NZ residential rental market news, April 8

Leading opinions on the OCR rise, Tony Alexander's latest newsletter boiled down, and a new ANZ property report.

The bullet points from this week:

ANZ Property Focus Report

Financial market volatility has increased due to recent bank collapses in the US and contagion spreading to Switzerland. 
Policy makers and regulators are trying to contain systemic risk in the financial system, but it's uncertain whether the situation is near containment or if further wobbles are yet to come. 
The potential impacts of these events on New Zealand housing stem mainly from two channels: direct and indirect impacts on credit conditions, and direct and indirect impacts on the real economy – with plenty of overlap between the two. 
Changes in the pricing of risk can impact the cost of banks sourcing funding, the availability of that funding, and how banks allocate credit. 
New Zealand regulators believe the cost is worth paying, and the country may see some benefit via a lower susceptibility to contagion. 
Credit conditions may be tighter than otherwise when an adverse financial shock comes along, leading to higher interest rates, lower credit availability, or both. 
If NZ remains isolated from global events or if they get resolved quickly, interest rates may take longer to get to restrictive levels, possibly meaning that rates need to stay high for longer. 
The financial shock may mean the OCR doesn't have to do as much work as otherwise, or it may mean the OCR has to do more – there's no way to tell, and the housing market data continue to evolve consistently with ANZ's forecast. 
At this stage, recent developments haven't affected ANZ's forecasts for the OCR and house prices. 
There is a growing risk that the housing market or the broader economy won't go the way ANZ expects.
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Average house values drop $100K

Across New Zealand, average house values have dipped by $100,000, with Auckland and Wellington seeing the largest drops. 
Outside the main centres, there are still some quite divergent trends in property values, with Whanganui and Palmerston North avoiding falls while Queenstown actually increased by 1.8%.  
The national average dwelling value declined by 2.4% over three months to March and declined by 10.5% over 12 months to March.  
However, property prices are still around 30% higher than pre-COVID levels and the recent drops are consistent with the market cycle's trend. 
The first marker for this downturn coming towards its conclusion is a mortgage rate peak. 
Banks are unlikely to make significant changes to mortgage interest rates due to the market's already tight monetary policy. 
Mortgage availability remains restricted, and market activity is low, leading to continued drops in property values. 
However, relative resilience for employment, rising net migration, and perhaps some scope for investors to sneak back into the market towards election time, could lead to property sales activity creeping higher later in 2023.  
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Record lows could signal recovery

Barfoot & Thompson sold 765 properties in March, a figure which is down 35% from the previous year and the lowest March sales figure since the Global Financial Crisis. 
However, sales were up 86.6% on those in February, and the highest number of sales made in a month since May 2022. 
Selling prices appeared stable, with an average selling price of $1,102,933 in March compared to $1,101,980 in February. 
Managing Director Peter Thompson says the increase from February is a sign of recovery as buyer confidence lifts. 
Barfoot & Thompson sold 60 properties for more than $2 million and 11 for $3 million or more. 
The pipeline of conditional sales has increased significantly, indicating a strong flow of sales going unconditional in April. 
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The OCR has been raised to 5.25%

The Monetary Policy Committee increased the Official Cash Rate (OCR) by 50 basis points, from 4.75 percent to 5.25 percent. 
The OCR needs to increase to return inflation to the 1-3 percent target range over the medium term. 
Inflation is still too high and persistent, and employment is beyond its maximum sustainable level. 
Economic activity over the December quarter was lower than anticipated in the February Monetary Policy Statement. 
Demand continues to significantly outpace the economy's supply capacity, thereby maintaining pressure on annual inflation. 
Recent severe weather events in the North Island have led to higher prices for some goods and services. 
Over the medium term, economic activity is anticipated to be supported by rebuilding efforts in the aftermath of the weather events. 
New Zealand's economic growth is expected to slow through 2023.
The Committee agreed that the OCR needs to be at a level that will reduce inflation and inflation expectations to within the target range over the medium term. 
Maintaining the current level of lending rates for households and businesses is necessary to achieve this, along with a rise in deposit rates. 
New Zealand's financial system is well positioned to manage through a period of slower economic activity. 
There is no material conflict between lowering inflation and maintaining financial stability in New Zealand. 
Credit conditions have not tightened substantially and while increasing, arrears on mortgages and other debts remain at low levels.
The Reserve Bank has other policy tools available to address financial stability risks which can be used if needed. 
Housing prices are returning to more sustainable levels due to current monetary policy settings. 
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OCR Opinions: Core Logic

Cyclone Gabrielle may push up consumer prices and economic activity via the rebuild.
OCR increased due to current and future inflation pressures across the NZ economy.
A reasonable assumption is that we get one more 0.25% OCR rise on May 24.
Flow-through from OCR change to mortgage rates is likely to be limited as tighter monetary policy has already been 'priced in' by banks.
It still seems likely that mortgage rates are at or close to a peak.
New borrowers still face tough serviceability testing and a continued wave of existing mortgages are yet to be repriced to current rates.
Net migration is rising and businesses are looking to retain current workers due to skills shortages, which could bolster the housing market.
Uncertainty is still high, but there is still light at the end of the tunnel for the housing market later in 2023.
Election could see mortgage interest deductibility reinstated and some investor demand returning.
RBNZ wants to emphasise that they're not about to 'go soft' on inflation and suddenly lower the OCR anytime soon.
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OCR Opinions: Opes Partners

The Reserve Bank increased the OCR yesterday by 0.5%, which was higher than expected and surprised economists. 
National's Nicola Willis described it as a 'punch in the guts' for Kiwis with mortgages. 
Despite the increase, interest rates may not increase by that much, and here are three reasons why:
The purpose of the OCR increase is to stop banks from reducing their interest rates.
The Reserve Bank wants banks to keep mortgage interest rates where they are and increase their deposit rates. 
Banks are reducing their rates because their costs are down. They don't borrow cash from the Reserve Bank to lend to mortgage borrowers, but instead get the money from their own funds, wholesale money markets, and term deposits.
Opes predicts that the 1-year mortgage interest rate will hit 7% in April, while ANZ suggests that interest rates have already peaked at around 6.6%. The Reserve Bank expects the OCR to peak at 5.5% later in May, which is the same as what they've been projecting for the last 4.5 months.
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OCR Opinions: Tony Alexander

While noting that the economy is smaller than expected, the RBNZ expressed concern about a number of things including the following:
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The Reserve Bank is concerned about the recent declines in wholesale bank borrowing costs because of events offshore could lead to a round of reductions in retail interest rates. Therefore, they have raised the cash rate 0.5% to get those wholesale borrowing costs back up and to prevent retail rate cuts. 
RBNZ do not actually intend that today’s 0.5% rate rise leads to higher mortgage rates – but they have continued their pressure on banks to raise deposit rates. 
Around $170bn worth of mortgages are up for rate resetting in the coming year. 
Capacity pressures are easing for businesses. 
The easing of difficulties in securing skilled and unskilled labor bodes well for slowing wage growth. 
Global inflation is easing off slowly. 
US bank collapses will cause weakness in world growth and inflation. 
The cash rate is likely to have peaked at 5.25% based on the change of tone from RBNZ 
The one-year wholesale interest rate has increased to 5.55%. 
The three-year rate is near 4.7%. 
Uncertainties remain quite extreme. 
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Alexander's latest housing market insights

Factors working towards a rise in housing demand: 
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Factors working against a rise in housing demand:  
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Also: 
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