It's been three months since the Reserve Bank last made an official cash rate (OCR) call, and as per usual, a lot has happened in that time. In particular, with annual inflation rising to 5.9% and the unemployment rate dropping to 3.2%, the case for a rate increase today was clear.
The only choice was around whether to raise it by 0.25% or a chunkier 0.5% – and in the end they went for a conventional 0.25% increase, taking the OCR to 1% (where it sat pre-COVID in February 2020).
Attention will now quickly turn to what's next, and with inflation likely to remain stubbornly high (especially if omicron results in even more supply chain disruption), the RBNZ now envisages a higher peak for the OCR than they previously indicated. It could now nudge above 3% later next year, compared to the previous indicated peak of about 2.5%. That said, the RBNZ will also be ‘giving back', by gradually reducing the size of the Large Scale Asset Programme.
In terms of mortgage rates themselves, there's been a flatter patch lately, after the sharp increases we saw last year. In other words, the future expectations for tighter monetary policy have already been ‘priced in' to current mortgage rates to some degree. This suggests that any further increases in mortgage rates could well be slower and/or smaller than what we've already seen.
In addition, we're just a little wary of casually assuming that the OCR will go up so surely and steadily. After all, there has to be a risk of more business insolvencies this year, and the resulting loss of jobs could feed back into weaker economic growth and hence a lower/slower path for the OCR – and also potentially mortgage interest rates too.
So what does all of this mean for the property market? There are already signs that higher mortgage rates, combined with intense affordability pressures and tighter credit availability, are cooling sales volumes and the pace of value growth. And although mortgage rates may not shoot up quite like they did last year, they've undoubtedly still got further to rise. Given that more than 50% of NZ mortgages are rolling off a fixed interest period this year, and with another 10% or so on floating rates, there's a high proportion of borrowers due to face increased interest costs soon.
Looking ahead, if unemployment remains low then the housing market shouldn't be headed for a crisis. But after growth in average property values of more than 25% last year, I'd expect that figure to be less than 5% this year – and the chances of prolonged falls are certainly growing.