Another bank joins OCR fray

Westpac earlier this week forecast it will rise to 6% and stay there for about nine months.

Any rise above 5.5% in the OCR could mean a rise in interest rates, but not necessarily a further fall in house prices. 

ANZ economists Sharon Zollner and David Croy say they expect another 25bps rise next week and another in July, taking the OCR to 5.75%.

“There will be as much art and strategy for the RBNZ in determining the OCR track as science, given the degree of uncertainty and the number of moving parts,” say Zollner and Croy. 

“However, if the RBNZ is more worried about housing green shoots and migration than we expect, they could signal a peak closer to 6%. Whatever the suggested peak for the OCR, the RBNZ is unlikely to corroborate market expectations of cuts by early next year,” they say.

However, it is likely to have little effect on house prices, which have already fallen about 16% from their peak, but immigration will be an upward influence on the OCR track. It is running at the equivalent of 100,000 net additional people per year. 

Zollner and Croy say the housing market is showing signs of life, and immigrants add to housing  demand – and demand more generally.

“The wealth effects of house prices going modestly higher may not be huge, particularly if unemployment is starting to creep higher,” they say. But when the RBNZ is imploring consumers to “cool their jets”, tolerance for any housing market pick-up is likely to be limited.

The relative impacts on demand and supply (and their timing) will depend on details about the mix of immigrants and emigrants that are poorly understood in real time, say Zollner and Croy.

“The RBNZ’s own research has indicated that despite offsetting impacts on supply and demand, overall, strong net migration tends to be inflationary, at least for a time.”

Other banks don’t agree with their rivals' predictions.

Kiwibank chief economist Jarrod Kerr says if the OCR goes higher than 5.5% as Westpac and ANZ predict, it will put more downward pressure on house prices. Drops in house values will be deeper and longer, he says.

He doesn’t think the OCR will rise above 5.5% as data supports the Reserve Bank’s view the economy is cooling quite quickly.

The OCR is only one lever that affects the housing market, says Stephen Toplis, BNZ’s head of research.

He says it is unlikely the OCR will rise above 5.5% and even if it did it is not going to affect house prices to any great extent.

Toplis doesn’t expect any further weakness in house prices. Any pressure from OCR rises, he says, should be offset by increased demand in housing from migrants.

Economists at ASB expect a 25bps OCR rise next week staying at 5.5% until the second half of next year followed by gradual cutbanks until mid-2025.

ASB has changed its housing forecasts and now has a 17% peak-to-trough fall in house prices nationally (previously -21%), with prices expected to bottom out later this year.

Senior economist Mark Smith says the bank no longer expects house prices to fall as much as previously anticipated.

“The market looks to be finding a floor earlier than anticipated and both near-term and medium-term indicators are looking more favourable. On the whole, high population growth, strong migration and constrained housing supply and a pause from the RBNZ, followed by cuts in 2024, should be a potent combo for house prices.”