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Interest rates rise, house prices fall as the CCCFA changes impact borrowers.

Following the announcement made by the Reserve Bank yesterday that it was increasing the Official Cash Rate (OCR) to 2% I thought it was timely to update you on the current state of the housing market and what has been happening at the banks lately in terms of the CCCFA changes introduced last year.


The increase made to the OCR was anticipated given the current level of inflation in New Zealand. Expect to see further increases made to interest rates this year but eventually these increases will cease. The Reserve Bank runs the potential risk of triggering a recession if they increase the cost of borrowing too much. The Banks at present are not busy lending money due to the impact made by last year’s CCCFA changes. Many people’s borrowing power towards a home loan have been considerably reduced. The LVR restrictions & increase in interest rates witnessed this year are not the main catalyst for house prices falling. The CCCFA changes have had the biggest impact on people been able to buy and sell property. Even instances of people been unable to secure vehicle finance are now starting to have an impact on the economy. We expect to see some relaxation of the CCCFA changes next month in June but to date none of the banks have been told exactly when this will happen. Any relaxation of the CCCFA changes could see a mini resurgence of purchasers again rushing to secure properties with plenty of stock now available to choose from.


There were very few crumbs on offer for borrowers from the Finance Minister last week in the Budget. This was unsurprising given the Government’s own stated goal of seeing house prices in New Zealand fall. The first home grant caps been raised for first home buyers was encouraging news but they still fall well short of what most people need to pay currently to enter the market. In Wellington for example the new caps for existing properties are now increased slightly to $750,000 and for new builds it’s $925,000.


House prices in parts of the country are probably heading now for a 20% correction and many properties sold this year have already experienced a sizeable reduction from what vendors would have realistically been expecting to sell for in 2021. It’s important to stress that given the heat of the housing market over the last 24-36 months the only gains been lost currently are those realised over the last 12 months. Vendors need to come to the terms with the new reality of purchasers been impacted by the CCCFA changes, the rising cost of borrowing (and living) and people’s understandable apprehension of overpaying. Good well presented properties will still sell if they are priced accordingly. It’s really important when selling that you list your property with a land agent who understands the market we are now in.


The building industry appears to be on the verge of a major correction with building costs souring beyond what most people are prepared to pay. Based on examples I am seeing I would caution anybody looking to do a new build project be it a progress payment or turn-key build. Material shortages for building companies have now become a serious impediment to new homes been constructed on time and to budget. People choosing to do a build need to enter such projects with both eyes wide open to fixed price contracts been changed on them & significant delays to when they can expect to settle. Both of these issues can end up becoming a major issue when it comes to securing finance at a bank even with a pre approval already in place. We have seen banks becoming less comfortable now assisting with new builds as they are fully aware of what is currently happening in the building industry. I personally see many construction companies unfortunately falling into financial difficulties over the next 24 months time.


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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