Following the Reserve Bank’s (RBNZ) announcement today Wednesday the 9th of October that it is reducing the Official Cash Rate (OCR) by 50 basis points to 4.75 percent, I thought you would be interested in knowing what impact I see this having on the housing market and interest rates.
With this announcement today the Reserve Bank is signalling to the market that it believes inflation has been contained and that the previous OCR increases it made can now be unwound. The Reserve Bank’s earlier than expected cut to the OCR on the 14th of August was completely opposite to what it had been signalling previously i.e. that the current level of mortgage rates advertised were expected to be with us until mid/late 2025. How much longer do New Zealanders have to tolerate the lack of competency been show by this Reserve Bank Governor and Monetary Policy Committee. A 50-basis point cut today is an admission that the Reserve Bank waited too long to cut. Their statement above made earlier this year makes it even more obvious now that the Reserve Bank doesn't actually know what it is doing. Other central banks around the world don't function this way so why is New Zealand's been allowed to?
We have one remaining OCR review due for 2024 on the 27th of November + the next CPI (inflation) data due for public consumption on the 16th of October. The first OCR review for 2025 is scheduled on the 19th of February. Actual OCR moves going forward will be heavily conditional on inflation, the labour market and wider economic outlook. Whilst things are getting better, in absolute terms housing remains very unaffordable and any significant upside to house prices is likely to be constrained by that. House prices across most of the country continue to fall, predominantly in the major cities and especially in Wellington. Home values in the capital have dropped at twice the average rate nationally, according to the latest QV House Price Index.
The introduction of debt to income (DTI) restrictions from 1st July this year is also likely to dampen any large upside to house prices. For owner occupiers, banks are restricted to lending no more than 20% of their total owner occupier lending to those borrowing more than six times their income. And no more than 20% of investor lending can be to those borrowing more than seven times their income. While these limits are not yet binding, they could kick in if falling interest rates were to see prices rebound sharply, as occurred during the COVID housing boom.
Back in 2015, loan to value (LVR) restrictions were also looser than they are now, particularly for investors. In fact, tighter LVRs were introduced near the end of 2015 in response to rapid increases in house prices, particularly in the Auckland market. In Wellington uncertainty about job security following public sector redundancies earlier in the year and the general cost of living are all having an impact on existing homeowners and prospective buyers. Many people in the public service have naturally been cautious about purchasing a home and taking on the associated financial commitment of a mortgage. This could be the new status quo in Wellington as the Government continues its restructure of the public service. It is still very much a buyers’ market and not just in the capital.
As I’ve talked about previously managing borrowers’ expectations around where interest rates might fall to potentially is important. For mortgage rates to continue falling successive cuts are going to need to be made to the OCR by the Reserve Bank. I don’t see us getting back to the very low mortgage rates that we saw during the pandemic. The Reserve Bank's earlier decision to reduce interest rates to record low levels has been a key instigator for a lot of the inflationary pressure that we have had to confront in New Zealand. The Reserve Bank has hopefully learnt that lesson. Borrowers need to decide themselves what fixed rate term is the best option for them financially. Most people want to have certainty with their loan repayments as a home loan is your biggest financial commitment. At present many homeowners are electing to fix for 6 or 12 months believing that interest rates will continue to fall. With the Reserve Bank making an earlier than expected cut to the OCR mortgage rates look likely to start reducing with some consistency again so I agree with this strategy. Again, you need to decide what fixed term is best for you based on your own financial circumstances.
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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