Following the Reserve Bank’s (RBNZ) announcement last Wednesday that it was leaving the Official Cash Rate (OCR) unchanged at 5.50% I thought you would be interested in knowing what impact I see this having now on mortgage rates and the housing market.
Leaving the OCR at 5.50% last week was a decision the RBNZ really had to make without knowing the latest annual inflation rate for New Zealand. These stats only became available today (19th July) and although the annual inflation rate has fallen now to 6% it remains stubbornly high and not falling fast enough to provide relief to borrowers and consumers. Many families are being impacted financially by rising mortgage rates and ongoing cost of living increases. Rising food prices were noted to be the biggest contributor to the annual inflation rate. Most bank economists had been forecasting annual inflation would squeak in just under 6%, at 5.9%. New Zealand is now entering its third year of unsustainable inflation – the longest period of high inflation since the early 1990s.
This latest update about the annual inflation rate could now increase the likelihood of another OCR increase on the 16th of August. Based on overseas trends where central banks have had to raise interest rates further after previously pausing, odds are that we could see another increase made next month. If realised this would see the OCR potentially sitting at 5.75%. As I have noted previously raising interest rates is the main tool that the RBNZ uses to reduce inflation. If the RBNZ don't act to combat inflation, then interest rates for borrowers will have to remain higher for longer. I do not see mortgage rates declining significantly until inflation is back at a level that the RBNZ is comfortable with. This could take some time to happen in New Zealand. Most economists don’t see the OCR being reduced now by the RBNZ until late 2024. Today’s annual inflation rate announcement seems to support that assessment.
With the above in mind, it is very hard currently for borrowers to know how long to fix their loan repayments for. If high inflation continues to remain “sticky” then interest rates for borrowers won’t be reducing anytime soon. I still tend to favour fixing for at least 18-24 months if a good discounted interest rate can be negotiated. Bank margins are also being squeezed now if you believe them, but the recent surprise increases made by banks over the past 2 weeks clearly illustrate they are sensitive to their profit margins being reduced. Regardless of how long interest rates remain at this level, the bigger question for most people with a mortgage is how low mortgage rates might eventually fall to again. I do not see a reason short of another pandemic or global financial crisis happening why fixed mortgage rates for Kiwi borrowers will fall to the levels that we saw back in 2020 & 2021. As one economist recently noted a dose of reality has returned to the global market now in terms of what borrowing money costs. After almost 3 years of unprecedented cheap money being made available by central banks globally, we are now entering what can be best be described as a “reset”.
Activity in the NZ housing market remains subdued. Many vendors have elected to take their homes off the market hoping to secure a better price for their property in the Spring or perhaps following a change of Government in October. I believe that most vendors will ultimately regret this decision. Housing affordability remains the key driver of house prices in New Zealand and for the bulk of Kiwis current house prices do not work with the interest rates we have now. There has been a lot of unhelpful speculation made by certain economists over the last few months as to where house prices might be heading over the next 2 years. When you drill down further you uncover that much of this commentary coming from economists is based around feedback provided by land agents and where their industry sees the market heading. The rate of house prices falls almost doubled in June compared to the month before according to CoreLogic. The property data firm’s House Price Index (HPI) showed June was the third month in a row that house price falls gained momentum, with prices falling an average 0.7% in May, 0.6% in April and then 1.2% in June. These findings call into question growing claims that the housing market has reached the bottom. It’s one thing to say that house prices have reached the bottom but another entirely to predict that prices will be rising again soon. The RBNZ has said that current house prices are not sustainable and as a country we need a level of affordability to return to our housing market. House prices have become massively inflated in recent years due in part to the RBNZ making the cost of borrowing money too cheap during the pandemic.
As I noted previously back in May the RBNZ’s decision to increase the allocation of above 80% loans that the banks can write has not seem a massive upsurge in 1st home buyers purchasing properties. Yes, there is more attendance at open homes but the economic reality of couples without a 20% deposit been able to afford a home loan when their fixed mortgage rate starts above 7% p.a. is seeing many properties left unsold and subsequently removed from the market. Affordability remains a key obstacle to these purchasers entering the market as it always has been. Again, as mentioned in May the RBNZ’s wish next year to force banks to introduce mandatory debt to income ratios (DTIs) when assessing a new home loan application would be a seismic shift in terms of the borrowing power of many credit worthy people. The potential impact that DTIs could have on property values in New Zealand cannot be overstated and needs to be seriously considered by anybody currently listing their home for sale. With the country now in the middle of Winter, in a recession and less than 90 days out from a general election there is certainly a lot for people to have to deal with.
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