22 May 2019

Cut to OCR may not be needed as house prices set to rise - Westpac

10:28 am on 22 May 2019

House prices may get a shot in the arm from current low interest rates and the government's decision to scrap any chance of a capital gains tax.

House sold sign, house auction sign, key.

Westpac's chief economist Dominick Stephens says house price inflation could reach 7 percent over the coming year, up from 1.3 percent. Photo: RNZ / 123rf

Westpac's chief economist Dominick Stephens says house price inflation could reach 7 percent over the coming year from 1.3 percent.

"The recent sharp drop in fixed mortgage rates, combined with the cancellation of capital gains tax, will be a major stimulus for house prices," he said.

"That should spur consumer spending and remove the need for a further OCR (official cash rate) reduction from the Reserve Bank (RBNZ)."

Mr Stephens said the dramatic decline in interest rates would be a game changer for the economy, which had been slowing in line with the global economy over the past year.

"But that is going to change, partly due to the dose of monetary stimulus that has just been delivered," he said.

Earlier this month the RBNZ cut the OCR to a record low 1.5 percent after being on holdings for more than two months, a move it said was aimed at getting "ahead of the curve" and helping to give support to the domestic economy. The central bank was ambivalent about whether any further cuts might be needed.

Westpac was forecasting the economy to grow just above 2 percent this year before rising.

"Over the coming year we are expecting the global economy to stabilise and the New Zealand economy to pick up to above 3 percent GDP growth."

He said low inflation had been a feature of the economy for several years and was not going away.

"New technologies and globalisation are holding consumer prices down across the world, including in New Zealand.

"Low inflation allows low interest rates, which cause higher asset prices and a period of stronger GDP growth."

However, he said the current economic environment was making it difficult for businesses to pass on cost increases.

"Business confidence is low, and firms have become wary of investing or employing.

"This business malaise will be hard to shift, although it might ease a little over the year ahead," Mr Stephens said.