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Borrowing from a bank may be about to get a lot harder.

Following the Reserve Bank’s announcement yesterday that it was increasing the Official Cash Rate by 0.25% to 0.50% (first increase made since July 2014) I thought you would be interested in knowing what impact I see this now having on the housing market.

That interest rates are now increasing should be a surprise to no one. Governor Orr & his merry team of academics at 2 The Terrace Wellington have made a fine mess of reducing interest rates too low too quickly. This has consequently seen housing in New Zealand become most investors new best friend. Surprise surprise we now have runaway house price inflation that won’t be stopping anytime soon as the return you can make from investing in property is going to continue to exceed that been offered by any other form of investment for the foreseeable future. That the supposed economic experts in charge at didn’t anticipate this might happen is more than a little concerning. I would like to see a select committee held to take a good hard look at some of the Reserve Bank’s decisions it has made over the last 24 months as I do not believe New Zealanders are being well served now by the current people in charge at the Reserve Bank.

Interest rates increasing now is not the worry that most borrowers should be focusing their attention on. Being able to borrow money towards a property purchase below 5% p.a. is still regarded historically as been incredibly cheap. Provided you have access to a 20% deposit you will likely still be able to secure an interest rate below 4% for the immediate future. The changes happening behind the scenes at the banks currently are what current & potential home owners should be paying close attention to. Changes being made to the Credit Contracts & Consumer Finance (CCCF) Act) will see a significantly higher level of scrutiny placed now on borrowers seeking finance from a bank to the point where some borrowers will now be unsuccessful with their loan applications. Banks are really struggling currently with some of the compliance requirements now being forced on them to the point where in my opinion it will ultimately see house prices slowing as access to credit becomes more & more difficult. This does not benefit NZ consumers. The Reserve Bank also looks set to get its wish to introduce Debt to income ratios and make no mistake about it these will definitely impact those property sales that are currently being enjoyed by so many vendors.

People sitting on the fence about purchasing a property should if they are able to go and make that purchase now. Whilst property prices must at some stage go through a correction (current house price inflation is unsustainable) if a borrower’s ability to secure a home loan approval with their bank is soon to be cut in half they may well find that they will never get on the property ladder. Debt to income ratios if they are introduced and extended to owner occupied mortgages will be the biggest game changer to the New Zealand housing market that we have witnessed in decades. I sincerely hope that the Government who has to ok debt to income ratios only allows the Reserve Bank to apply these lending restrictions against investor property mortgages. Most investors are able to endure them. Given though the track record of politicians in New Zealand making bad decisions when it comes to introducing new policies and pieces of legislation I am not at all confident that first home buyers in particular won’t end up paying the price now for Governor Orr’s very poor management of monetary policy. Of course a change of Government at the next election could see Debt to income ratios then being scrapped.

On the subject of where I see house prices heading meantime demand will continue to outweigh supply and the rush of immigration that will occur when the borders re-open (likely next year) will ensure house prices continue to go up well into double digits for the foreseeable future.

Whilst it has been wise for most borrowers post COVID-19 to remain on a short term interest rate going forward it appears that fixing longer is now the better strategy. As always borrowers need to decide themselves though which fixed term best suits them financially. It’s important to stress that New Zealand’s current rate environment over the last 16+ odd months has been largely artificial having been determined by COVID-19’s financial impact on our economy. Prior to early-mid 2020 interest rates for borrowers had been expected to increase with July 2020 being the initial intended start date for the above extra bank capital requirements. These capital increases are now scheduled to be introduced in July 2022 and will put further pressure on interest rates to rise.

Please let me know if you would like to discuss the current interest rate you are on with your bank or are needing assistance with finance to purchase a new property.

Kind Regards

Simon

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