12 Sep 2008

Housing sector will fall further, says Bollard

7:49 pm on 12 September 2008

The bank cut the Official Cash Rate on Thursday by a larger than expected half a percentage point to 7.5%.

Most economists were picking a more modest drop of a quarter of a percentage point.

Mortgage brokers say the cut will immediately benefit first-home buyers, and some predict it will accelerate an increase in business sparked by falling house prices.

Dr Bollard told Morning Report some of that may be premature optimism, as the housing sector has some way to fall, and the rebalancing of the household sector is only about half-way through.

He says the general interest rate track is very close to market expectations, and the Reserve Bank is front-loading an interest rate reduction in order to encourage retail banks to pass on the cut faster than they might otherwise have done.

Dr Bollard expects financial markets to settle down in a couple of days, as the bank is clear that Thursday's move does not imply any difference in its approach.

Mortgage Brokers Association spokesperson Bruce Patten says with both house prices and interest rates dropping, first-home buyers are at last beginning to re-enter the market.

Sue Tierney, from Mortgages by Design, says in the past four weeks she has seen more first-home buyers than for some years.

Brokers say they are advising clients to fix their interest rate for as short a time possible.

The TSB points out the drop in interest rates will have a negative impact on those people who have already paid off their house and now rely on their deposits for income.

Banks respond

Major retail banks have all dropped at least some of their home mortgage rates and are now turning their attentions to rates paid to savers.

All of the big banks have now dropped their variable home loan rates by half a percent following the Reserve Bank's decision to cut the cash rate to 7.5%.

On Friday, Westpac cut its term deposit rates for cash savings accounts by up to a half percent, meaning its online saving rates have fallen to 6.95%.

BNZ says its rates will also drop by up to half a percent from Saturday. Kiwibank says it is likely to follow suit over the next week.

ANZ and National Banks have not reduced their savings rates as yet.