Last OCR call before the election: What will the Reserve Bank do?

1. No OCR rise this week, but November odds are finely balanced

It seems almost certain that the Reserve Bank of New Zealand will hold the Official Cash Rate at 5.5% on Wednesday. However, the final cash rate decision for the year, in November, seems more delicately balanced. On one hand, recent falls in projected dairy prices and the lagged effects that are still be fully felt from previous monetary policy tightening – as existing mortgage holders reprice up to current interest rates – probably argue for no change. But the sense that inflation itself is proving more stubborn than expected suggests the opposite. Of course, even if the OCR did rise again before the end of the year, the big increases in mortgage rates have already been seen – and generally, they’ve been absorbed, thanks to the low unemployment rate.

2. Mortgage lending turns the corner

Mortgage lending flows totalled $5.8bn in August, across loans for house purchase, top-ups, and bank switches. That was $0.4bn higher than the same month last year, the first annual rise in about two years. In other words, this may well prove to be the start of an upturn in mortgage lending activity, to go alongside the early signs of a rise for sales volumes and house prices.

These Reserve Bank figures showed that interest-only lending flows remain ‘under control’, and this option could still be a useful back-stop for anybody who might start to struggle with full principal repayments in the coming months. Meanwhile, the breakdown by loan to value ratio shows that lending to investors without the required 35% deposit is still almost non-existent, but also that loans to investors with a 35-40% deposit (now allowed under the looser LVR settings from 1st June) and to owner-occupiers with less than a 20% deposit have begun to rise. In turn, much of that lending to owner-occupiers with a low deposit actually just goes to first home buyers.

Overall, it’s early days, but the latest mortgage lending figures add to other evidence that the housing market downturn has (all but) ended. However, with interest rates unlikely to fall anytime soon, this recovery could prove to be fairly subdued by past standards.

3. Economic indicators remain encouraging

Broadly speaking, the overall message from last week’s economic data – i.e. the NZ Activity Index, filled jobs, and ANZ business & consumer confidence – was positive. That is, activity measures are still rising (albeit gradually) and indicators of cost/price pressures remain on a slowly declining trend. To be fair, you’d probably still call the economy ‘patchy’ and a strong recovery doesn’t seem likely anytime soon, but we’ll take what we can get.

CoreLogic chief economist Kelvin Davidson: "With interest rates unlikely to fall anytime soon, the recovery could prove to be fairly subdued by past standards." Photo / Peter Meecham

4. Dwelling consents falling but hopefully not too far

This week, Stats NZ will publish the new dwelling consent figures for August, which are likely to show a further decline. For now, however, consents are actually still at a pretty high level compared to past cycles, and builders remain pretty busy working through the previous pipeline of approved dwellings. But given the problems we’ve had in the past with shortages of housing, we just have to hope that this decline in dwelling approvals (and hence subsequent construction volumes) doesn’t run too long or get too deep.

5. Fixing shorter again?

Finally for this week, the Reserve Bank will publish fresh stats on the terms people are choosing when they take out new loans – either floating, or fixed, and if the latter, how long they’re locking in for. There’s still certainty in taking say a three-year fix, but given a reasonably flat curve (i.e. most fixed rates at a similar level regardless of length), July’s data showed that shorter fixes became more popular again – perhaps because people are wary of the risk of over-paying later, if mortgage rates fall more quickly over the medium term. I wouldn’t be surprised if 1-2 year fixes (rather than three years) stayed popular in August.

- Kelvin Davidson is chief economist at property insights firm CoreLogic