Following the Reserve Bank’s (RBNZ) announcement last Wednesday the 22nd of May 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.
Reserve Bank Governor Adrian Orr said that while he was confident that monetary policy was working, a real consideration was given to a rate hike in this latest official cash rate (OCR) decision. Orr was keen to emphasise a couple of key things. First that the last leg of inflation has proven to be sticky around the world and hard to get down. Currently inflation in New Zealand is sitting just on 4% and still above the desired 1% to 3% target range. Second, that the central bank is alive to the potential downside risks for inflation. In other words, it will be alert for and responsive to risks which could threaten the downwards movement on inflation. If inflation looks to not be going where the bank is comfortable, rate hikes while not currently expected are very much on the table if required. The bad news for borrowers. The RBNZ has now pushed out the likelihood of the first cut in its official cash rate from the June quarter of next year to the second half of 2025 and perhaps not even until the last quarter of 2025. According to the Reserve Bank’s current forecast track there will be no interest rate relief for mortgage holders until the back end of next year.
Whilst inflation in housing construction has fallen, key domestic cost pressures are proving much harder to move. Council rates which are increasing around much of the country are one of the factors still holding inflation, and therefore mortgage interest rates up. This will severely annoy many homeowners. Insurance premiums likewise. My personal belief is that the Reserve Bank is going to have to learn to live with a certain amount of domestic “services” inflation going forward. It’s hard to fathom how or why council rates and insurance premiums are going to become any cheaper for Kiwis in the future.
If you’ve read my earlier posts, I’ve been saying for some time that until the RBNZ is confident it has got inflation under control it will not be making any cuts to the official cash rate and hence mortgage rates will not be falling any time soon. Many bank economists and certain “commentators” who have predicted rate cuts consistently earlier than the bank’s forecast track need to admit now they have not been paying attention to what the RBNZ has been saying. The next official cash rate decision will be handed down in six weeks, on the 10th of July. There is a possibility that the Australian Reserve Bank may increase their own OCR on the 18th of June with services inflation also receding slowly across the Tasman. This decision will be watched closely by the RBNZ.
With the above in mind, I believe a strategy of fixing for either 12 or 18 months currently positions most borrowers best to take advantage of lower interest rates in 2025 when they start to become available. We are seeing the banks still making small reductions to their advertised rates occasionally, but these reductions are very minor and not illustrative of what borrowers can look forward to once the RBNZ starts to make cuts to the official cash rate. Again, when interest rates fall historically, they tend to reduce much more slowly than when they increase.
Based on the likelihood that the cost of borrowing money will essentially remain unchanged for the next 12 months, I don’t see much upward movement in respect to house prices for the same period. An already oversupply of housing stock in many regions of the country coupled with the 1st of July bright-line property test changes mean that many investors will soon be unloading their properties on the market providing buyers with even more options. With unemployment rising now and the ongoing job cuts to the Public Service some land agents are now reporting low attendance at open homes. Bank test rates used to “stress test” new mortgages remain close to 9% and these rates are going to hang around for a while yet meaning that many people’s borrowing power towards a mortgage is being impacted.
Its looking increasingly likely the Reserve Bank is going to get its wish for debt-to-income ratios (DTIs) to be introduced in the 2nd half of 2024. DTIs if introduced won’t have an immediate impact on house prices but rest assured, they will start to influence what properties sell for when interest rates start to fall. This is being deliberately engineered by the Reserve Bank to combat runaway house price inflation in the future. DTI limits if introduced will impose artificial restrictions on the amount banks can lend to home buyers based on their income. To anyone with even the most basic understanding of how banking works the outcome of such a rule should be obvious. The first people banks will cut lending to are those on low incomes. This will make it even harder than it already is for first home buyers to get onto the property ladder. The Government is supposed to be making things easier for first home buyers, not harder. The recent announcement that the First home buyer grant has been scrapped is a further kick in the teeth to eligible first home buyers albeit the consequence of the previous Government’s financial mismanagement of Kāinga Ora.
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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