Following the Reserve Bank’s (RBNZ) announcement last Wednesday that it was increasing the Official Cash Rate (OCR) by 0.50% to 5.50% I thought you would be interested in knowing what impact I see this having now on mortgage rates and the housing market.
The RBNZ with this decision last week is clearly concerned about inflation remaining stubbornly high in New Zealand. Although we saw a reduction to 6.7 percent in the March inflation rate announcement inflation is still at levels not seen since the 1990s. Food was the largest contributor due to rising prices for vegetables, ready-to-eat food, and milk, cheese and eggs. The second largest contributor was housing and household utilities, which was attributed to rising prices for construction and rent. Prices for building a new house increased 11% in the 12 months to March 2023, following a 14% increase in the 12 months to December 2022.
The RBNZ has indicated several times now a higher level of interest rates is going to be needed to bring inflation back under control. Raising interest rates is the main tool that the RBNZ uses to reduce inflation. If the RBNZ don't act to combat inflation, then interest rates for borrowers will have to remain higher for longer. My feeling is that we will see another increase to the OCR unless the RBNZ becomes more confident in the proceeding weeks and months that inflation is now in check. I don’t see mortgage rates declining significantly until inflation is back at a level that the Reserve Bank is comfortable with. This could take some time to happen in New Zealand. With this in mind most borrowers are currently electing to fix their repayments for 18-24 months. If we see a change of Government in October though and a reduction in overall Government spending, I think inflation may reduce faster perhaps.
Mortgage rates have now returned to their historic levels that we saw prior to COVID. It’s hard to see a scenario in which we have very low mortgage rates again short of another pandemic or global financial crisis happening. The Reserve Bank’s earlier decision to reduce interest rates to record low levels during the pandemic has been a key instigator for a lot of the inflationary pressure that we are now having to confront in New Zealand. In retrospect the Reserve Bank made the cost of borrowing money too cheap and lots of people took full advantage of it. House prices thus skyrocketed with a 40% average increase between early 2020 and late 2021. We are now witnessing a correction to the housing market. The longer it takes the Reserve Bank to rein in inflation the more likely it is interest rates will have to remain high. This is going to obviously see higher repayments on household mortgages and business loans meantime.
As far as the housing market is concerned as I have mentioned previously people who have owned and held on to their home for several years now 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. There will be some borrowers now who are in a negative equity situation with the value of their home having fallen below what they owe their bank. While the RBNZ has just recently increased the allocation of above 80% loans that the banks can write appetite from borrowers for such loans remains low. Interest rates at this level of borrowing are all north of 7% p.a. now hence lack of affordability remains a key obstacle to these purchasers entering the market.
Vendors who are postponing the sale of their property until the Summer or next year now hoping that they will get a better offer then are likely to regret this decision. If you’re thinking that waiting to sell will see house prices increasing again soon, you aren’t paying attention to the fundamental reason why prices are falling in the first place which is a lack of affordability. House price inflation during the pandemic was unprecedented been driven by very cheap interest rates which are simply no longer available to borrowers. Ask any front-line lender what is happening currently in the market, and they'll tell you that most homes are still overpriced based on the current mortgage rates now on offer and what most people physically need to borrow as a home loan from a bank. Houses became unaffordable for most borrowers the moment interest rates started returning to their pre pandemic levels. It’s distressing for homeowners and investors sitting on a devaluing asset, but the harsh reality is that a house is only worth what someone is prepared and more importantly able to pay. The RBNZ has said that current house prices are not sustainable and as a country we need a level of affordability to return to our housing market. House prices have become massively inflated in recent years and the RBNZ needs to acknowledge that it contributed to this by making the cost of borrowing money too cheap during the pandemic.
If the RBNZ gets their wish next year and forces the banks to introduce mandatory debt to income ratios (DTIs) then the borrowing power of many credit worthy people will be impacted significantly much like when the CCCFA changes were originally introduced in late 2021. The impact DTIs would have on credit worthy people been able to borrow money cannot be overstated and this will naturally also impact property values. Talk among some economists about some “green shoots” emerging now and property values bottoming out and potentially increasing fail to take into consideration the impact that DTIs would have on the housing market. DTIs in my opinion will just be another monetary policy disaster from the RBNZ adding to their growing list of failures now which have negatively impacted New Zealanders. The rationale for DTIs been introduced seems to change from one moment to the next with the RBNZ saying they are needed to ensure the banks lend responsibly and then the next day that DTIs are necessary to stop house price inflation getting out of control again. The RBNZ needs to have a good hard look in the mirror about that last statement.
In summary these are challenging times for many Kiwi borrowers and aspiring homeowners. Housing when you break it down to its most basic element is all about providing shelter for its inhabitants. We simply cannot have a property market in New Zealand in which values keep rising excessively, outstripping most people’s ability to afford the accompanying home loan needed.
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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