Following the Reserve Bank’s (RBNZ) announcement made today on the 29th of November that it was leaving the Official Cash Rate (OCR) unchanged at 5.5 percent, I thought you would be interested in knowing what impact I see this having on the housing market and interest rates.
There seems to be a debate raging now about when interest rate cuts will start happening. This debate has been triggered by the cost of funds offshore for banks decreasing and the RBNZ having held interest rates for the fifth consecutive time having previously lifted the OCR by 525 basis points since the end of 2021 in a bid to tame skyrocketing inflation. The latter is not however a catalyst for interest rates to start falling suddenly. Given how sticky inflation is proving globally interest rates will be unlikely to become significantly cheaper for some time yet. Inflation is still sitting at 5.6 percent and well above the Reserve Bank’s target of 2 percent.
Governor Orr as distracted as he might be currently with extraneous issues realises if he reduces interest rates too soon inflation will then become entrenched. You only need to look across the Tasman to see what the Australian central bank has been saying recently about the impact of migration and high petrol prices on inflation there. Odds are then that we will see the Aussie central bank announce another increase to their cash rate on the 5th of December. New Zealand unsurprisingly is in the exact same boat as Australia when it comes to the impact of migration and rising fuel costs. Our next inflation stats from Stats NZ are not available now until the 24th of January. Depending on what these show there is a possibility that Mr Orr will need to increase the OCR again on the 28th of February.
Current expectations are that the OCR might start dropping at the end of 2024, but most experienced economic commentators believe this to be optimistic. Recently ANZ’s chief economist Sharon Zollner revised her bank’s expectation of an OCR cut happening back out to February 2025. Mr Orr previously stated that the OCR might have to remain unchanged until mid-2025. Prior to the election the RBNZ noted Government spending as being a significant challenge for it in terms of getting inflation back under control. Both coalition agreements National has recently signed with ACT and NZ First have a strong emphasis on reducing Government spending. Because of the nature of these agreements, I remain optimistic that inflation may fall faster than anticipated and we get within the RBNZ’s target of 2 percent sooner. Until the RBNZ can be confident though that inflation is well and truly contained it won’t be cutting the OCR. 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. Again, the previous commentary that interest rates might have to stay higher for longer in New Zealand looks likely. Historically interest rates take a lot longer to fall than they do to rise.
As I mentioned last time when it comes to the future direction of house prices affordability is the key issue now dictating the direction that prices will 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 are predicting. The economic reality is that most properties remain overpriced based on the interest rates now available, and the amount people physically need to borrow as a home loan. House price inflation during the pandemic was unprecedented driven at the time by very cheap interest rates which are simply no longer available. We are in a totally different environment now from June 2021 when you could borrow money as cheap at 2.19% p.a. The anticipated flood of new listings over the Summer months will likely see house prices contained. Purchasers should have far more 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 on a realistic sale price for their property. We are seeing some vendors understanding this fact while others fail to. The latter are unlikely to secure a higher offer for their property by waiting. High levels of migration are unlikely to have much of an impact on house prices aside from an increased demand for rental accommodation. The bulk of these new arrivals coming into the country are here to fill low wage jobs. Current law states only NZ citizens and people deemed ordinarily resident can buy property in New Zealand. National’s earlier plan to allow foreign buyers back into the market for luxury property purchases has been scuppered.
With a change of Government, the industry is hopeful now that the RBNZ’s stated desire to implement debt to income ratios (DTIs) in 2024 can be avoided. DTIs would only result in further eroding the borrowing power of potential homeowners. The new Government will be introducing legislation to force the RBNZ to see controlling inflation as its “primary focus”. The taxpayer is now paying Mr Orr a salary of $853,810 – almost 13 times the average New Zealand wage and yet he has been flying around the world to give speeches about everything except monetary policy. The new Minister of Finance Nicola Willis needs to make it clear, do your job Adrian or get a new one! New Zealand needs a boring, old school, inflation-busting central banker. A Don Brash, or Roderick Deane, not a Greta Thunberg. The new Government has also committed to scrapping the much-hated CCCFA changes which saw many borrowers forced to approach 2nd tier lenders and pay higher interest rates. There needs to be a recompense from those officials at MBIE who ignored the many warnings from the industry about the negative impact the CCCFA changes would have on borrowers. Any new legislation introduced to replace the CCCFA changes must be fit for purpose. National, ACT and NZ First have committed to reintroducing interest deductibility for property investors albeit over several years and the current bright-line test period looks to be reduced considerably. Encouraging more people to become landlords in New Zealand is a step in the right direction towards tackling our housing crisis.
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