First-home buyers take a hit from latest OCR decision

Decision aims to maintain price stability and support maximum sustainable employment

First-home buyers take a hit from latest OCR decision

First-home buyers (FHBs) are finding it more and more difficult to enter the property market this year, with the latest official cash rate (OCR) decision described as another kick in the guts for this type of buyer.

This week, the Reserve Bank of New Zealand (RBNZ) raised the OCR to 0.75% because it “remains appropriate to continue reducing monetary stimulus to maintain price stability and support maximum sustainable employment.”

The OCR increase was followed by banks passing on the hike in borrowing costs by adding between 0.15% and 0.2% to floating rates. ANZ, in particular, was one of the first banks to make home loan changes after the RBNZ's announcement – deciding to pass through 0.15% of the 0.25% OCR increase to Housing Variable rates, taking this rate to 4.60% and the Orbit home loan rate to 4.70%. Its low-cost Back My Build rate for new home builds, linked to the OCR, will also increase to 2.29%.

First Home Buyers Club director Lesley Harris said record low-interest rates were the only factor giving FHBs a chance to enter the property market, but that had gone as well.

“It's hard enough to get a deposit together, let alone try and get the lending based on what the properties in New Zealand are now worth. Nothing's really lining up particularly well for first-time buyers, and this is just another blow,” Harris said, as reported by RNZ.

“It's kind of a kick in the guts because people think, right we're just about there, you know, we can afford to borrow $600,000, we've got pre-approval. As soon as interest rates move, that $600,000 that someone can borrow on their income unless they've had a miraculous you know, pay increase, that borrowing might change down to $550,000 or $500,000.”

Read more: Market reacts to OCR increase - how high will it go?

CoreLogic chief property economist Kelvin Davidson said he expects further mortgage rate rises soon, and while some borrowers may not notice any significant changes to their costs, others will experience a sharper increase, with affordability measures 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,” he said.

“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 added. “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%).”

By contrast, Century 21 New Zealand owner Tim Kearins argued that the recent increase in OCR would not dent FHBs' enthusiasm to enter the property market because paying a mortgage remains comparable, or even cheaper, than paying record-high rents nationwide.

He added that even though banks decided to increase their interest rates, they are nonetheless heading on an upwards track, which would see buyers more motivated to act and make the most of low-interest rates this summer.

“People are waking up to the fact that they can either buy and set their interest rate at say 4.5% or wait and pay 6% – which is 33.3% more! Further, many pundits doubt property prices will drop, so waiting is now not much of an option,” he said.