There is a complete consensus that the Reserve Bank will cut the official cash rate.  However, the size of the cut is still uncertain.

Mearly a fortnight ago, safe money was on a 50bp cut with a large number of commentators suggesting 75bp.  To be honest, after coming out of December MPS it felt like another 75 in January was pretty likely.  Of course, since then world economic growth forecasts have collapsed, and domestic economic indicators have deteriorated – leading analysts to push for a 100+bp cut.

It is a tough call in such a fluid environment, but I’d be of the view that the Bank won’t go past 100.  Why?  Well commodity prices have steadied since December, credit markets have started to thaw, and a bunch of essential data points still haven’t been released – namely the December quarter employment figures.  If those figures are bad they can just cut 100 again in March – and they have a set of forecasts (from the MPS) to justify what they are doing.

Still – I have been consistently surprised by how much the Bank has been willing to cut the OCR 🙂 .  We will see tomorrow.

The Dom post has two articles on the potential shortage of property in New Zealand, one on builders capacity (the labour force of traders) and another on the response of rents to the undersupply.

Now we have talked about this before.  Structural factors have prevented developers and builders from getting funding (go credit rationing) which has lead to a collapse in house building activity.  However, a fall off in building will help to support prices by making property more scarce.

In the short term the recent drop in residential building will prevent a free-fall in prices.  The question then is, how many of these structural factors are temporary (credit rationing) and how many are permanent (constraints on land use, RMA?)?

If we only have temporary factors keeping down building then we can expect a sharp decline in prices once this has worked through the system and the “undersupply” has been dealt with.  If there are structural factors (which National and Labour both believed) then there will be some support to prices until these factors are dealt with.

Another thing I would point out.  There is a feeling out there that house price falls=bad, greater housing affordability=good.  However, house price falls=greater housing affordability – so unless bad=good I think this is a factor we have to keep in mind when discussing the housing market …

It appears that the Labour party has decided that, in some cases, contracts shouldn’t be enforced. Phil Goff has suggested that people should be able to easily break out of their fixed rate contracts to jump on a lower interest rate.

I tell you what, while we’re at it why don’t we also make it that employers can break contracts and make employees reapply for their jobs when wage rates are falling (when unemployment is high)? Why don’t we make it the contracts are only a suggestion and have no actual legal force in setting the price and quantity in a transaction.

I’ll tell you why – because contracts act as a mechanism to prevent “hold-up” between agents. It allows trade to happen in places where issues of bargaining power prevent efficient trade.

People committed to a mortgage in knowledge of the costs and risks – why should we suddenly make banks pay for that? If the government goes around intervening in contracts, will the banks be as willing to loan to people who want to buy homes anymore?

Wow, I’m glad that we don’t have Labour in charge in this tough economic climate …

Update:  Anti-Dismal covers here.  He provides a tighter argument for hold-up than my rant 😉