Sat. Jun 22nd, 2024


More major bank economists are predicting that there will be no further interest rate cuts on 2021 as the market continues to soar. Investors re-claim market share just as new restrictions are being floated.

Here is what you need to know:

No Further Interest Rate Cuts in 2021 Predicts Economists

The list of economists no longer expecting the Reserve Bank to cut official interest rates this year has grown larger, with Westpac’s chief economist Dominick Stephens predicting that house price inflation is going to peak at 20% (from a pick of 16% previously) in the bank’s latest OCR forecast update.

Stephens has cited the surging house prices as a significant part of the reason why he’s no longer picking two cuts to the OCR this year, “We expect annual house price inflation will peak at 20% later this year, which is not an environment conducive to further OCR cuts.”

Not very long ago at all the broad expectation in the marketplace was that the RBNZ would early this year take the Official Cash Rate down from the current 0.25% levels into minus territory. But that expectation’s slipping away fast in the face of much better-than-expected economic figures and the steaming hot housing market.

Stephens says the housing market “has outstripped even our very bullish expectations”.

“Now is a time for the RBNZ to sit back and observe how the stimulus it has provided translates from house prices to the economy and then to inflation, rather than to cut further. It just does not seem likely that the RBNZ would cut the OCR amid 20% house price inflation.”

Other economists to move away recently from expecting a negative OCR have included those at ANZ, who now see just one further OCR cut to 0.1% in May. And global independent economic researchers Capital Economics forecast earlier this week that the RBNZ will start raising interest rates again in the second half of 2022.

Property Investors Could Face Restrictions as Market Share Increases

According to property data company CoreLogic, it is becoming increasingly likely that residential property investors will face further restrictions on their activities in 2021, possibly including a loan-to-valuation ratio (LVR) restriction of 40% for new mortgages, and an extension of the Bright Line Test for tax on capital gains beyond the current five-year threshold.

According to CoreLogic’s Buyer Classification Series, investors accounted for 27% of residential property purchases in the fourth quarter of last year, outstripping purchases by first home buyers who had a 23% share. “The last time that mortgaged investors had a market share near this high was 28% back in Q3 2016, when the Reserve Bank imposed a 40% deposit requirement,” CoreLogic Senior Property Economist Kelvin Davidson said.

“While we have already seen the Reserve Bank move to reinstate LVR speed limits at 30% from March 1, the question is, will this be the end point? We think a move to 40% is possible if investor participation continues to push higher.”

Davidson said an extension of the Bright Line Test could also be on the cards and pointed out that the Reserve Bank had already requested the Government give it the ability to impose debt-to-income limits on mortgage borrowing.

-by Ravi Mehta from Professional Financial Solutions

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