Declining mortgage rates are welcome relief for homeowners but some experts say buyers should now watch out for the impact of debt-to-income ratios, which will likely begin to bind next year.
Higher interest rates for most of 2024 have limited how much people can borrow but with rates now widely forecast to fall to below 6% - or even below 5% - in the next 12 months, the new DTI rules will take over limiting how much people can borrow.
In general, owner-occupiers will be able to borrow a maximum of six times their income while investors will be able to borrow a maximum of seven times their income, with some exceptions, such as for new builds.
The Reserve Bank introduced the DTIs this year on July 1, the same day it loosened loan-to-value restrictions on deposits, but those interviewed by OneRoof say the measure to watch is the DTIs which – technically, at least – should prevent runaway house prices, which can happen with falling interest rates, as seen after Covid.
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The Reserve Bank’s October decision to cut the OCR by 50 basis points to 4.75% was preceded by and then followed by banks cutting mortgage rates, and more mortgage rate cuts are expected if the Reserve Bank again cuts the OCR in November.
CoreLogic chief economist Kelvin Davidson said the July changes to LVRs, which gave banks more leeway to lend to more people with lower deposits, had not had much impact but he thought the DTIs would alter the market.
LVRs were there to protect banks against house price falls, while DTIs were put in place to protect borrowers: “That’s about saying, ‘You might think you might be able to afford your loan at current interest rates, but what if they go up in the future? We want to limit your loan size.'”
Davidson described the DTIs as “a pretty big landscape shift” and could take effect sooner than had been expected. “The way things are going it looks like we could go below 5.5% for a range of mortgage rates pretty soon.”
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But while DTIs could make borrowing trickier, they are not all bad news because while they would limit the amount people could borrow, they should also limit the extent of house price growth, which means people should not need to borrow as much.
Davidson said the outlook for next year was positive, but noted that world events could upend forecasts, such as an escalation in the Middle East conflict, rising oil prices and the outcome of the US election: “There’s always risks. Nothing is guaranteed.”
Hanging out for relief
Jarrod Kerr, Kiwibank’s chief economist, said interest rates remained the biggest driver of the housing market and the recent OCR cuts were having an effect on market sentiment.
The current frontloading of cuts meant the OCR was likely to reach around 2.5% sooner than anticipated, and Kerr expected mortgage rates to be around the low fives, with some possibly in the high fours, by this time next year.
“Which is significant relief for people who were facing 7%-plus not that long ago. That’s the power of monetary policy, so cutting those rates, people are kind of hanging out for it, and there’s going to be a lot of relief out there.”
CoreLogic chief economist Kelvin Davidson: “The way things are going it looks like we could go below 5.5% for a range of mortgage rates pretty soon.” Photo / Peter Meecham
House prices are expected to grow in 2025. Photo / Fiona Goodall
DTIs would make people more aware of how much leverage they could take on, but mortgage test rates would also come down, which had been an inhibitor for some to get loans.
Kerr said DTIs should temper crazy house price increases. “It won’t enable the same sort of lending that we got a few years ago.”
Wayne Shum, senior research analyst for Valocity, OneRoof’s data partner, did not think DTIs would limit buying appetite.
“You’ll probably still have a similar number of buyers in auction rooms perhaps but it’s not going to be the same growth power we had previously.”
Other factors would also play into the housing market, from a glut of listings to other assessment criteria banks use, such as the CCCFA, and the ongoing economic uncertainty.
“Unemployment is forecast to be in the 5% range next year. Every day or two we hear redundancies or closures, so we’ve still got a little bit of that to come through.”
Westpac’s chief economist, Kelly Eckhold, said mortgage rates could get close to 4% next year, including the shorter one-year and six-month rates.
“You might see a more normally sloping mortgage curve where the shorter rates are slightly lower than the longer rates.”
That was a material improvement in budgeting for first-home buyers and made the metrics for investors look more positive.
Global volatility
Eckhold expects DTIs to bite if house prices run ahead of income growth.
Westpac’s house price forecast was for a 6.25% rise next year but Eckhold said with wage growth likely to settle closer to 4% in nominal terms there was not a huge gap between income growth and house price growth in the forecast.
“If it turned out the house prices rose a lot stronger and we’re doing 10 or 15% per annum, well, that’s going to bring DTIs into play, and LVRs into play as well, because obviously, it will mean people will have to have an even bigger deposit.”
That was unlikely, he said. The inflation rate was on track to reach 2% and flatten out around that level, which was what the Reserve Bank wanted.
Even with “plenty” of sources of volatility in the world, such as petrol prices and war, the 2% level gave the Reserve Bank a lot more room to look through volatility.
Westpac chief economist Kelly Eckhold: “If it turned out the house prices rose a lot stronger and we’re doing 10 or 15% per annum, well, that’s going to bring DTIs into play." Photo / Fiona Goodall
“If inflation is running at five and then something suddenly disrupts your inflation forecast for six months it’s harder to say ‘don't worry about it’ – you sort of have to worry about it – whereas in next year they should be more relaxed.”
ANZ was also expecting mortgage rates to be in the five to 5.5% range. Economist Henry Russell said the risk was the housing market bouncing back more aggressively than expected, adding the housing market had many different drivers which were pointing in different directions.
The loosened LVRs along with other policy changes, such as reinstatement of interest deductibility and reduction of the bright-line test, supported demand but Russell said the economy was weak and unemployment was rising.
DTIs would come into effect if house prices did increase rapidly and that would temper the increase: “I think the best way to describe that policy is it’s trying to reduce the boom/bust cycle of the housing market, which I think is a good thing.”
Busy year ahead
ANZ was forecasting house price growth of around 4.5% next year but Russell said some things could not be planned for. One factor that could cause more aggressive growth was FOMO (Fear of Missing Out) which drove huge price growth after Covid.
“Fear of missing out and all those things are not things that we can forecast. The challenge is that in scenarios where animal spirits [economic speak for emotional drivers] captivates the market it starts to move away from what fundamentals would suggest.”
Mortgage adviser Campbell Hastie, of Hastie Mortgages, expects next year to be a busy one for his profession. He expected the Reserve Bank would keep cutting the OCR through to next winter until mortgage rates were in the fives, saying the rate itself was less important to people as the downward trend was, which gave confidence, but people also needed job security.
“If there’s more cash flowing through the economy it’s more likely people will keep their jobs and, therefore, more likely they will take on a mortgage obligation.
“I think the average Kiwi is pretty much in love with property. As a country we seem to get it. People will always be interested in buying and they will still be knocking on my door to try and figure out what they can do – the appetite won’t change.”
Tella Mortgages CEO Andrew Chambers expects the OCR to be in the 4%s next year and in the 3%s in 2026 – he advised first-home buyers to get into the market now because it would only become harder from here on in.
“The window for good buying will close relatively quickly and competition for housing will begin to increase so those looking to buy should act quickly.”
Falling rates would drive borrowers to shorter rate periods with more people going back to one-year fixed rates, he said.
“As we come out of the down cycle and into greater job security, activity will pick up – inflation improving, rates falling, tax adjustments all add up to more financial security and that will drive activity.”
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