Reserve Bank decision could push one- and two-year mortgage rates up to 6 per cent

Wednesday, 13 April 2022

Homes used to cost a lot less, but in previous decades home loan interest rates were much higher. Home loans rates are however on the rise as the Reserve Bank Te Pūtea Matua has been raising the official cash rate to fight inflation.

The Official Cast Rate (OCR) has been increased to 1.5 per cent, which could put the squeeze on homeowners and would-be borrowers.

The Reserve Bank increased the OCR 50 basis points on Wednesday, taking it from 1 per cent to 1.5 per cent – a move in line with most commentators’ predications.

This shift may seem modest, but with interest rates historically low and national average asking price sitting 16 per cent higher than last year, small changes will have a big effect on home loan borrowers’ interest repayments.

To put the changes in perspective, CoreLogic chief property economist Kelvin Davidson said the 50 basis point rise in the OCR could see popular one- or two-year fixed term interest rates easily end up in the range of 5 to 6 per cent over the coming months or even above (up from 4 to 5 per cent currently).

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CoreLogic chief property economist Kelvin Davidson says the total price fall could end up at about 20%.

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'Going from a 5 per cent to 6 per cent mortgage rate would cost an extra $750 per year per $100,000 of debt. So somebody with a $500,000 mortgage would be on the hook for almost $4000 more per year - and they’ll already be paying more anyway, if they were originally fixed at 2 per cent or 3 per cent a year or two years ago,” he said.

“It's certainly another challenge for the market, but again the general thinking is that serviceability has been tested, so most people should be ok.'

CoreLogic head of research Nick Goodall said prices were influenced by affordability, and if interest rates rose, the size of mortgages people could afford would shrink, and the prices of homes would follow.

“There’s less demand, because fewer people can borrow the sums of money required to pay the prices of where the market is currently at. It will further slow things down.”

Goodall said this headwind would add to others already acting on the market, including supply of homes being up, and the buyer pool having shrunk due to stricter lending rules and restrictions on low-deposit lending.

Reserve Bank governor Adrian Orr kept the OCR outlook at 3.4 per cent by late-2024.

Economist Tony Alexander said house prices could fall 10 per cent this year, but it was the words and commentary from the Reserve Bank governor that would matter more than the rate increase.

Reserve Bank highlights continued cost of living increases

Among these words were notes from the Reserve Bank’s Monetary Policy Committee that stated global consumer price inflation remained high, and well above most central banks’ targets.

“The economic disruption caused by Covid-19 has been exacerbated by rising energy and food prices resulting from the Russian invasion of Ukraine,” the committee noted.

The committee said it was appropriate to continue to tighten monetary conditions at pace to maintain price stability.

Economist Tony Alexander says a correction is overdue for the housing market.

It also noted the rise in mortgage interest rates, amongst other factors, had acted to reduce mortgage demand and house prices.

The committee remained comfortable with the outlook for the OCR it had published in February, which highlighted a need for the rate to rise to about 3.4 per cent by late-2024 to bring down inflation.

Alexander said the thing that would have the biggest effect on the sentiment of home buyers and sellers would be what the Reserve Bank said about future interest rate increases and the outlook for the wider economy.

A recent study by Consumer NZ found the “bank of mum and dad” is the fifth-largest supplier of owner-occupier loans to help family get onto the first rung of the property ladder.

“Things are slowing down quite a bit, the business sector is feeling pretty pessimistic, consumers have already reined in their spending, and the housing market is already turning downwards,” he said.

“I don’t necessarily think there’s going to be all that much extra negativity in terms of the housing market from this.”

Alexander doesn’t predict any degree of panic, because interest rates remain at historically low levels.

He said recent borrowers had to prove to their bank they could service a mortgage rate of at least 6.5 per cent.

“I have no worries, people had to prove they could service at least 6.5 per cent, and anyone who took out a mortgage three years ago probably had to prove they could service 7.5 or 8 per cent,” he said.

“The strain here isn’t going to be so much in the housing market, but in other areas of consumer spending. People with mortgages are going to be pulling back on spending on eating out, on dining out, on those sorts of things.”

He said the only sector where panic might set in was among property developers, who might no longer get the pre-sales their financiers demanded.

Alexander said everyday home loan borrowers were no better at understanding the impact of the Reserve Bank’s monetary policy than they were a decade ago, and their focus remained on the home loan interest rates of the day – and not how they might change in the future.

“Over a year ago I was suggesting to people with interest rates rising, perhaps they should lock in for five years at 2.99 per cent,” he said.

“Instead, people jumped in to fix one year at 2.19 and 2.49 per cent, so people’s focus is very much on the rates of the day and not really to where rates are likely to go in the future.”