How high will mortgage rates go on Wednesday?

1. Budget 2022 a small positive for some buyers

The Government estimates that the loosening of price caps announced in last week’s Budget will lead to 7,500 more First Home Grants each year and 2,500 extra First Home (low deposit) loans with Kāinga Ora backing. Clearly, this is great for those people who can now make a purchase, but in terms of housing market effects, it’s likely to be fairly small. After all, some of these people may have planned to buy anyway without government backing, and of course, they’ll still have to satisfy expense tests, and be able to handle higher mortgage rates.

2. Banks are reining in high debt to income loans

The latest batch of debt to income (DTI) data last week was really striking, with high DTI lending already dipping, even without any rules enforced by the Reserve Bank. For example, the share of first home buyer loans with a high DTI (>7) has fallen from 9% in December to 5% now, and for investors (DTI>6), the drop has been from 54% in December to 48%. This illustrates the effect that self-imposed DTIs at some of the banks have had, and adds to the case for thinking that official limits won’t be seen in this cycle (and the Reserve has already said it wouldn’t be until mid-2023 anyway, at the earliest, if required).

3. All eyes on Adrian on Wednesday

It’s pretty much unanimous amongst economists* that the Reserve Bank Governor Adrian Orr will follow up April’s 0.5 percentage point rise in the official cash rate with another 0.5 point rise on Wednesday, taking it to 2%, a level not seen since September 2016. The Reserve is due to make a full Monetary Policy Statement too, so the detailed projections for where the OCR might finally end up will also get plenty of attention. Currently, they’re suggesting a peak of about 3.25% late next year, so any deviation from that will generate market reaction.

Ultimately, local mortgage rates are influenced by more than just the OCR (e.g. overseas wholesale rates), but the implication of another OCR rise will be further upwards pressure on mortgage costs. That said, at least we’re closer to the end of this rising cycle than the start.

(* You might joke that when economists are unanimous, it’s very likely they won’t raise it by 0.5%!)

CoreLogic chief economist Kelvin Davidson: "We’re closer to the end of this rising cycle than the start." Photo / Peter Meecham

4. Still tough to get a low deposit mortgage

An hour after the OCR decision, the Reserve Bank will publish aggregated mortgage lending figures for April, which will be subdued, given that we already know sales volumes were soft last month. My main focus, however, will be on the breakdown by loan to value ratio. In March, just 3% of owner-occupiers got a mortgage with less than a 20% deposit, and all the anecdotes we’ve had in recent weeks suggest that this figure might have stayed very low in April.

5. Consumer confidence and filled jobs will tell us a lot

I think the two data releases due this Friday will reveal plenty about where the economy and housing market might be headed in the short term. First, ANZ will publish May’s consumer sentiment indicator, and although it rose a small amount in April, confidence was still very low – and it’s hard to imagine that May’s figure will be noticeably stronger. This just emphasises the possible recession risks we currently face.

And second, Stats NZ will release April’s filled jobs data. There have definitely been signs of a loss of momentum in new job creation in the past few months, and it’s conceivable that the number of jobs might have fallen in April. Given the importance of the labour market to how housing might perform over the coming months, a reduction in employment would be a significant concern.

- Kelvin Davidson is chief economist at property insights firm CoreLogic

Listen to The NZ Property Market Podcast below