Rising rates, sinking prices: The ‘orderly correction’ that feels anything but

1. More official cash rate increases on the cards next year

Last week, the Reserve Bank duly raised the official cash rate (OCR) from 3% to 3.5%, the highest level for more than seven years. Perhaps more noteworthy, however, was the language in the statement reiterating that they want to continue to tighten monetary policy “at pace”, and that they also pondered a 0.75 percentage point increase at the latest meeting (before settling on a 0.5 percentage point rise). Now, to some extent that may just have been a cunning plan to try and boost the exchange rate. But with the dust now settling, the overall conclusion has to be that the chances of 4% (in November) being the peak for the OCR in this cycle have reduced, and hence, mortgage rates are still facing upwards pressure – especially if the next consumers price index reading (October 18) remains elevated.

2. Property values still sliding

The CoreLogic House Price Index released last week showed a decline of 1.5% in average property values in September, with Wellington again a soft spot (-2.5%). Just like the falls in mortgage rates contributed to the previous post-Covid upswing in property values, the rises in borrowing costs are now a key driver of continued price drops. After all, a higher interest rate simply means that new borrowers can’t get as big a mortgage as before. Meanwhile, many existing borrowers are still grappling with the sharp jump in mortgage costs as they roll off lower rates from a year or two ago and emerge into the new >5% world. The downturn in prices can probably still be labelled as an “orderly correction”, but much hinges on unemployment staying low.

3. Net migration ‘less negative’?

Stats NZ will publish the August migration data on Wednesday this week, and there’s a chance that the data will continue to look a little better – still below zero on a net basis, but less negative than in previous months, as non-citizens start to arrive in greater numbers. Of course, even if that is the case, it’ll be a while until the overall balance turns significantly positive again, and in the meantime there are still concerns about the ‘brain drain’ of kiwi citizens heading overseas.

CoreLogic chief economist Kelvin Davidson: “A higher interest rate simply means that new borrowers can’t get as big a mortgage as before.” Photo / Peter Meecham

4. Slowing rental growth a further challenge for landlords

Then on Thursday, Stats NZ will release September’s rent price figures, and these seem closely linked with the negative net migration data at present – i.e. rental growth has slowed as net migration has been below zero, dampening demand for rental properties, and making it difficult for landlords who are looking for new tenants. Indeed, rental growth has dropped from 6.9% (on an annual basis) in April to 3.6% in August, and it wouldn’t be a surprise to see another softer figure in September.

5. Don’t forget about potential debt to income ratio caps

Slowing rental growth is a further headache for investors, already faced with low rental yields and higher mortgage rates. Those running their sums also shouldn’t forget about the ongoing Reserve Bank process to establish formal caps on debt to income ratios (DTIs) for new mortgage lending. They’re not due until the middle of next year at the earliest, and of course could also be set at a level that isn’t binding straightaway – there are likely to be exemptions/speed limits too. But with about 40% of investor loans (by value) still being taken out at a DTI >6, this buyer group could be stung the most by any official system enacted next year.

- Kelvin Davidson is chief economist at property insights firm CoreLogic

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