Squirrel: Which Way Mortgage Rates?

Now that inflation appears under control, what are mortgage rates likely to do? Squirrel mortgage expert John Bolton shares his views.

Inflation under control

For a while, there were some clear signs that we were starting to get on top of the inflationary battle. However, the numbers weren’t telling the same story. But now inflation is tracking at 6.7% — a figure well below market expectations, including even those of the Reserve Bank.

It’s worth remembering that inflation figures in New Zealand are pretty slow to show the truth of the situation, because they represent a long-term average, looking back over the previous 12 months. So, that’s why the numbers stayed so stubbornly high.

And in reality, I think there are actually more positives behind the most recent figures than what you might guess at first glance. There’s an extremely high food inflation number hidden in there, for example, which will have skewed the number upwards — but that will also work its way through in time.

Between a weakened construction sector, increasing migration and more businesses starting to retrench (both of which are helping to ease pressure in the job market), I think there’s lots of stuff happening out there to indicate that inflation’s coming under control.

Long-term vs short-term fixed mortgage rates

If you look at the rates out in market now, you’ll see they’re starting to price in potential falls over the next six to 12 months — with longer-term mortgage rates (ranging from three to five years) already sitting lower than shorter-term rates, at around 5.99%.

While it might be tempting, I’d be really hesitant to fix for any longer than a year right now — or two, at a push — especially if you’re only doing it in the hopes of getting a better rate.

As rates start to fall in the coming months, you can be sure there will be better deals to be had. And if you’re locked in long-term, you’ll need to break that to take advantage of rate falls, and chances are you’ll find yourself hit with costly fees for doing so.

What’s the bad news?

Although the sense out there is very much that we’re at peak rates, unfortunately, that doesn’t mean we’re out of the woods in terms of the impact.

There are more and more Kiwis still rolling off low fixed rates of around 3.00%, onto current rates, which means the hurt will continue to grow, even if rates don’t get any higher.

And as more people have to grapple with higher mortgage costs, we’re going to see more households tightening their belts on discretionary spending, and the downstream impact of that on the economy can’t be understated.

What’s happening with house prices?

Sales activity in the housing market was absolutely anaemic over summer — but we’ve definitely entered a pretty healthy comeback phase in the last month or two.

In part, that’s down to the fact that house prices are starting to stabilise.

Prices have now fallen about 20% in nominal terms, or 30% once you factor inflation into the equation, essentially taking us back to where they were pre-Covid. Commentary out of the Reserve Bank is that those falls have done what was needed to get us back to a more sustainable space with house prices.

And given interest rates are likely to start falling in the coming months, I think we’re going to see housing turnover gradually pick up more and more from here.

What does this mean for buyers and renters?

But now those causes for uncertainty are starting to disappear, people will be back on the hunt to buy.

And now that we’ve turned the tap on again with respect to immigration, you can bet that’s going to add even more fuel to the housing market fire. It won’t necessarily mean prices shoot back up, but we’re certainly going to see choice start to disappear for buyers — something I’ve been warning about for a few months now.

In fact, we’re already seeing demand heat up in a massive way in the rental space. Looking at Auckland in particular, rentals are being snapped up so quickly there’s barely anything going at the moment — meaning we could be on track to follow in the wake of Sydney, Melbourne and Brisbane, which are deep in the midst of a rental crisis.

And the sad irony of it is that, as demand picks up again, we’re systematically destroying our construction sector at the same time.

What we should really be doing right now is supporting the sector to maintain the levels of consents and building we hit last year — to help us stay ahead of immigration levels, and maintain sustainable house prices.

Unfortunately it’s the same mistake New Zealand makes every time we go through this sort of housing market cycle. Hopefully one day we’ll learn.