One-year fixed-rate mortgages could surge as high as 7 per cent in the coming months putting even more pressure on New Zealand property prices according to an expert.
CoreLogic NZ Chief Property Economist Kelvin Davidson said with more rate hikes on the cards, following the latest 0.75 basis point increase from the Reserve Bank of New Zealand (RBNZ), fixed rates will likely continue to surge.
“With another 0.75 per cent increase in the official cash rate seemingly on the cards for 22 February next year, it’s very likely fixed mortgage rates will push towards 7 per cent or above over the coming months, adding to the current pressures on household budgets and mortgage serviceability,” Mr Davidson said.
Mr Davidson said the “hawkish” decision from the RBNZ suggests the OCR may eventually rise all the way towards 5.5 per cent next year, putting even more downward pressure on house prices.
“The RBNZ doesn’t anticipate CPI inflation dropping below 7 per cent until perhaps the middle of next year, when the economy could have tipped into a small recession, with the unemployment rate edging higher,” he said.
“They also expect the ultimate fall in house prices (CoreLogic House Price Index) could be 20 per cent by the end of next year.”
“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 have in some ways pushed us into ‘phase two’ of the current property market downturn.”
Mr Davidson said if borrowers were forced to roll off their current 3.8 per cent fixed rate loans and onto a 7 per cent interest rate next year, they would pay an extra $11,955 per year in interest on a $500,000 loan.
Mr Davidson said as long as people maintain employment, they should be able to manage the higher repayments.
“As always, however, some perspective is warranted, and a key factor over the coming months remains the labour market,” he said.
“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.”
Weakness in property sales volumes will linger well into 2023 Mr Davidson said.
“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,” he said.
“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.”