Continuing the major themes of the last few months, inflation and mortgage rates are still very much the focus out there across the housing market at the moment.
We’re now only a week out from the Reserve Bank’s (RBNZ) last Official Cash Rate (OCR) announcement of the year – as it continues to try to bring inflation under control. So let’s first take a look at what might happen there, before a quick check in on what’s going on in the housing market more broadly.
With inflation still running high, what are market expectations for New Zealand’s next OCR announcement?
The RBNZ’s next OCR announcement, and the last one for the year, is coming up on the 23rd November.
The latest quarterly inflation stats last month didn’t exactly deliver the news the market (or anyone, to be honest) was hoping for. Inflation is tracking at 7.2%, as opposed to the 6.5% that was anticipated.
And, as a result, the market’s now all but unanimous in the expectation that the RBNZ will push through a triple increase of 0.75%, marking another step up from the series of hefty double increases we’ve already had this year.
I’m inclined to disagree. My perspective – perhaps a little optimistic – is that the RBNZ could settle at a 4% OCR heading into Christmas.
My rationale behind why the RBNZ might choose to go with a 0.50% increase instead is the significant rises we’ve had already. And the RBNZ ‘s desire to understand the full impact of those, and how they’re biting, before forging ahead with further aggressive increases.
Whichever way things go, Kiwis should take some reassurance that markets have already priced a 0.75% increase into the fixed rates out there.
Floating rates will go up in line with the increase, as they always do. But, despite some volatility in the short-term, fixed rates should be relatively stable.
That said, I’m not one to shy away from admitting when I might’ve got it wrong.
For the best part of this year, I’ve been pretty clear in the view that mortgage rates would peak somewhere between 5.5% to 6%. Looking ahead, that is looking a bit too optimistic.
Right now, we’re seeing one-year rates sitting at around 5.99%, and they could certainly go higher still – possibly (at least in the shorter term) getting up close to 6.5%.
But if they do increase further, I don’t think that shift will last that long and, ultimately, I still believe rates will settle down at around 5.5% to 6%.
There will still be all the same scare-mongering commentary out there about what an increasing OCR means for mortgage rates. So it’s really important to keep in mind that any increase in the OCR has largely been priced into mortgage rates already. While they will go up potentially in the short term, we are close to peak rates.
Globally, we’re seeing central banks take differing approaches in the battle against inflation.
The US Fed pushed through its fourth consecutive 0.75% increase in their funds rate recently, taking it up to a range of 3.75% to 4%, from just 0.25% to 0.5% back in March.
This is one of the major factors behind why the New Zealand dollar has been so low. Between pretty compelling interest rates in the US, and people’s general tendency to revert to the US dollar in times of economic uncertainty, it’s a double whammy.
Meanwhile, across the pond, the Reserve Bank of Australia (RBA) moved its OCR by just 0.25%, from 2.6% to 2.85%. There’s a real disconnect between how the RBA acts, and the decisions made on this side of the Tasman.
In stark contrast to here, the RBA is taking a far more cautious and conservative approach to its OCR hikes, waiting to understand the consequences of previous increases before they push too hard.
Whether it is ultimately lauded or criticised for this “slow and steady” approach remains to be seen – but it’s an approach I can certainly appreciate.
Amidst all of this inflation-induced uncertainty, Kiwis’ borrowing power has taken a big hit.
In recent weeks, a number of the banks have upped their loan serviceability test rates to between 8% and 9%.
There’s no doubt this is having a real impact on people’s ability to get a loan, especially for anyone in the low deposit first home buyer space – and for investors coming off interest-only or restructuring their finances.
I’m not expecting test rates to go any higher – I’m not sure how they could – but as long as they’re up near current levels, buyers can expect to be able to borrow about 20% less than what they might’ve been able to this time last year.
So that’s something to be particularly mindful of right now if you’re out to buy.
And more generally in the housing market… there’s not much to report beyond what we’re all seeing in the headlines.
That being, of course, that house prices and sales volumes are down.
It’s worth noting though that, in my experience, it takes a good three or four months for the truth of price reductions to make its way through to the media. So, even though commentators are anticipating that house price falls will continue through until next year, the reality is they’ve already happened.
If I had one message for potential buyers at the moment, it’s that good stock is never going to be in huge supply. So, while competition is down, it’s a prime opportunity to try and score a lower-priced deal on a good property, as long as you can secure a loan and afford the higher rates.
John Bolton founded Squirrel in 2008. He is a former General Manager at ANZ, where he was responsible for the bank’s $60bn of retail lending and deposits. He has 10 years of senior banking experience behind him in financial markets, treasury, finance, and strategy, and is a director of Financial Advice New Zealand, the industry body for financial advisers. Check out Squirrel’s website for how Squirrel helps first home buyers, here.
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