Given the evidence that inflation is proving tougher to stamp out than was previously expected, it doesn’t come as much surprise the Reserve Bank of New Zealand (RBNZ) opted for a ‘jumbo’ 0.75% increase in the official cash rate (OCR) today, lifting it to 4.25%.
The fact this was largely anticipated by most economy-watchers (and the banks themselves) means fixed mortgage rates may not move much straightaway. However, floating rates will no doubt rise again shortly, and with more OCR increases in the pipeline, fixed rates are unlikely to have peaked yet either.
Indeed, this was quite a ‘hawkish’ decision from the RBNZ, indicating that the OCR may eventually have to rise all the way towards 5.5% next year. The RBNZ doesn’t anticipate CPI inflation dropping below 7% until perhaps the middle of next year, when the economy could have tipped into a small recession, with the unemployment rate edging higher (albeit more due to a larger labour force rather than mass job losses). They also expect the ultimate fall in house prices (CoreLogic House Price Index) could be -20% by the end of next year.
So what does all of this mean for the housing market? After some ‘green shoots of optimism’ had started to emerge through the first half of October, the stubborn inflation reading for Q3 and expected higher peak for the OCR (and mortgage rates) have in some ways pushed us into ‘phase two’ of the current property market downturn.
With another 0.75% increase in the OCR seemingly on the cards for 22 February next year (with further increases after that too), it’s very likely fixed mortgage rates (e.g. for a high-equity one year loan) will push towards 7% or above over the coming months, adding to the current pressures on household budgets and mortgage serviceability.
Indeed, based on the current average fixed mortgage rate across the stock of loans of 3.8%, the fortnightly mortgage repayment for every $100,000 of debt (30 year term) is around $215 – or roughly $5,590 per year. But somebody then refinancing to a current rate of 6% would see that repayment jump by $1,602 per year – or more than $8,000 if they had a $500,000 loan. A potential future rate of 7% would see a change of almost $12,000 for a $500,000 loan. On that note, it’s important to point out 20% of home loans in NZ are currently fixed but due to reprice in the next six months.
For every $100,000 of debt (30 year term):
Change from 23/11/22
Change on $500k
As always, however, some perspective is warranted, and a key factor over the coming months remains the labour market. If unemployment can stay relatively low, most borrowers will continue to service their loans (even at higher mortgage rates and as negative equity becomes more prevalent), and this should help to limit the risk of a rise in bad debts and the downward spiral that could be kicked off by an increase in mortgagee sales.
Overall, it’s likely the weakness for property sales volumes will linger well into 2023. Indeed, after perhaps around 67,000 sales this calendar year (the lowest since 2010), there may only be a small revival next year to about 68,000 – as rising wages and net migration are offset by a soft economy and higher mortgage rates.
Meanwhile property value falls are far from over yet either, presenting an opportunity for first home buyers. We’ll be watching the labour market very closely, but also any signs the OCR is ‘overshooting’ and therefore the likelihood rates could need to be cut again fairly sharply.