This cut in the Official Cash Rate has been very much anticipated by most. We all should be aware of the huge hurt the global economy is in and the huge effect this is having on almost every single market we know. This rate drop is hoped to bring back some business confidence which is at a 30 year low which has caused our dollar to drop to approx .52 USD. Instantly after the OCR cut as you can see by this image the New Zealand dollar dropped 1 whole cent of the American Dollar and will most likely drop another 1 cent before it may rallay.
Its hard out there and with fuel prices creeping back up, Fonterras payout drop, house sales declining there isn’t alot to be optimistic about right now. But todays OCR drop of 150 bias points will hopefully go some way in helping that.
Here are the facts.
OCR before today was at 5.0% now it has dropped by 1.5% to 3.5%. The lowest in New Zealand history.
The OCR was at its peak at 8.25% which was in June last year.
On the flip side of this rate cut we will see our New Zealand Dollar drop slightly which is good for the exporters. The NZ OCR is still well higher than most of the western nations. With most of the western nations having official cash rates around 0 – 1%. Does this mean we still have a way to go before the activity in the economy picks up again. I feel there is still a way to go before the economy picks up and people feel comfortable to buy things.
Should soon be able to buy property at cash flow positive with interest rates creeping down to these levels.
8 thoughts on “OCR Cut 29th January 2009 to 3.5%”
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Interest rate drop or house price drop – which benefits you more?
Right now it is the interest rate drop that is having far more impact than the house price drop. Don’t believe me?
OK here goes – for ease of calculation and comparing apples with apples assume a 100% financed interest only purchase in both cases:
House worth $600,000
Mortgage at 9% = $54,000 per year
Mortgage drops to 5% = $30,000 per year
SAVING $24,000 per year on interest rate drop alone
House worth $600,000
Mortage at 9% =$54,000 per year
House drops to $552,000 (say 8% drop – Qoutable Value say its only been about 8%)
Mortgage at 9% = $49,680 per year
SAVING $4,320 per year on house price drop alone
So on a yearly basis a 45% drop in interest rates from 9% to 5% (which is close to happening) will benefit you more than a 8% drop in house prices if interest rates stay the same.
Now buyers can actually benefit from a combination of BOTH house price drop and interest rate drop. What a win win for buyers! So it’s no wonder they are highly active again, open homes are busy and multiple offers are being presented on homes!
So take a long hard look at the figures above. If you find a home you like and the interest rate is very low then why not just buy it, go floating for a while and fix when interest rates are even lower!
Waiting for house prices to drop 20% or 30% now appears to be a MASSIVE gamble with interest rates so low!
Totally agree with you there Ross. A first home buyer with some good savings can buy some very good buys out there. With interest rates down, prices down its good. When you hear investors talking about positive flowing properties things must be starting to go in the right direction in terms of affordability.
Hiya Deon,
always love your blog and posts, informative as ever
Thanks Peter. Was good to hear from you and to hear your doing well. Sorry couldnt talk to long. Just so dam busy at the moment. Will call you later on.
I am about to come off my fixed term interest rate. I am going to to be saving 11,000 a year on the new rate as they are today.
Yes I have heard of this happening alot. Was just listening to the radio and reading the paper at how many people are breaking their mortgages to have a lower rate. But the cost of doing so seems to be very very high. I just heard of a case it was going to cost someone $48,000 to break their mortgage. All I can say to that is it must be a huge mortgage and ouch!
House prices WILL drop further, It make me laugh when I read bloggs in New Zealand and a large number of people in the general populace (mainly realestate agents) think that the NZ market will be immune to what is happening in the World.
American house prices have plumeted, U.K house prices have plumeted, French house prices have plumeted, global trade has fallen through the floor, need I go on. Current U.K predictions are that hosue prices will correct themsleves by upto 55% which will mean that an average hosue will return to the value it would hae been at in 1990!!! The same is true for other countries aswell.
We are only just starting to see some of the effects of these on this ‘rock’ in the south pacific and believe me when I say people are beginning to lose there jobs, and you can have interest rates at 0% but it won’t make any difference if they cannot pay the debt.
My advice, hold tight, keep your money in the lowest risk place you can find, i.e. not property and get rid of any debt as soon as possible to put yourself in a good strong position for when the world economy turns around.
Great advise Rob and its very much a good arguement and I see where you are coming from. Its hard not to look at the facts and say it wont happen to us. Unfortunately we are sometimes a little nieve about things. But we will continue on and we will move on and upwards again in time.