Following the Reserve Bank’s 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 the housing market and mortgage rates.
The Reserve Bank of New Zealand (RBNZ) has taken a wait and see approach to whether it applies any additional increases to the OCR to combat inflation. This follows the pattern of what other central banks overseas are currently doing. Whilst some economists are forecasting that the RBNZ will need to make another increase as soon as November more ominous is RBNZ Governor Adrian Orr’s comments that the OCR could now remain unchanged until June 2025. For borrowers, this scenario would mean that they are unlikely to see fixed mortgage rates reducing much now over the next 12-18 months. The previous commentary that mortgage rates might stay higher for longer in New Zealand looks increasingly likely. The RBNZ leaving interest rates too low for too long during the pandemic has ultimately resulted in homeowners with a mortgage facing a steep increase in their loan repayments when they come to refix.
Mr Orr has noted that current Government spending remains a significant challenge in terms of the RBNZ getting inflation back under control. Depending on October’s election result we might see inflation falling faster if a new Government takes office and reprioritises spending. I don’t think however the outlook for borrowers is looking particularly rosy over the next 18 months as they are unlikely to see the cost associated with servicing a mortgage becoming much cheaper. As central banks around the world are all realising now the massive money printing and record low interest rates from the pandemic resulted in high domestic inflation becoming very entrenched. Until the RBNZ can be confident that inflation is well and truly contained it won’t be reducing the OCR significantly. With the above in mind most people with a mortgage are currently electing to fix for 18 months to 2 years.
When it comes to the future direction of house prices there is a growing chorus of real estate agents and property development companies predicting that house prices are about to take off again. Personally, I don’t buy into this narrative as affordability is now the key issue dictating the direction house prices will take in the years ahead. Thanks to the RBNZ keeping interest rates too low for too long we witnessed record house price inflation during the pandemic. House prices in New Zealand have subsequently fallen due to a lack of affordability. With mortgage rates back at historic norms most borrowers can’t afford the loan repayments necessary to service the home loan needed to purchase a home. This is why house prices haven’t stopped falling yet and even once they do, they won’t suddenly start rising again, at least not significantly. Granted we have witnessed some small rises in house prices recently in regions such as Wellington, but this due to a lack of available listings rather than any sudden appetite from purchasers prepared to pay more. It remains firmly a buyers market.
Many vendors are postponing the sale of their property until the Summer or next year hoping they will get a better offer then. They are likely to regret their decision. House price inflation during the pandemic was unprecedented been driven by very cheap interest rates which are simply no longer available. Most houses remain overpriced based on the current mortgage rates now available and what most people physically need to borrow as a home loan from a bank. A home loan of $600,000 taken over 30 years cost as little as $1,050 per fortnight during the pandemic. This same loan now costs over $1,800 per fortnight at a time when cost-of-living increases are seeing many families stretched financially. Bank "test rates" which lenders use to stress test new home loans are now just below 9%. This means the borrowing power of most people has also reduced considerably. Previously back in late 2020 most banks were stress testing home loans at rates as low as 5.35%.
I don’t believe then that house prices have hit a floor yet but bizarrely the RBNZ Governor has made the comment that he now sees current house prices as been around a "sustainable level". As one economist quipped last week “When the Reserve Bank says house prices are around that sustainable level... if that’s sustainable to them, I’d hate to see what’s unsustainable.” Migration has been suggested as a possible reason for house prices to start rising again but the bulk of the new immigrants coming to New Zealand are here to fill low wage jobs. They won’t be buying a house. Most will rent with friends and family and send every dollar they can back home. National are yet to announce whether they will repeal the current ban on foreign buyers owning residential property here and if this ban was lifted, we could see this impacting house prices. It’s hard to see this change been very popular with Kiwi voters especially when most countries in the Asia Pacific region also ban non-residents from owning houses having seen the impact on their housing markets. With the very strong possibility that Debt to income ratios (DTIs) will soon be forced on the banks next year (further eroding the borrowing power of potential home owners) it's difficult to see a scenario in which house prices will be rising significantly. The RBNZ has previously said that DTIs are necessary now to keep house prices sustainable.
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