The increase in New Zealand’s official cash rate (OCR) has come as little surprise to experts, who note it is unlikely to be the last hike that the Reserve Bank of New Zealand (RBNZ) will announce in the coming months.
Yesterday, the RBNZ raised the official cash rate 0.25 basis points to 0.75 per cent in response to high employment and inflation that is well above target.
CoreLogic NZ Chief Property Economist, Kelvin Davidson noted prior to the decision analysts had been as certain of an increase “as pretty much anytime in history”.
“The only conjecture was around whether the rise would be 0.25 per cent or 0.50 per cent, and in the end the RBNZ took a slightly more cautious path and raised by 0.25 per cent,” Mr Davidson said.
“Attention will now quickly turn to what’s next, and when/how high the peak for the OCR might ultimately be.
“The forecasts contained in today’s documents from the RBNZ suggest a peak of around 2.5 per cent in late 2023, but you’d have to think that this peak could be reached sooner and/or be higher, especially with today’s announcement from government that borders will reopen in the first half of 2022.”
The flow-on effect to the property market
Mr Davidson stated that the implications for the residential property market were clear.
“There are further mortgage interest rate increases to come,” he stated.
“With most shorter-term fixed rates now pushing up towards (or above) the 4 per cent mark, we’ve already seen them pretty much double from the previous lows, and figures of 5 per cent or more wouldn’t be a surprise over the next 6-12 months either.”
Mr Davidson said interest rates of 5 per cent still remained low compared to past standards.
As a result, borrowers with loans dating back two years ago or those who kept their repayments the same even when rates fell in 2020 may not see much change.
“However, many borrowers on rolling one-year terms could see a significant shift in mortgage costs,” he noted.
“In fact, according to RBNZ data, $227.8 billion in mortgages are either floating or due to roll over in the next year.
“This equates to 71 per cent of all lending – a lot of funding, which when re-fixed, will likely lead to greater mortgage repayments and subsequently less disposable income.”
And that would have major impacts on affordability, he said.
“…with house prices having soared by 28.8 per cent over the last year, mortgage payments as a percentage of gross household income are already back at 41 per cent – well above the average of about 37 per cent, and the highest since Q2 2008 (when mortgage rates were above 9 per cent).
“A mortgage rate of 5 per cent now would see that repayment burden rise to 46 per cent, and at a 6 per cent mortgage rate, it would climb to more than 51 per cent – which would be the worst level for at least 18 years.”
However, he stressed the housing market wasn’t necessarily headed for a crisis, especially as employment was high.
“But there are certainly headwinds (such as higher mortgage rates, and tighter lending rules such as potential debt to income ratio caps) which will likely lead to a slowdown in sales volumes and a reduction in the pace of value growth throughout 2022,” Mr Davidson said.