How quickly will NZ mortgage rates rise?

Banks have already been “subtly raising rates in anticipation of future hikes”

How quickly will NZ mortgage rates rise?

ANZ and Kiwibank were the first banks to raise their interest rates following the Reserve Bank’s OCR hike this week, and more are expected to follow - however, some market commentators say that homebuyers can still expect relatively low rates for some time yet.

Shortly after the decision was released, ASB announced that it would be holding its base business interest rate at its current level until the end of 2021, with executive general manager business banking Tim Deane noting that small business owners are doing it tough under the current conditions. He said ASB wouldn’t be passing the OCR cost on through its business rate, and that he hoped this would “bring peace of mind to small businesses at this highly uncertain time.”

Commenting on the OCR hike, Century 21 New Zealand owner Tim Kearins said he expected to see low interest rates persist for some time yet, particularly as banks had been taking cautious steps towards higher interest rates even before the October decision.

He said he wouldn’t expect the decision to put off first home buyers either, as rates are still fairly close to their historic lows, though he noted that pressures on supply may be about to increase.

Read more: Reserve Bank releases October OCR decision

“We are not expecting to see a sudden and significant change in rates, as banks have already been subtly raising mortgage rates in anticipation of future hikes,” Kearins said.

“It will take a lot more than a tweak of the OCR to put off those desperate to get into the housing market.”

“The demand pressure on our housing stock is not going anywhere fast, particularly when you consider that 165,000 migrants are now eligible for fast-tracked resident visas,” he explained. “While it’s positive news, it will nonetheless start unleashing many new home buyers into the domestic market.”

While interest rates are predicted to stay fairly low in the short term, CoreLogic chief property economist Kelvin Davidson said that we can expect them to lift into 4% territory within the next few years.

He noted that the slow liftoff in mortgage rates “has much further to run” and, combined with tighter LVR rules and increased regulation on lending, it will mean that borrowers need to start planning for an increase in mortgage costs into 2022-23.

“It’s not hard to imagine that a typical one- or two-year fixed rate could be pushing 4% by the end of next year, and 4.5% into 2023 - still low by past standards, but a large proportional increase from current levels,” Davidson said.

“Higher mortgage rates clearly mean that borrowers are going to have to divert more money towards paying their mortgage, and some may not be able to access as much home finance as before. Either way, this is another headwind for the property market, in addition to regulatory changes such as tighter LVR rules and the phased removal of interest deductibility for investors.”

Read more: OCR decision puts an end to mortgage rate wars

“On the whole, we’ve all still got a tricky period to negotiate,” he said. “But recent events haven’t materially altered the property outlook.”

With only two of New Zealand’s main banks having lifted their interest rates so far, ASB chief economist Nick Tuffley said it is difficult to predict how strongly the banks will react to this decision over the coming days.

When it comes to the future of the OCR, he said that the focus now will be on vaccinations allowing more freedom of movement and spending, as New Zealand is currently in a “twilight zone” between more daily cases, and an ongoing vaccination push.

“When it comes to the banks, we really are going to have to wait and see what their response to this is going to look like,” Tuffley said.

“On a wholesale market level, there has certainly already been a high degree of anticipation that interest rates will go up over time, so we have seen some lifts in term, mortgage and deposit rates ahead of this meeting.”

“A more prolonged period of restrictions would mean more job losses and weaker wage growth, and one of the challenges will be that these lockdowns don’t do a lot to cool inflation off,” he explained. “If they cause a sharp lift in unemployment, that will weaken wage growth, which obviously we don’t want.”

“Vaccinations really reduce the need to be putting disruptive restrictions in place, so the higher the vaccination rate, the less we are going to need to rely on those,” he concluded.

“That’s one of the most important things that we can do to get the economy healthy, and the challenge now is that we’re in a bit of a ‘twilight zone’ where the virus is starting to spread, but our vaccination rate still isn’t high enough to contain the reach of the outbreak. That does put us under ongoing pressure at the moment.”