It’s now been over a year since the Reserve Bank of New Zealand (RBNZ) first started to increase the official cash rate (OCR), with a move from 0.25% to 0.5% on October 6 last year. The direct aim of these OCR increases has been to quell inflationary pressures in the economy, but also as they simultaneously try to stick to the high employment part of their mandate too. But the housing market clearly hasn’t been immune to this monetary policy tightening phase either, and so we take a look here at key developments over the past year or so.
October 6, 2021
• OCR rises from 0.25% to 0.5%
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• Typical one-year fixed mortgage rate: 2.9%
• Three-month change in average property values: 5.2%
• Sales volumes versus October norm: -3.3%
In August’s Monetary Policy Statement last year, the RBNZ had decided to keep the OCR at 0.25%, noting that “recent increases in inflation are largely temporary”. However, mortgage rates started to increase more appreciably from early September, and then – only two months after noting the potential for short-lasted inflation – the RBNZ actually delivered the first OCR rise. For context, the September quarter inflation data (published a little later on October 18) showed a figure of 4.9%, well above the average of around 1.5% over the previous five years.
In the property market, sales had already begun to weaken, and for the month of October were around 3% below the norm for that month of the year (going back 20 years). But property values were still rising.
November 24, 2021
• OCR rises from 0.5% to 0.75%
• Typical one-year fixed mortgage rate: 3.3%
• Three-month change in average property values: 5.4%
• Sales volumes versus November norm: -2.6%
At this stage, economic matters were probably best summed up as “steady as she goes”, with inflation still a key talking point, but the RBNZ feeling comfortable with only a 0.25 percentage point increase in the OCR at November’s meeting.
The property market wasn’t necessarily doing anything dramatic either, although of course more new borrowers were being curtailed by a further rise in mortgage rates, and some existing borrowers would have been facing up to higher repayments as their current loan term ended. Indeed, as at November 2021, the one-year fixed rate had risen by about one percentage point over 12 months. However, the bigger factor in the property market was the tightening of the loan to value ratio rules for owner-occupiers on November 1, from 20% of loans being allowed at less than a 20% deposit, to only 10% of loans at low deposit. Moreover, the CCCFA rules were about to be tightened too ….
February 23, 2022
• OCR rises to 1%
• Typical one-year fixed mortgage rate: 3.6%
• Three-month change in average property values: 4.9%
• Sales volumes versus February norm: -28.7%
By now, some of the key variables had begun to change noticeably. CPI inflation had risen to 5.9% in the December 2021 quarter, and inflation expectations remained elevated too, with businesses fearing the outlook for input cost pressures, and consumers facing up to cost of living strains (which the Government later attempted to mitigate with the cuts in fuel tax and the $350 Cost of Living Payment). That said, the RBNZ still stuck to the conventional 0.25% OCR rise, taking it to 1%.
Reserve Bank of New Zealand Governor Adrian Orr has warned Kiwis that the cash rate is likely to rise above 5%. Photo / Getty Images
The property market was also shifting. With the CCCFA rule changes having been enacted (from December 1, 2021) and the tighter LVRs also biting, the market share for first-home buyers was declining, hitting 23% in February. It wasn’t much easier for mortgaged investors either, as they continued to grapple with low rental yields, higher mortgage rates, 40% deposits (unless buying newbuilds), and the interest deductibility adjustments.
April 13, 2022
• OCR rises to 1.5%
• Typical one-year fixed mortgage rate: 4.1%
• Three-month change in average property values: 0.7%
• Sales volumes versus April norm: -32.2%
April saw the first of the so-called “double shot” hikes in the OCR, taking it from 1% to 1.5%, as inflation was confirmed at 6.9% (annual rate) in the first quarter of 2022 (albeit the CPI data wasn’t released until April 21, after the OCR decision).
The effects of tighter monetary policy were showing through very clearly in the housing market, with a typical one-year fixed mortgage rate climbing above 4%, with the change since borrowers originally fixed one year prior standing at about 2% – i.e. a doubling of mortgage rates in the space of a year. Property sales volumes remained at very low levels and property values had stalled as well.
May 25, 2022
• OCR rises to 2%
• Typical one-year fixed mortgage rate: 4.4%
• Three-month change in average property values: -0.9%
• Sales volumes versus May norm: -28.9%
The process of monetary policy tightening was certainly in full stride by the time May rolled around, and the OCR reached 2% on the 25th, with a typical one-year fixed mortgage rate sitting at close to 4.5%. We didn’t have the Q2 CPI data at that stage, of course, but we now know that inflation over the second quarter climbed to 7.3%. The net result is intense pressure on household finances, both from the cost of living itself, but also higher mortgage repayments (albeit a benefit for savers).
