As expected the Reserve Bank (RBNZ) delivered another 0.5% increase in the official cash rate (OCR) today, taking it to 3% – the highest level since September 2015 (when it was lowered from 3% to 2.75%).
As has been the case for several months now, with inflation high and unemployment low, the case for today’s decision was pretty clear.
Looking ahead, the Reserve Bank’s own projections envisage a slightly soggier GDP growth path than last time (but no recession), a marginally ‘higher for longer’ projection for the inflation rate, a rise in unemployment driven by higher labour force participation (but no meaningful job losses), a slightly deeper peak to trough drop in house prices (15%), and a marginally higher peak for the official cash rate. In essence, not a huge amount changed in terms of their forecasts, although the ‘hawkish’ language used suggests that they’re still keenly focussed on inflation and doing what it takes in terms of OCR increases to quell those price pressures.
In terms of the direct impact on the housing market from today’s decision, it wouldn’t be a surprise if it’s pretty minimal. For a start, the upwards path for the OCR has already been ‘priced in’ to current mortgage rates, at least the shorter term fixes (e.g. one year rates). Second, reduced pressure in wholesale offshore funding costs will also tend to cap the pass-through to mortgage rates here.
And third, with fewer property transactions taking place (hence less new lending), there’s a lot of focus in the banking sector on existing borrowers and keeping market share. This will also be playing a role in putting the brakes on mortgage rate increases, and in fact the outright cuts in borrowing costs that we’ve seen in recent weeks.
Still, the housing market faces plenty of challenges yet. For example, there are parts of the market where recent buyers with a 20% deposit could have seen falls in property values erode most or all of their equity – on paper at least. We estimate that nationally as many as 500 first home borrowers who bought near the peak of the market could now be in that negative equity situation. Of course, with unemployment low, provided that they don’t need to sell, negative equity on paper needn’t be a disaster.
Meanwhile, even if mortgage rates are truly at (or past) a peak, the fact is that they’ve already risen a lot and this reduces the maximum loan size for new buyers – as well as presenting a refinancing headache for existing borrowers. New investors may also be finding it harder to make the sums stack up, in a world where rental yields are still low (and rental growth is slowing) and financing costs are much higher. There’s probably a limit to how long they’re prepared to ‘top up’ a property while they wait for renewed capital gains.
All in all, the property market will continue to face a testing period for the rest of 2022 and into 2023. Low unemployment remains a key support, but any signs of job losses coming through would tend to increase the eventual size of this downturn in property values.