No retreat, no surrender: Cash rate hike meant to kill off cheaper mortgages

1. The Reserve Bank isn’t relenting yet

Another Official Cash Rate (OCR) decision, and another 0.5 percentage point rise. Last week’s increase was ahead of the 0.25 percentage point rise most had been expecting, but it wasn’t a total shock either – given the Reserve Bank of New Zealand’s tough stance of late, few people had ruled out entirely such a move. Clearly, the Reserve Bank remains very concerned about inflation, and noted that the effects of Cyclone Gabrielle are likely to result in stronger price pressures than otherwise, as well as more economic momentum (from the rebuild).

That said, in terms of mortgage rates, there may not be much upwards impact. Indeed, in the statement that accompanied the OCR decision, they explicitly noted that part of the reason for raising by 0.5 percentage points was to try and reverse some of the recent modest falls in mortgage rates. That might sound harsh, but this is monetary policy in action – keep rates “higher for longer”, curb demand/spending in the economy, and help bring down inflation.

So has the OCR finally peaked? Perhaps not, and it wouldn’t be a surprise to see the Reserve Bank to put up the cash rate again on May 24. It would be the 12th consecutive rise if it does happen, and a 0.25 percentage increase would take the cash rate to 5.5% - the Reserve Bank’s long-indicated target rate. But before that, on April 20, we’ll get to see the next consumers price inflation data, covering the first quarter of 2023, and if the annual rate of inflation, currently at 7.2%, drops, the Reserve Bank would probably start to more seriously question the need for any more OCR increases – especially given the lagged effects of the OCR rises already seen.

2. House prices are still falling

The CoreLogic House Price Index for March showed another monthly fall in average property values (1.1% down), with the annual change now sitting at -10.5% – worse than the GFC. Each of the main centres saw a fall in values in March, but over the full duration of this downturn, it’s definitely Wellington and Auckland that have seen the largest declines in property prices. Queenstown, by contrast, has held pretty steady.

3. Caps on debt to income ratios still firmly on the cards

Last week the Reserve Bank released more material around caps on debt to income ratios (DTIs) for new mortgages, although there wasn’t really anything new – the release mainly just set out some clarification for banks around what actually counts as income and debt. We still await the key content – i.e. where the limits will be set (DTI of six, seven etc), what speed limits might be in play, and any exemptions (e.g. new-builds). But what is certainly clear is that DTIs are coming early next year, and over the long-run they’ll tend to limit house price growth and also restrain the number of properties that an individual can actually own. This will tend to favour first home buyers and hamper investors.

CoreLogic chief economist Kelvin Davidson: “this is monetary policy in action – keep rates “higher for longer”, curb demand/spending in the economy, and help bring down inflation.” Photo / Peter Meecham

4. Early signs of life?

With the higher OCR, DTI caps, and further falls in house prices, it was a gloomy week for the property market. However, early data (from Barfoot & Thompson) on Auckland sales activity and house prices in March did have a slightly stronger tone. Could this be the beginning of the end for the downturn? It’s probably too early to say, but I’ll certainly be watching listings data in the next few weeks – if total stock starts to tighten a bit, this would support the idea that the downturn is ending.

5. Net migration still rising?

And finally, Stats NZ will publish February’s migration data on Friday. This has turned around very sharply in recent months, and it adds to the list for thinking that the wider housing downturn will end later in 2023.

- Kelvin Davidson is chief economist at property insights firm CoreLogic