In the property market, sales remained sluggish, and values continued to drop. The effects of past changes to the LVRs and CCCFA rules were clearly impacting first home buyers, who saw their market share dip to just 22%, less than mortgaged investors at 23%.
July 13, 2022
• OCR rises to 2.5%
• Typical one-year fixed mortgage rate: 5.2%
• Three-month change in average property values: -2.5%
• Sales versus July norm: -33.6%
July saw another 0.5 percentage point OCR increase, taking it to 2.5%, as the inflation fight remained front and centre for the RBNZ – not just actual inflation, but also expectations of where it might go next.
The period from May to July had also seen mortgage rates rise even more sharply, and anybody repricing a loan that had been secured one year earlier would have been looking at a rate rise of at least 2.5%, probably closer to 3%.
CoreLogic chief economist Kelvin Davidson: "in all likelihood property sales volumes will remain lacklustre for a while yet." Photo / Peter Meecham
The market shares for various buyer groups were also stagnant, but at least from the perspective of first home buyers, the CCCFA rules had been loosened from July 7 – meaning less scrutiny of expenses, and a slightly looser borrowing environment.
August 17, 2022
• OCR rises to 3%
• Typical one-year fixed mortgage: 4.9%
• Three-month change in average property values: -3.5%
• Sales volumes versus August norm: -31.2%
August brought the fourth consecutive 0.5 percentage point rise in the OCR, taking it to 3%. However, competition amongst the banks for a shrinking pool of new mortgage lending, combined with some falls in offshore wholesale interest rates, saw domestic NZ mortgage rates dip a bit, back down below the 5% mark. Alongside the effects of looser CCCFA regulations – and perhaps also a change in mood amongst would-be buyers – a hiatus for mortgage rate increases helped bring back some first-home buyers, who saw their market share rise to 24% in August.
October 5, 2022
• OCR rises to 3.5%
• Typical one-year fixed mortgage rate: 5.2%
• Three-month change in average property values: -4.1%
• Sales versus September norm -33.3%
The foot was still flat to the floor, with another 0.5% OCR increase in October, taking the level to 3.5%. We also now know that CPI inflation in Q3 barely changed, only slowing slightly to 7.2% – hardly reassuring, and “locking in” further OCR increases in November this year, and into 2023 as well. Ultimately, a peak of at least 4.5% now looks likely, potentially as high as 5% or more. A typical one-year fixed “special” mortgage rate could easily top 7%.
In the property market, sales volumes remain ultra-low, and property values continue to fall. More encouragingly, at least first-home buyers are showing signs of life, at least in terms of % market share (even if the number of deals is still low). However, August’s falls in mortgage rates have now been reversed, and the peak is not yet on the cards.
November 23, 2022
• OCR rises to 4.25%
• Typical one-year fixed mortgage rate: 6%
• Three-month change in average property values: -4.5%
• Sales volumes versus October norm: -38.6%
The latest OCR increase is the biggest on record, and the Reserve Bank has also signalled plenty more to come (a possible peak of 5.5%), with inflation potentially not under some kind of control until later next year, a recession eminently possible, and unemployment edging higher. House prices are anticipated by the RBNZ to ultimately drop by 20%, so in terms of the property market, a typical one-year fixed rate (high equity) could easily top 7% over the coming months. This will put pressure on new borrowers, but also those rolling off previously lower fixed rates and onto a much higher repayment schedule.
Conclusion
Clearly, the past year has been a tough one for the property market, which has been collateral damage in the RBNZ’s determined path to knobble inflation. But the work isn’t done yet, and both the OCR and mortgage rates have further to rise.
This means that in all likelihood property sales volumes will remain lacklustre for a while yet and that values have further to fall. However, it’s still conceivable that if the economy ticks over (and unemployment stays low), wages continue to rise, net migration turns around to some degree, and mortgage rates find some kind of peak, we might see property sales activity start to rise again in 2023 and the falls in prices could come to an end.
In that environment, it wouldn’t be a surprise to see a decent presence for first home buyers, but the outlook remains tricky for new investors looking to make a purchase or for existing landlords wanting to add to their portfolios. Other homeowners/borrowers will also continue to face pressures as they reprice their loans off older, lower fixed rates and onto current levels.
The battle to rein in inflation has had an impact on the property market. Photo / Peter Meecham
Finally, there are two other important points to put across all of this too. First, the regulatory environment is set to loosen again in March next year, with further changes to the CCCFA rules. And second, the RBNZ’s consultation on formal caps for debt to income ratios still lingers in the background – any changes here early in 2024 could potentially also be accompanied by relaxation of the LVR rules at the same time.
The net result would tend to be a shift in conditions further towards first home buyers (who suffer most from LVRs) and away from investors (who would be hampered most by DTIs). Granted, a National election victory could see the interest deductibility rules scrapped. But that’s far from guaranteed, given the fickle nature of politics.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
