Following the Reserve Bank’s announcement today that it is increasing the Official Cash Rate (OCR) by 0.75% to 4.25% I thought you would be interested in knowing what impact I see this having now on the housing market and mortgage rates.
We haven’t seen an increase of this size made to the OCR since it was introduced as a monetary policy tool back in 1999. As the economy has become increasingly overheated a much higher level of interest rates are needed now to bring inflation back under control. Most banks are forecasting an OCR of 5%+ by March 2023 so we will likely see a similar increase made to the OCR next February. Interest rates for borrowers are likely going to continue to increase and more importantly remain higher for longer than was anticipated. I personally don’t see us getting back to mortgage rates below 5% again without another major pandemic or global financial crisis happening. Mr Orr’s recent reappointment as Reserve Bank Governor doesn’t leave many people myself included with a great deal of confidence that New Zealand is going to experience an economic “soft” landing.
As I’ve mentioned previously, we are going into a correction period now when it comes to house prices. 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. The latest REINZ house price stats this month show that Lower Hutt in Wellington has now experienced a 26.5% drop in house values over the last 12-month period.
Housing affordability has reached a critical turning point in New Zealand. While house prices have reduced, most no longer work with the current mortgage rates now being advertised by banks. We are going to have to see further reductions happen to house prices for some level of affordability to return to the housing market. Many borrowers have also been significantly impacted by the banks increasing their “test rates” which banks use to stress test new mortgages. Whilst a vendor may have a buyer prepared to pay them what they want for their property, ultimately the purchaser’s borrowing power with their bank will dictate what they can offer. The much tighter credit conditions caused by last year’s CCCFA changes also continue to pose problems for many borrowers seeking finance to purchase a property.
People who have previously committed themselves to a newbuild contract and who are patiently waiting for their builder/developer to complete their build should brace themselves for the reality that the value of their property will decline. The wisdom of anybody currently considering a new build purchase i.e. turn-key contract 12 months+ with house prices continuing to fall needs to be given serious consideration. Recently a major property developer has now offered voluntary redundancy to 30% of their staff signalling that they don’t expect to have enough work for them next year. It’s likely that other property developers will follow as they struggle to secure new buyers.
Please let me know if you would like to discuss the current mortgage rate you are on with your bank or are needing assistance with finance to purchase a new property.
Kind Regards
Simon
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