Could your finances handle a mortgage rate of 6.5%?

1. Reserve Bank brings out the big stick

There were no surprises that the Official Cash Rate (OCR) went up by another 0.5% last Wednesday, but the aggressive upgrade to where the Reserve Bank thinks the OCR needs to go did cause quite a few sharp intakes of breath. They’re now indicating an earlier and higher peak of about 4% by mid-2023 (instead of 3.5% in late 2023), implying a “typical” mortgage rate of 6.5% at least – they haven’t been that high since 2010.

Now, the RBNZ might be “talking a big game” here, hoping that they can scare consumers and businesses into softer price-setting behaviour, thereby meaning the OCR doesn’t actually need to go as high. A weaker economy (e.g. possible job losses) from a higher OCR may also mean it doesn’t actually need to rise so quickly. But either way, we haven’t seen the end of mortgage rate increases yet, and it means that the huge wave of people on low fixed rates from a year ago will now be looking at an even steeper increase when they refix.

2. A bit more leeway for low deposit borrowers

But although a mortgage is going to cost more, at least people with low deposits found a bit more finance available in April (at least in relative terms). The latest mortgage lending stats showed that 6.1% of owner occupier lending was approved with less than a 20% deposit last month, up from 3% in March. That said, the lending figures are still below the 10% speed limit, and with values now falling, banks will probably retain a very cautious attitude towards low deposit loans.

3. Still reasons to avoid outright housing pessimism …

Clearly, the property market has weakened, and there are many “headwinds” – e.g. a rise in unemployment (if it occurred) would be a serious new challenge. But it’s also important to take a balanced view, and consider buffers for the market such as the “insurance” provided by the LVR rules, serviceability tests, and now the data coming in from various sources lately that many borrowers have taken the opportunity of previous low mortgage rates to get ahead on their repayments. This provides some wriggle room in the event of changed financial circumstances.

CoreLogic chief economist Kelvin Davidson: “We haven’t seen the end of mortgage rate increases yet.” Photo / Peter Meecham

4. …. but recession risks are still ever-present

But even though we’re wary of over-doing the housing pessimism, you can’t avoid the risks. For example, there’s still got to be a serious level of concern about how weak consumer confidence is – the ANZ’s measure for May (released last week) remained as low as ever. This does not bode well for retail spending in the economy, and just keeps those recession risks bubbling away in the background, especially given that interest rates continue to climb at the same time. Although again, balance is required – on the plus side, filled jobs across the economy rose strongly (0.6%) in April.

5. Consents are not the same as finished houses

Just quickly, Stats NZ will publish April’s building consent data this week, and who knows, it might be strong yet again! But as we pointed out recently, some of these consents may never get built, and we’re also demolishing houses too – meaning the stock change is smaller.

- Kelvin Davidson is chief economist at property insights firm CoreLogic

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