Interest Rate expectations barely budge

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ASB Commentary, Auckland, May 22, 2018

An ASB Housing Confidence Survey (see another story posted earlier) found that a majority of respondents continue to expect higher interest rates, but expectations have barely budged compared to three months earlier, and are well below those evident a year ago.

A breakdown of the net quarterly figures shows (a) 38% expect higher interest rates over the coming year, while only 6% expect lower interest rates (was 37% and 6% last quarter); (b) The net balance of 32% was little changed on the 31% in January and compared to a net 51% in April 2017; (c) 30% expect interest rates to stay the same (30%), while 26% don’t know (26%). Regions where house price expectations were the strongest (notably Other North Island (+36%) and Other South Island (+37%)) tended to be more confident that interest rates would rise. Net balances for Auckland (+27%) and Canterbury (+30%) were below the nationwide average.

Carded mortgage interest rates have been drifting down and are currently at historically-low levels. However, the general consensus is that interest rates will start to drift higher over coming years.

OCR to rise next year

Indeed, we expect the OCR to move up from August 2019, but assume a gradual path of policy tightening and historically low OCR endpoint this cycle. This should ensure that mortgage interest rates stay reasonably low over the next few years.

Not as bad a time to buy as over the last two years Net balances remained in negative territory, with house price pessimists outnumbering optimists in most regions.

Encouragingly, however, this net balance is now considerably less negative than it was a year ago (-17%), with only a net 6% believing it not to be a good time to purchase, the least negative net balance in two years.

This signals that although respondents are generally cautious on the outlook, there is (slowly) growing confidence that a soft landing for the housing market could be achieved.

Breaking down the net quarterly nationwide figure shows: (a) 14% say it is a good time to buy, while 20% say it is a bad time (was 13% and 20% last quarter); (b) The difference is the net-6% plotted opposite (was -7% last quarter); (c) 53% say it is neither good nor bad (was 53%), and 14% don’t know (14%) (d) Canterbury (+6%) was the only region where a majority of respondents consider it a good time to buy, with the net balance for the region the highest since the devastating earthquakes in early 2011 (e) The Auckland net balance (-6%) was in line with nationwide averages.

Negative in South

Given their recent resurgence in house prices, net balances were the most negative in the rest of the North Island (-10) and the Rest of the South Island (-7%).

Net balances for all of the regions were considerably less negative than a year ago.

In Summary

In summary, House price expectations rebounded nationwide and for all of the broad regional areas. Auckland price expectations lifted to a 12-month high (19%).

Price expectations were the most upbeat in the Rest of the South Island (+45%) and the Rest of the North Island (+43%).

Despite some falls for fixed mortgage rates, respondents continue to expect interest rates to increase in the next 12 months (net 32%), fractionally up on last quarter, but not to the same extent as 12 months ago.

Most respondents still see it as a bad time to buy, but views are the least pessimistic in two years. Canterbury respondents view it as the best time to buy since early 2011.

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