The good and bad from the new lockdown

Padlock and chain against green door

Two weeks ago, I wrote that come Spring we might see banks making some small reductions in short-term fixed interest rates in order to capture new customers, in an environment where house prices were not falling. Now, courtesy of the change in Auckland’s and the rest of the country’s Alert level, the chances have both gone up, and down that this will happen.

Let’s start with the case for interest rates not falling

The outlook for the economy has got slightly worse as a result of the new community outbreak of Covid-19, and we have to expect that one result will be some buyers backing away from the housing market. The outbreak increases the chances that my underlying expectation of house prices falling by up to 5% will come true. So far, the data show prices as down on average only by 1.2% nationwide.

If banks feel less confidence that house prices have stabilised, they will pull back from seeking new customers and slow down the very gradual easing in lending rules evident over the past three weeks.

But there are two good reasons why the case for interest rate reductions has in fact risen. First, we have knowledge now of what happens during a lockdown, and what happens after. When a lockdown is in place, we cut our spending and put off big decisions. When a lockdown ends, we catch up on delayed spending and dive into the housing market hoping for a bargain and higher listings.

This suggests that while real estate activity may cool down for the period of lockdown (hopefully just three days, but maybe slightly longer), a new wave of buyers will eventually appear. Knowing this, there is a good chance that many recently frustrated buyers – both investors and first home buyers – will actually boost their house-searching efforts. Some people will anticipate less competition at auctions and will try to take advantage of that.

Therefore, I am not of the view that the new lockdown will actually have all that much impact in the very short-term.

The RBNZ stepping in

The second reason why scope for interest rate cuts has increased, is that the Reserve Bank has adopted what we call a very “dovish” view on monetary policy in their quarterly economic assessment released on August 12.

They expressed concern about persistently low inflation and high unemployment and the need for action to be taken to try and address both measures. They have boosted their scope for printing money over a now extended period. Plus, they spent some time indicating that more work is being done on policies such as a negative official cash rate (currently +0.25%), and direct lending of long-term money to banks to finance low-cost lending to bank customers.

Will we see negative interest rates?

The chances of negative interest rates have gone up, but they are still low, especially in light of the growth we can see in the economy recently which delivers momentum heading into and hopefully through to the other side of this new lockdown of very uncertain duration. But the dovish assessment and comments by the Reserve Bank were written down before they and we learnt of this new outbreak.

As a result, wholesale interest rates have fallen very slightly and this has slightly increased scope for cuts in mortgage rates – though not by much this side of Christmas. Next year however, and the years after that, the chances have increased that the 0.25% cash rate will be cut, and that it will stay low, at 0.25% or less, for potentially longer than we were all thinking at the start of this week.

What does this mean for borrowers and investors?

For borrowers the news has just got better, and for simple investors in term deposits it has got worse. And for property owners? Short-term price risks have shifted slightly lower. But the longer-term price outlook has actually brightened on the back of lower borrowing costs for longer.

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How does this impact me?