1. The big question for homeowners - 0.25% or 0.5%?
On Wednesday, the OCR is guaranteed to rise – the question is only by how much. 0.25% or 0.5%? The consensus is for a 0.25% rise, taking it to 1%. But a 0.5% increase can’t be ruled out, and either way, this is only one step on the journey, not the end of it. With inflation very high, the OCR could ultimately rise to around 2.5% next year, meaning mortgage rates have perhaps another 1% to rise, maybe more (depending on the competitive environment and how willing the banks are to absorb smaller margins to potentially gain some market share).
2. Rental growth may have peaked
Stats NZ figures last week showed that rental growth slowed to an annual rate of 5.5% in January – still high, but the slowest since August last year. With landlords still keen to recoup the extra costs they’re facing through higher tax and mortgage interest bills, rents are unlikely to grind to a halt straightaway. However, they’ve outpaced wages for a while now, and affordability for tenants is stretched – acting as a natural handbrake on rents over the next six to 12 months.
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3. Mortgages are still large in relation to incomes
The latest figures on debt to income (DTI) ratios for new mortgages over October to December probably didn’t alleviate too many concerns within the financial stability arm of the Reserve Bank. True, the share of lending going out at a high DTI has stabilised lately (instead of rising further), but it’s still elevated – especially for investors. Lately, more than 50% of investors have been borrowing at a DTI >6. By comparison, the first home buyer share has been about half that figure. The current consultation on DTIs ends on February 28, so expect discussion on this topic to re-emerge again over the next few weeks.
CoreLogic chief economist Kelvin Davidson says Kiwi incomes need time to catch up to house prices. Photo / Peter Meecham
4. Affordability is simply getting worse
Across the four key affordability measures in the latest CoreLogic report, three pushed out to new record highs (i.e. affordability at a new record low) in the fourth quarter of the year: the value to income ratio at 8.8, years to save a deposit at 11.7, and rents as a share of gross average household income at 22%. The fourth measure, which is mortgage payments as a share of income, is now 48% – only a whisker short of the previous (pre-GFC) peak of 50%, and a mark that could easily be surpassed in the next quarter or two as mortgage rates rise further. A long term improvement in affordability could be a long slow grind, as income needs time to catch up to prices.
5. Lots of gain, not much pain
This week CoreLogic will be releasing its Pain & Gain Report, looking at the difference between what property owners sold for in the last three months of 2021 versus what they originally paid (however far back that was). Inevitably, with the average hold period sitting at around seven years, and property values rising for most of that period – and especially in the past 12 to 18 months – recent vendors have enjoyed large gross profits. Of course, for the typical owner-occupier, that fresh equity just needs to be recycled back into the next purchase (everything else has risen too), and often trading up would actually mean taking on more debt as well.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
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