ANALYSIS: It has, without question, been a hard year for most homeowners with a mortgage. The cost of living is more than double the acceptable rate of inflation, mortgage interest rates are double what they were a year ago, and most Kiwi homeowners will have felt the additional cost of higher mortgage rates at some point this year as their fixed rates matured.
But what about those who are looking to buy in 2023? This year, borrowers were met with the strictest borrowing policies since 2008, making it extremely difficult to get on the property ladder. Will 2023 be any better? To forecast what borrowing will look like in the near future, we must first look at what got us to this position.
At the risk of minimising the pain caused by interest rate increases, the biggest brake on the market this year was the sudden withdrawal of finance due to last year’s changes to the Credit Contracts and Consumer Finance Act (CCCFA). "Withdrawal of finance" isn't actually a fair term as it insinuates that the banks volunteered to make borrowing more difficult. Instead, the banks had to adhere to the new rules that made it almost impossible to lend to most applicants.
This sudden inability for all but the very best applicants to get finance had two outcomes; it removed a significant percentage of the buyers from the market as their mortgage pre-approvals were declined, and shook the enthusiasm for those who were approved by the bank. Add in the mix the sharply increasing interest rates, and the property market that was boiling too hot just a few months earlier was suddenly very cold.
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Fast forward a year to today and believe it or not, things have got a little better for home buyers. A few tweaks to the CCCFA have meant that most people who rightly deserve a mortgage can now get one, albeit that they now have to meet a mortgage test rate - often referred to as the servicing rate - of 8%-9% rather than the 6.5%- 7% that was applied last year.
All that remains to hold back the market, therefore, is buyer hesitancy about how much higher interest rates will go and how low the price of houses will sink. The former - interest rate concern - is dwindling in buyer's list of fears as interest rates seem to have stabilised at around 6%.
Rupert Gough: "The buyers in the 2021 market could only dream of the market we're in at the moment." Photo / Fiona Goodall
For anyone considering buying a home in 2023, the first step I would suggest is to find out how much you can afford under the current bank policies. There is almost no harm in asking the bank or your broker what your current mortgage affordability is. It's unlikely that bank lending policies will change much in the next 12 months; if anything, they may relax a bit further, so finding out how much you can borrow today will probably let you know where you stand for all of 2023.
If you can't borrow enough to purchase the house you want, find out what is holding you back. It is usually your deposit or your income/expenses. Take the next six to 12 months to work on this hurdle; either find a way to get more deposit through savings or family, or try to minimise your monthly expenses.
For those who can afford to borrow for a home but find themselves hesitant to move ahead, take a moment to consider what the market was like 12 months ago: queues out the door at open homes, auction rooms full of hungry bidders. The buyers in the 2021 market could only dream of the market we're in at the moment; a market where a buyer with finance can make an offer with no competing bids. Take advantage of this cool market and take your shot at purchasing a house you love. While there is the potential that house values could fall a further 5% or so, this would only be an issue for someone who wants to sell in the near future. History tells us that by the time we realise houses have reached the bottom and started to increase in value again, the open homes have started to fill again and you've missed out on the buyer's market.
In short, I expect 2023 to be the year of the new norm. Interest rates should remain fairly close to where they are now and stay there, house prices may drop a little further but even out in the early part of the year. Bank lending policies will remain a little painful but shouldn't get significantly harsher. This presents the best buying opportunity for a pre-approved buyer in years.
- Rupert Gough works for Mortgage Lab and is author of The Successful First Home Buyer.
