Mortgage rates have started to rise swiftly in response
The Reserve Bank has lifted the OCR by 25bps, and experts say that the time of cheap borrowing is well and truly over, and interest rates are going to rise swiftly - especially with the Monetary Policy Committee signalling more rate hikes to come.
Yesterday’s statement from the Reserve Bank made clear that stimulatory settings are no longer needed, and further rises to the OCR should be expected in its next decisions. However, the 25bps hike is also more cautious and considered than predicted, with some commentators having expected a “double hike” of 50bps.
Several banks have already lifted their interest rates in response, and the market is expecting them to continue rising at a steady rate.
Kiwibank chief economist Jarrod Kerr said that the New Zealand economy is doing “remarkably well”, and that the 25bp hike was a safe bet. He said that easing restrictions, a quick vaccination rollout and the end of the Auckland border would all lift confidence and put the economy on track to rebound, though as ever, COVID-19 remains unpredictable.
“Auckland’s extended disruption and isolation from the rest of the country has dragged on for much longer than was expected at the start of the current delta outbreak,” Kerr said.
Read more: Reserve Bank releases November OCR decision
“The extended disruption has certainly hit areas of the service sector hard, such as retail and hospitality, and both consumer and business confidence has stated to waver following a stoic start to Delta. COVID isn’t done with us yet.”
“But COVID restrictions have generally been eased across Aotearoa,” he said.
“Importantly, the rapid take up of the COVID vaccine – propelling New Zealand to the top half of global rankings – is allowing restrictions to be wound back further. New Zealand will soon transition to a traffic light system, and the Auckland border is being opened. The economy is on track to rebound strongly over summer.
“The new OCR track has pulled forward expected hikes, and lifted the end point to 2.6%. We now expect the Cash Rate to hit 2.5% in 2023.”
ASB chief economist Nick Tuffley said that the decision was also in line with ASB expectations, but the future outlook is still “uncertain and fluid.” He said the Reserve Bank will be keeping a close watch on how the economy adjusts from here, and how it will weather the ongoing COVID-19 disruption.
Despite the uncertainties, more positive news was announced this week with the gradual lifting of the international border. International tourists will be able to return to NewZealand from April 2022, a move which will bring a lot of relief to starved tourism and hospitality businesses - many of which have taken an even harder hit with the lack of visitors from Auckland.
With the economy looking on track to rebound well, the question now will be how high the OCR will go. Nick Tuffley said ASB is still predicting a 2% OCR peak, despite some higher forecasts from other banks.
“Financial markets had recently been pricing in an OCR peak of around 3%, and despite some pullback in pricing today, are still factoring in that the OCR goes up further than the Reserve Bank’s latest forecast,” Tuffley said.
“In contrast, we are still forecasting a 2% OCR peak, though we freely acknowledge that there is a lot of uncertainty ahead.”
When it comes to the implications for the residential property market, CoreLogic chief property economist Kelvin Davidson said that there are certainly further mortgage rate rises to come. He said that while some borrowers may not notice any significant changes to their costs for a while yet, others will experience a sharper increase, and affordability measures are looking increasingly pressured.
“With most shorter term fixed rates now pushing up towards (or above) the 4% mark, we’ve already seen them pretty much double from the previous lows, and figures of 5% or more wouldn’t be a surprise over the next 6-12 months either,” Davidson said.
“Of course, that’s still low by past standards. And borrowers rolling off loans agreed perhaps two years ago, and/or who kept their repayments the same even as rates fell in 2020, may not see much change.”
“In addition, the fact that rates may well still be low by past standards might not be of much comfort when you look at affordability measures,” he explained.
“For example, with house prices having soared by 28.8% over the last year, mortgage payments as a percentage of gross household income are already back at 41% – well above the average of about 37%, and the highest since Q2 2008 (when mortgage rates were above 9%).
“A mortgage rate of 5% now would see that repayment burden rise to 46%, and at a 6% mortgage rate, it would climb to more than 51% – which would be the worst level for at least 18 years.
“Overall, with unemployment still low, the housing market isn’t necessarily headed for a crisis. But there are certainly headwinds which will likely lead to a slowdown in sales volumes, and a reduction in the pace of value growth throughout 2022.”