"Interest rates are still a lot lower than when they peaked in past decades," says real estate boss
Mortgage rates are predicted to rise further and the property market could see price increases of less than 5%, following another hike in the official cash rate.
The Reserve Bank recently lifted the official cash rate by 25 basis points to 1% – the third consecutive OCR hike in the last six months and a return to where the rate was sitting pre-COVID in February 2020.
Kelvin Davidson, chief property economist at CoreLogic, said the RBNZ had also predicted a higher peak for the OCR than they previously indicated – from the previous indicated peak of about 2.5%, to a nudge above 3% later next year.
The CoreLogic economist also said mortgage rates had a flatter patch lately, after sharp increases last year, with much of the future increases in the cash rate already “priced in” to current rates to some degree.
“This suggests that any further increases in mortgage rates could well be slower and/or smaller than what we’ve already seen,” Davidson said.
Davidson said he was wary of “casually assuming that the OCR will go up surely and steadily,” given the “risk of more business insolvencies this year,” and “the resulting loss of jobs could feed back into the weaker economic growth and hence a lower/slower path for the OCR – and also potentially mortgage rates too.”
Already, Davidson see signs that higher mortgage rates, combined with intense affordability pressures and tighter credit availability, are cooling sales volumes and the pace of value growth.
“Although mortgage rates may not shoot up quite like they did last year, they’ve undoubtedly still got further to rise,” he said.
Davidson said that with more than 50% of NZ mortgages rolling off a fixed interest period this year, and with another 10% or so on floating rates, a high proportion of borrowers are due to face increased interest costs soon.
“Looking ahead, if unemployment remains low then the housing market shouldn’t be headed for a crisis,” Davidson said. “But after growth in average property values of more than 25% last year, I’d expect that figure to be less than 5% this year – and the chances of prolonged falls are certainly growing.”
Tim Kearins, owner of Century 21 New Zealand, argued, meanwhile, that “interest rates are still a lot lower than when they peaked in past decades” and that “servicing a mortgage remains comparable, or even cheaper, than paying current record-high rents.”
“Yes, the OCR is now at 1.00% which is the highest it has been for two years,” Kearins said. “However, let’s not forget that in April 2015 it was at 3.50% and in June 2008 it was at 8.25%. Historically, 6.0 or 7.0% interest rates have been about the average for Kiwi borrowers. So, today’s rise in the OCR needs to be put in perspective. We’re coming off a period of extraordinary low interest rates after the OCR didn’t move from 0.25% for most of 2020 and 2021.”
Kearins said New Zealand's property market remained relatively resilient despite the arrival of Omicron, tighter lending restrictions, rising interest rates, and a softening of prices forecast.
“The speed of growth is certainly slowing, but good properties remain in strong demand and that will continue in the foreseeable future,” he said. “First-home buyers need to keep in context that compared to past decades, interest rates remain favourable.”