Following the Reserve Bank’s (RBNZ) announcement that it is increasing the Official Cash Rate (OCR) by 0.50% to 5.25% I thought you would be interested in knowing what impact I see this having now on the housing market and mortgage rates.
This OCR increase of 0.50% was not expected by bank economists. Most had predicted 0.25% instead. The central bank has stated that inflation is still too high and remains persistent. The bank is also saying that employment is beyond its maximum sustainable level. Previously the RBNZ had indicated a higher level of interest rates were going to be needed to bring inflation back under control, however banks in recent times had pushed back against making additional increases to the cost of borrowing. This decision by the Reserve Bank today will almost certainly see banks increase their advertised mortgage rates. Raising interest rates is the main tool that the RBNZ uses to get inflation back under control. If the RBNZ don't act aggressively enough to combat inflation then interest rates for borrowers will have to remain higher for longer. OPEC’s surprise recent decision to cut oil production potentially adding up to 40 cents to a litre of gas in New Zealand, the cost of rebuilding from Cyclone Gabrielle and finally the much-delayed building code changes been implemented on the 1st of May will add even more inflationary pressure in the months ahead.
The prices vendors are asking for their homes fell again in March as sinking prices and fewer owners put their homes up for sale. There were just 9242 new listings of homes for sale in March. That was just under 18% fewer than in March last year. People looking to buy homes have faced rising home loan rates at the same time as inflation has been running at more than 7%.
Newly released property price stats show that between 2010 and 2016 NZ house prices increased by 29%, then again from 2016 to 2020 by another 20%, During COVID 2020 to 2022 prices exploded by another 44%. To date nationwide they have only dropped back 11% on average although Wellington has witnessed declines of at least 20% across the region. As I have mentioned previously people who have owned and held on to their home for a seven-to-eight-year period should still be sitting on large capital gains. Others who bought at the peak of the market and are being forced to sell through changing circumstances will be caught out. In some cases, they will have no choice but to sell at a loss.
Based on the above gains made between 2020 & 2022 vendors who are currently selling need to get a move on and negotiate a sale of their property quickly. If you’re thinking that waiting 12 months to sell will see house prices again increasing, you aren’t paying attention to the fundamental reason why prices are falling in the first place which is housing affordability. While house prices have reduced, most no longer work with the current mortgage rates now advertised by the banks. The majority of borrowers remain worried about overpaying and are thus sitting on their hands waiting for house prices to fall. It’s galling for homeowners or investors to see the level of equity in their property eroding but as a country we need a level of affordability to return to our housing market. House prices have become massively inflated. Short of another GFC or global pandemic happening it’s hard to imagine a scenario in which New Zealand will see fixed mortgage rates return to the historic low levels witnessed during 2020 to late 2021. Central banks around the world have learnt the hard way what happens when they set interest rates too low for too long.
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
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