Following the Reserve Bank’s (RBNZ) announcement yesterday the 28th of February that it was leaving the Official Cash Rate (OCR) unchanged at 5.50 percent, I thought you would be interested in knowing what impact I see this having on the housing market and interest rates.
I have been saying since last year that inflation has not been falling fast enough. The RBNZ has said now that the OCR needs to remain at a restrictive level for a sustained period of time to ensure inflation returns to the 1 to 3 percent target. The central bank still has a lot of work left to do then to achieve this. Whilst inflation has fallen to 4.7% at the end of last year (from its peak of 7.3%. back in June 2022) the Reserve Bank cannot declare victory yet. The RBNZ disclosed to media yesterday that it discussed whether to increase the OCR again but voted not to.
The new Government’s legislation introduced in Parliament late last year was very clear in its mandate to refocus the central bank’s attention on inflation been its top priority. It’s concerning that our central bank which is supposed to be staffed by monetary experts needs reminding by our politicians what its job is. Mr Orr now seems to be attempting to explain why he has been trying to tackle inflation over the medium term, rather than targeting a specific timeframe. He still refuses to acknowledge that he kept interest rates too low for too long during the pandemic. New Zealanders are now paying the price for that mismanagement.
Mr Orr recently stressed and reiterated the importance of the inflation target, how seriously the bank takes that target, and how hard they’ll work to achieve that target. He seems to be becoming increasingly exasperated by the media and certain commentators who are under the illusion that the RBNZ will be making reductions to the OCR soon. The RBNZ’s desire is that the higher interest rates already in place will change consumer and business activity, dampening demand over time to lessen inflationary pressures. We are not yet at a point where the RBNZ would feel like it can say this has happened.
So, what should borrowers with a home loan be doing currently? As I mentioned last month homeowners should expect no immediate relief from the current mortgage rates being advertised. There are still good discounts available, but we are unlikely to see significant reductions to the cost of borrowing money for some time unfortunately. Currently most people are still electing to fix for 12 or 18 months which should give them a good degree of protection during that timeframe. Again, when interest rates fall historically, they tend to reduce much more slowly than when they increase.
Based on recent statistics released house prices in most parts of the country have at least doubled over the past ten years. Prices though are now getting so far from incomes that for prices to double again over the next decade would require a change in lending. Mortgages would need to be a lot more accessible with lending criteria becoming easier and/or the Reserve Bank making it easier for banks to lend more. This scenario seems unlikely with the RBNZ committed to the introduction of Debt-to-Income ratios (DTIs) The RBNZ believes DTIs are needed to maintain house price affordability in New Zealand. DTIs if introduced will ultimately end up restricting the borrowing power of many first home buyers and those people seeking a new home on lesser incomes. If current mortgage rates persist long-term and DTIs become a reality, then in conjunction with worsening economic conditions we could very well see further house prices reductions. The impact of planned layoffs in the public service will inevitably have an impact on house prices, especially properties in Wellington.
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