Peak of 4.5% would feel higher: ASB
An official cash rate of just 4.5% would stretch Auckland house price affordability to a level similar to that seen at the peak of the last cycle, ASB’s economists say.
Thursday, May 1st 2014, 6:00AM
by Susan Edmunds
The bank has released its latest Quarterly Economic Forecasts, in which it outlines its expectations for the trajectory of the OCR.
ASB’s economists expect a peak of 4.5% this cycle, lower than the Reserve Bank’s most recent interest rate forecasts imply.
They say the effect of interest rate rises will be felt quickly because three-quarters of home loans are still on a floating rate or fixed for less than 12 months. Debt servicing costs would rise quickly for a lot of households.
“Higher interest rates will be very potent in restraining borrowing growth and containing house price growth, in turn keeping inflation sufficiently in check. An OCR of 4.5% would imply the floating mortgage rate will eventually reach around 7.75%, give or take.”
Higher interest rates would also raise the bar for those trying to get into the housing market, they said. “Given the combination of higher house prices and higher interest rates expected over the next couple of years, housing affordability, measured by debt servicing, for new entrants to the market is likely to become stretched quite quickly.”
In cities where prices are higher, it will be felt even more intensely. "Even with an OCR of 4.5%, in Auckland affordability would become stretched to a similar degree as was seen at the peak of the previous cycle. This suggests that OCR increases will be very effective in slowing the housing market, which we expect to cool."
But they do not expect house price inflation to stop altogether. “Even though house price growth is already moderating – and will continue to do so – the underlying need to house a strongly-growing population means house price inflation will slow gradually rather than abruptly in centres that have been heating up.”
The report said the 4.5% peak would be roughly neutral, although there was a risk the OCR might peak slightly higher if inflation threatened to stay above 2% in the medium term, or the true neutral rate turned out to lie closer to 5%.
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