Falling Official Cash Rate could put pressure on housing crisis if it dips into negatives – economist

After the official cash rate dropped to its lowest level yet last week, an economist says if it dips into the negatives it could put more pressure on New Zealand's housing crisis.

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Oliver Hartwich from the NZ Initiative talked about the possibility of going into the negatives after the OCR dropped to a record low last week. Source: Breakfast

Economist Oliver Hartwich's analysis comes after the Reserve Bank on Wednesday dropped the OCR, which is the rate of interest which the central bank charges on overnight loans to commercial banks, by 0.5 percentage points to one per cent - a new record low.

Economists have since been pondering the idea of it dropping into the negatives.

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Retail banks have already started cutting interest rates on home loans after the surprise move from the Reserve Bank today. Source: 1 NEWS

Oliver Hartwich from the NZ Initiative told TVNZ1's Breakfast this morning if the OCR dropped into the negatives it would mean people would essentially be paying banks a fee to look after their money.

The good thing would be for people paying off a mortgage they would pay less on that, as well as the Government paying less on their loans.

But when people realise they aren't getting monetary returns from banks anymore on their term deposits and bank accounts they would try to find alternative investments including property, Mr Hartwich said.

"Imagine if we went in this negative interest territory. You could imagine in New Zealand you would see more pressure on the housing market, you would see house prices spiraling up once against because if you can't put your money in the bank you will probably put it in property and therefore you're pushing up the prices."

He said it was in a market where New Zealand was already in need of housing to become more affordable.

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The message comes in the wake of this week’s shock cut to the official cash rate. Source: 1 NEWS

Since 2014 in Germany though, some banks had started charging their customers fees for holding their money. It was introduced modestly at first with just a smaller bank charging wealthy customers, but it has since become popular with other banks.

"The European Bank has now announced that the next step they're going to take will also be in the easing direction which means that they will go deeper into the narrative and therefore more banks in Europe, more banks in Germany are likely to spread it and soon," Mr Harwich said.

"You might actually start to have to pay the bank - at least in Germany - from the first year you put in and this is a scenario that's now looming for New Zealand as well."