • the possibility of continued high net immigration, and
  • pressures in the housing market.

Therefore:

  • Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data.

 

A word of caution on the investment property groundswell:

As we see more and more people look to "leverage' their existing property and get an investment property or two, we thought it timely to remember that this is an investment, which comes with risk. Risk is necessary for returns. Risk is also to be mitigated as much as possible.

So, in your analysis, ensure you factor in as a minimum:

  • Property values can go up as well as down. It was only 7 years ago where negative equity (loan is higher than the property value) was occurring.
  • What have you allowed for vacancy rates (some mining towns in Australia are currently shut down - the entire town - but the mortgage still has to be paid with no prospect of tenants for some time)?
  • What have you allowed for maintenance and repairs?
  • What happens when rates go up? Where is your pain point (stress test this on our mortgage calculator here)
  • If you are investing out of your area/home town, what research have you conducted around sales history, rental returns, vacancy rates, insurance risks?
  • Are you diversified? Imagine owning several rental properties in the Red Zone for the past 5 years...

The other question to ask yourself - what does all this media attention mean and what will it lead to?

We are seeing unprecedented media commentary on the housing market. In the last two weeks, half a dozen articles each day per publication have popped up and growing.

There is a saying in the stockmarket world along these lines: "when you start getting stock tips from taxi drivers, it's time to get out".

Let me be clear - we are not making a prediction nor providing any advice or guidance around where the property market is headed. Nor are we saying to sell or not to buy.

We're just saying that in amongst the hype, excitement, and emotion; do your homework and make sure you have several back up plans. Better yet, talked to your Authorised Financial Advisers!

 

Interest Rates

There was some pressure on the long term rates in the last 6 weeks due to reduced liquidity in the international markets. That seems to have eased again for the 3,4,5 and the long term rates are once more pretty attractive. Interestingly, the 7 year swap is still ticking up and we'll keep a close eye on this.

Here are the current Swap Rates

and here is the yield curve. The blue line is as at today; the red line is this time last year, and the yellow is from 2013.

The floating rate is the least attractive - talk to us if you would like to discuss a "back door short term float" to reduce your interest and increase your principal decimation.

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