The Jack that house built (was very cheap to finance)
One of the things that was easy to miss in the RBNZ rate decision was the mention of the RBNZ needing to reference the housing market in their monetary policy decisions.Why is this? Firstly, it is because there has been a huge increase in New Zealand house prices. This is partly being fuelled by the very low interest rates.
What does this mean?
Well importantly it means that the RBNZ may be limited in using easy monetary policy. If they have to consider the housing market when making decision the political pressure is that they do nothing to help that rise in house prices continue. Take a look at the chart below and you can see that as interest rates have been falling, house prices have been inflating.
But what else does it mean?
Well for some time I have been thinking that with interest rates so low many people have only ever known low mortgage rates. The idea of 15 & 16% mortgages for those living in most major economies is unthinkable. There is no way they could take the stress. Many people, taking their first mortgage in particular, are unaware of the impact a fluctuating rate will have on their re-payments. The long and short of this is that more central banks may have to start considering the housing market. This now works both ways. Interest rates will be kept from going low if the housing market is hot. Interest rates will be kept from going high to avoid defaults.
This is one are to watch in the future and means the NZDJPY remains a buy on the dips as the political mandate should keep the NZDJPY supported.
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