Frank Newman: Interest rate clarity

The big news of the week has been the Reserve Bank's decision to lower the Overnight Cash Rate (OCR) by a further 25 basis points to 2.5%.

Most of the trading banks reacted by lowering their flexible mortgage rates by the same amount. Kiwibank has the lowest variable rate mortgage on offer at 5.65%. Westpac is the only bank so far to cut a fixed-term rate, slicing 15 points off its two-year special rate to 4.24%. The lowest rate in the market place is 3.99% fixed for one year from SBS Bank. Interest rates are now at their lowest level in over 60 years.

Internationally, interest rates are likely to be influenced by the US Federal Reserve. The general expectation is that it will increase their cash rate, for the first time in nine years, which may flow through to the cost of offshore funds that our banks source.

The most significant part of the interest rate announcement was the commentary. Reserve Bank Governor, Graeme Wheeler, indicated no further changes were likely in the near future and that further reductions would only occur should our economy get hit by some adverse event like a long El Niño drought or a significant fall in dairy prices.

Most market punters (and those who are actually prepared to bet on interest rate changes via iPredict) are not expecting there to be any change in the first half of 2016. That means we are likely to have a very stable interest rate market, which is good news for those who have mortgages coming off fixed rates within the next six months.

This is on top of what's already been a good year for property investors. Regional property prices virtually everywhere have recovered strongly after flat-lining for many years. Much of this is due to the ‘Auckland effect’, and those regions closest to Auckland have done the best. Thanks to short-sighted planning rules a huge amount of equity has been created in the property market and some of that wealth has been translated into buying investment property in the regions.

So what are the prospects for the Auckland property market? While the construction industry is ramping up its building activity and consents are on the rise, demand from immigrants remains the most critical factor in Auckland. The Governor said, "Migration has been a huge factor in the Auckland market, plus the shortages that already existed there, the fifteen to twenty-five thousand houses." In other words, the new builds are struggling to keep up with new demand without even addressing the supply shortage.

As I see it the only significant risk to property prices in Auckland is migration. That's tap can turn on and off very quickly, and it was not so long ago that New Zealand had an outflow of migrants. How our nearest neighbour fares is obviously a key factor.  The Australian economy is still relatively weak and the chances of a revival in their fossil fuels sector is looking unlikely given the commitment the world leaders have made in Paris towards renewable energy.

I think one of the most astounding turnarounds has been the collapse of the oil price, down 65% since mid-2014. This is due to significant new supply coming out of the US, which is now the world's largest supplier of oil (funny how one never hears about Peak Oil any more now that the world is swimming in oil!). The OPEC cartel, which has held the world to ransom for decades, has been broken by the free market. It is now consumers who are benefiting instead of the blackmailers. The lower oil price is also resulting in lower travel costs, which is great news for our domestic and international tourist operators. What a great outcome and one reason I am so keen on free trade and the democratisation of market places. The freeing up of access into overseas markets also bodes well for New Zealand's future as a trading nation.

So 2015 has been a good year for property investors and things are looking pretty bright for 2016.