Following the Reserve Bank’s announcement made on the 4th of October that it was leaving the Official Cash Rate (OCR) unchanged at 5.50%, the country subsequently opting for a change of Government on the 14th of October and the latest inflation stats being released on the 17th of October I thought you would be interested in knowing what impact I see this all having on the housing market and mortgage rates.
With the timing of the election few were surprised the Reserve Bank (RBNZ) didn’t move the official cash rate (OCR). Again, the timing of the release of the latest inflation stats left the RBNZ with few options but to do nothing. Although it’s a step in the right direction we have seen inflation falling again, the worry for the RBNZ is the slow pace at which this is happening. To get within the RBNZ’s comfort level whereby they can start to reduce the OCR could take at this pace 2 years. RBNZ Governor Adrian Orr has previously commented that the OCR might have to remain unchanged until mid-2025. At the rate inflation is falling this may yet become a reality. Odds are then that another OCR increase will occur on the 29th of November or 28th of February in 2024. Clearly the banks see this been a likelihood hence some have recently increased their advertised mortgage rates again. Their excuse about the cost of offshore funds having increased I don't buy.
For borrowers, if we see inflation continuing to remain “sticky” then it's unlikely fixed mortgage rates will reduce over the next 12-18 months. Again, the previous commentary that interest rates might have to stay higher for longer in New Zealand looks increasingly likely. Whilst it would be great to believe some of the more optimistic economist’s predications that an OCR cut will occur in May next year, I don’t see this becoming a reality myself. Until the RBNZ can be confident that inflation is well and truly contained it won’t be reducing the OCR and based on the above this may take the bulk of 2024 to accomplish. With the above in mind most people with a mortgage are still electing to fix their repayments for 18 months or 2 years.
Prior to the election the RBNZ had noted Government spending as being a significant challenge in terms of getting inflation back under control. If a National, ACT and possibly NZ First Government follow through on their election pledge to rein in core Government spending then we may see inflation falling faster. With Christmas ahead though and a sizeable number of borrowers still enjoying record low interest rates on their home loans until 2024 & 2025 it’s hard to see the inflation genie being put back in its bottle. As central banks around the world are realising now the massive money printing and record low interest rates from the pandemic has resulted in high domestic inflation becoming very entrenched. People forget that historically interest rates take a lot longer to fall than they do to rise.
When it comes to the future direction of house prices affordability will be the key issue dictating the direction that prices will now take in the years ahead. House prices in New Zealand have fallen over the last 2 years due to a lack of affordability. With interest rates having returned to their historic levels, significant cost-of-living increases occurring and the strong possibility that interest rates will remain at their current levels for some time it’s hard to see why house prices are going to increase significantly as some predict. The economic reality is that most properties remain overpriced based on the mortgage rates now available and what most people physically need to borrow as a home loan from a bank. It’s important to remember that house price inflation during the pandemic was unprecedented driven at the time by very cheap interest rates which are simply no longer available. At present many families are being stretched financially and a home loan remains their single biggest financial commitment. Yes, we have witnessed some rises in house prices but this because of a lack of available listings with many vendors having purposefully postponed the sale of their property until after the election. I believe that an anticipated flood of new listings over the Spring and Summer months will see house prices contained as purchasers will have far more many properties available to choose from. Vendors need to come to terms with the economic reality of where the housing market is at now when they decide a realistic sale price for their property.
The bank "test rates" used by all the lenders to stress test new mortgages keep increasing. ANZ's is now sitting at 9.10% as of today. This continues to reduce the borrowing power of purchasers impacting what they can offer for a property. Like some economists I continue to question whether current house prices in New Zealand are sustainable. As I mentioned previously migration won't cause house prices to suddenly start rising again. The bulk of these new immigrants coming into the country are here to fill low wage jobs. They won’t be buying a house, and most will rent with their friends and family sending every dollar they can back home. With the threat that debt to income ratios (DTIs) will be forced on the banks in 2024 (further eroding the borrowing power of potential homeowners) it's difficult to see a scenario in which house prices will rise significantly over the next 12 months. If I was a vendor currently thinking about selling my property, I would be realising this sale as soon as possible.
Please let me know if you would like to discuss the current mortgage rate that you are on with your bank or are needing assistance with finance to purchase a new property or refinance.
Kind Regards
Simon