Interest rates warning: Why a cash rate peak of 5.75% could still be a win for homeowners

1. Will this actually be the last official cash rate increase?

At 2pm on Wednesday the Reserve Bank’s latest Monetary Policy Statement will be released, and it seems likely that the official cash rate will be pushed up by 0.25 percentage points to 5.5%. But that increased has already been priced in, so mortgage rates may not directly react too much, if at all, to the lift itself.

Thereafter, however, uncertainty has increased. Following last week’s expansionary Budget, economists at each of the big four banks now believe that the Reserve Bank won’t stop at 5.5%, and that a peak of 5.75% or 6% is on the cards. They’ve recently been pretty accurate in predicting what the Reserve Bank will do, but let’s not forget that the cash rate has already been raised sharply over the past 18 months (from 0.25% in October 2021) – and that a fair chunk of that impact is yet to be felt, because of New Zealand’s high share of bank lending that’s on fixed rates. Either way, it’ll be fascinating to see what the Reserve Bank envisages within their own detailed forecasts that will accompany the Monetary policy Statement as well as the tone of the media conference on Wednesday.

Overall, the upshot is that although the bulk of the increases to mortgage rates is now behind us, the final/definite peak for the key 1-2 year fixed rates may still be just a little way away yet. An eventual rise in the cash rate to 5.75% may not necessarily impact those key rates too much (given stiff competition in the banking sector), but if it went to 6%, some pass-through to market interest rates would be more likely.

2. Budget 2023: not a direct property impact, but could be indirect

Last week’s Budget didn’t contain too much in the way of direct housing market measures, although it was good to see some more money for extra public housing places, and also of course a renewed emphasis on infrastructure – which is key to getting enough houses in the right places to cater for future population needs. However, in an indirect way, the Budget could still impact the property market – i.e. increased public spending keeping inflation a bit higher for longer, necessitating more cash rate increases, and a bit more upwards pressure on mortgage rates.

3. Watching the economic dataflow

One key aspect to that monetary policy puzzle is simply how the underlying economy is tracking, and we’ll get another update on that later in the week – with the NZ Activity Index for April on Thursday morning and the ANZ’s consumer confidence measure for May on Friday at 10am. Both indicators will probably highlight a lingering recession risk, but more focus might actually be on the inflation expectations component of the ANZ’s survey. It eased last month and a further softening in May could just calm those fears of yet more cash rate increases.

CoreLogic chief economist Kelvin Davidson believes increased public spending could keep inflation “a bit higher for longer”. Photo / Peter Meecham

4. Mortgaged investors still pretty quiet

The latest CoreLogic Buyer Classification data showed that mortgaged multiple property owners (MPOs, including investors) accounted for a touch less than 20% of purchases in April. Yes, that’s still about one in every five deals, so not a complete absence from the market. But it was still a record low, and squares with the pressures they currently face – such as the potent combination of low rental yields and high mortgage rates (meaning significant cash ‘top-ups’ out of other income), large required deposits, and tougher tax rules than in the past. It needs to be noted that existing investors aren’t selling to any great degree, but it’s certainly hard to get the sums to stack up on an additional (or first) investment property at present.

5. ‘Risky’ lending a minor issue at present

Last week’s Reserve Bank data showed that high debt to income (DTI) ratio lending remained subdued over the first three months of 2023, for both owner occupiers and investors. That’s not surprising, given that house prices have fallen (hence less debt is required), incomes have risen, and also when you consider that higher mortgage rates themselves naturally limit how much debt can be serviced from a given income. However, just because high DTI lending is under control for now, it’s unlikely to sway the RBNZ from imposing official caps early next year – it’s just that those caps might not actually bite until the next upswing phase of the property market starts again.

- Kelvin Davidson is chief economist at property insights firm CoreLogic