OCR cut: No ‘rocket to the moon’ for house prices

Wednesday, 9 October 2024

High bank mortgage ‘test rates’ remain a barrier to first home buyers getting loans.

The property and mortgage industries are breathing a sigh of relief over the 50 basis point cut to the Official Cash Rate ‒ but economist Brad Olsen is warning people not expect house prices to suddenly be so good they’d “jump on a rocket ship to the moon”.

“We don’t expect that tomorrow buyers will be flooding the market,” said Olsen, Infometrics’ chief executive and principal economist, of the Reserve Bank Te Pūtea Matua’s move on Wednesday.

That was because though mortgage rates were coming down, they remained relatively high.

Another of the reasons for that is because while banks like ASB, BNZ and Kiwibank have started cutting their variable mortgage rates, they haven’t dropped the “test rates” they use for deciding whether buyers can afford loans.

Mortgage adviser Karen Tatterson, from Loan Market, said: “What we need now is for the banks to drop their test rates.”

Currently banks were testing the affordability of loans with test rates of 8.75% to 8.95%, which was so high it was making it impossible for many buyers to qualify for loans.

Finance Minister Nicola Willis talks to media after OCR cut

Tatterson expected the banks to drop their rates, but she couldn’t see them making large cuts to them, although economists are holding out hope for another cut the OCR in November.

Even assuming banks start cutting their fixed-term home loan rates, there remained a large number of properties for sale, which economists expect will keep property prices from accelerating upwards.

Sarah Wood, chief executive of Realestate.co.nz, said after an OCR cut there was traditionally an uptick in people searching for properties on its website.

After the Reserve Bank cut 25 basis points from the OCR in August, which was the first cut in four years, there was an 8.5% rise in visits to Realestate.co.nz, and a 5.5% rise in people “saving” a property to look at later.

But she said a lot of new homes had come onto the market, and stock levels in major cities remained elevated, especially in Wellington.

“We have a lot more homes on sale in New Zealand than we had last year,” Wood said.

That may get expand further as spring and summer generally saw a rise in people listing homes, which many felt were better presented to would-be buyers in sunshine than rain.

Realestate.co.nz chief executive Sarah Wood says after cuts to the OCR, there is an increase in public interest in properties for sale.

Kelvin Davidson, economist from CoreLogic, said the OCR was now on a steady downward path, and the key point for buyers was that mortgage interest rates were likely to continue to drop too.

“This could easily produce a short-term lift in confidence and a more active housing market as we hit the normal Spring uplift anyway,” he said.

But that would probably only result in ending house price declines in the coming months, and buyers who had finance would remain in a strong negotiating position.

Many people with home loans have been preparing for rates starting to fall for around a year, opting for shorter-term fixed rates in anticipation of rates cuts, said Tatterson.

That’s shown in Reserve Bank figures which show that of the $266 billion in owner-occupier home loans, $100b was fixed for a period of six months or less at the end of August, which was $34b more than the same time last year.

There is currently a glut of houses for sale.

Mortgage adviser Bruce Patten, from Loan Market, said all the banks had cut their rates several times since August 14, and more cuts would come.

“Our best guest is we can expect at least another 1% to 1.5% drop in the OCR over the next six to 12 months,” he said.

“Riding rates down is the easy part, picking the low point is the challenge, so don't wait too long in making a decision to consider a longer term fixed rate. We expect this could be anywhere from April to October of 2025.

“If I could get something with a four in it for two to five years, I would grab it all day long, but I might be wishing for a little too much,” he said.

Mortgage adviser Karen Tatterson says banks need to drop their home loan affordability ‘test rates’.

ANZ’s two-year rate is 5.69% for people with at least 20% equity. ASB’s rate is 5.69%.

As rates drop there is a temptation for borrowers locked in to higher rates to “break” their loans, and refix at lower rates.

Tatterson said the cost of mortgage break fees was designed to compensate banks for lost interest on the broken loan. Banks also required break fees to be paid in cash, and not added to their loans, which ruled out many borrowers.

There were moments when it made sense for borrowers to pay a break fee, but the windows of time for them to do it were limited.

She said one young couple she was speaking to faced a $4000 break fee on their loan, but on current rates they could save $6000 to $7000 over the longer term for doing it.

But that fee would increase, once banks dropped their fixed rates.

The Property Investors’ Federation’s Matt Ball suggested the OCR cut was a sign that better times were ahead for both landlords and renters, suggesting renters might find themselves in a market where they had “more choice at a better price”.

Ball said lower finance costs would mean less pressure on landlords to raise rents, but acknowledged that it was supply and demand that determined the rents landlords could command for their places.

Olsen saw the “better price” comments as disingenuous, and suggested landlords in the Federation could put their money where their mouths were, and cut their rents when they refix at lower rates.