Given the (slowly) emerging evidence that inflation has peaked and that the economy is now starting to soften, it wasn’t a surprise to see the Reserve Bank opt for ‘only’ a 0.5% rise in the official cash rate (OCR) today, rather than the potential 0.75% increase.
This was firmly in line with what most commentators thought in advance of the decision, and perhaps reflects the need to move the focus from hammering inflation towards not undermining the economy too much.
Inflation remains the number one enemy however, and the Monetary Policy Committee said they did not consider anything other than a 0.5% or 0.75% lift.
The Committee recognised the devastating effect of Cyclone Gabrielle on New Zealanders but decided that it was too early to assess the monetary policy implications, and therefore opted to look-through any short-term impacts from the significant recent weather events.
So, what about the housing market effects?
Perhaps most importantly, the Reserve Bank’s core forecasts of inflation, unemployment and the OCR were largely unchanged, meaning the market implications are reduced. Their house price forecast did forecast a lower trough – 23% below the Q4 2021 peak, but this mostly brings them in line with other economist forecasts.
The good news for stretched borrowers is that the impact of today’s decision on mortgage rates doesn’t seem likely to be too significant.
Floating rates will likely go up again, but only about 10% of loans are on these rates. There may also be a bit of upwards pressure on one-year fixed rates, but it’s expected to be minimal given further OCR increases had already been ‘priced in’, and that the banks have actually brought down their longer-term fixes in recent weeks.
Even so, it’s still expensive to be a new borrower (especially since serviceability test rates are even higher), and the adjustment for existing borrowers as they reprice onto new rates remains large too. At present, about 50% of existing mortgages are fixed but due to reprice in the next 12 months, and those borrowers could potentially still be looking at a change in interest rates of 2-3%.
As an example, for somebody repricing from 4% a year ago to 6.5% now, the increase in mortgage repayments on a $500,000, 30-year mortgage, would be around $9,275 per year.
These interest rate pressures are likely to keep the housing market soft for at least the next six months or so.
Towards the end of the year, it’s not out of the question that buyer demand starts to return a little more strongly, sales activity lifts off the floor, and property values stop falling – especially if net migration continues to rise steadily. But it seems unlikely that 2024 will mark a strong rebound in the housing market, especially with affordability still so stretched.
Meet Kelvin Davidson
Chief Economist
Kelvin joined CoreLogic in March 2018 as Senior Research Analyst, before moving into his current role of Chief Economist. He brings with him a wealth of experience, having spent 15 years working largely in private sector economic consultancies in both New Zealand and the UK.
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