CHIEF ECONOMIST CORNER: A FIRESIDE CHAT
ANZ Chief Economist Cameron Bagrie provides some quick answers to topical housing market questions. He concludes 1) that LVR restrictions could be loosened from mid-2018, but likely in a staggered manner; 2) despite the economics (a supply shortage) telling us prices will keep rising in Auckland, the fact that rents haven’t moved to reflect the shortage shows us house prices have been heavily influenced by interest rates and credit – and these factors are set to be less supportive going forward; 3) the banks’ funding gap is still a key indicator and it has closed up, which suggests some of the extreme competitive pressure in the deposit space could ease and the credit wheels could turn a little faster; 4) falling Auckland house prices and rising construction costs could spell trouble in the developer space; and 5) while weaker housing activity has traditionally turned the broader economy lower, that link is expected to be broken to some degree this cycle. Cameron Bagrie
This suggests to us here at Onion that there could still be more value to come out of the Auckland market for buyers. We have already seen some softening but we wouldn't expect the fall to be of any significant scale so keep your eyes peeled for that bargain while the opportuntiy exists.
Long-term fundamentals (population growth, migration) are going head to head with cyclical drivers (mortgage rates bottoming out, affordability, credit availability and LVR restrictions). While you can’t ignore the fundamentals, cyclical drivers – such as the ability to borrow and at what interest rate – are hugely relevant, particularly when they push the market up a long way in a short space of time. Auckland is the case in point, and we expect the cyclical drivers to work in a reciprocal manner and keep activity constrained, despite an obvious shortage. If rents were rising sharply, we’d have more sympathy for the fundamentals dominating over the coming year. Cameron Bagrie
Some key economic drivers have either peaked or are set to peak, and the housing cycle has turned. New drivers will come to fore in the form of commodity prices, fiscal policy and rising household incomes. We expect the economic expansion to extend further, with modest GDP growth over the years ahead. Inflation is expected to remain low and the same applies to the OCR. An extended period of election-related uncertainty is unwelcome and has the ability to derail the economy’s transition from the “old” drivers to the “new”. Cameron Bagrie
MORTGAGE BORROWING STRATEGY
Average mortgage rates nudged a little lower in what we call the belly (2-3 year) of the curve but retained the familiar tick-shape. From a pure “lowest is best” assessment, the 1 year rate stands out. Slight movements lower in the 2 and 3 year rates have improved their break-evens but not sufficiently for us to move from favouring the 1 year rate as the sweet spot. Longer-term rates remain very low by historic standards and offer certainty. The downside is that we struggle to see where inflation is going to come from to necessitate major lifts in the OCR. Cameron Bagrie