The housing market's biggest question: should I wait or buy now?

1. Another month, another cash rate increase

By far the biggest event on the economic data/news front this week is Wednesday’s Monetary Policy Statement from the Reserve Bank. The bank is almost certain to increase the official cash rate by another 0.5 percentage points, taking it to 3%, in a bid to curb inflation and inflation expectations. There’ll also be interest in the bank’s detailed projections for the economy, including its thinking around future GDP growth, the unemployment rate, inflation, the OCR itself, and house prices. What might a projection for further steady increases in the OCR mean for mortgage rates? Potentially not a lot, given that a higher OCR has already been “priced in” to current mortgage rates, and that it’s actually offshore factors which seem more important for local mortgage rates (e.g. falls in overseas bank funding costs leading to recent rate cuts here).

2. Should first home buyers sit on the sidelines?

Last week I wrote a short response to a frequently asked question by first home buyers: should I wait or buy now? Obviously, this decision is ultimately down to the individual, and non-monetary factors should mean a lot, including “do you actually like the house?” and “do you want to trawl through a never-ending stream of open homes?” But a few simple scenarios for potential future house price and mortgage rate changes do tend to point to an incentive to wait, especially if you think mortgage rates are close to (or at) a peak and that house prices could fall for a while yet. Of course, uncertainty is high, and identifying the trough for any market has historically proven difficult.

3. First home buyers holding up for now

As it happens, the latest CoreLogic Buyer Classification figures show that first home buyers aren’t waiting en masse at present, accounting for 23% of property purchases in July – down from the record high of 27% a year ago, but still above the average of a touch less than 22%. Meanwhile, the share of purchases by movers (relocating owner-occupiers) and mortgaged multiple property has, if anything, been slightly lower in recent months (amidst an overall drop in the number of deals). The flipside is a rise in the share of purchases by cash multiple property owners, which stands to reason when credit availability has tightened and mortgage rates are higher.

CoreLogic chief economist Kelvin Davidson: “Identifying the trough for any market has historically proven difficult.” Photo / Peter Meecham

4. New mortgages shrinking in relation to incomes

Although the Reserve Bank has indicated that they won’t be officially mandating caps on debt to income ratios (DTIs) for new lending until mid-2023 at the earliest (if required), high DTI loans are already falling away anyway – perhaps as fewer borrowers actually want the risk, and/or as banks take a more cautious attitude too (with higher mortgage rates also naturally limiting the amount of debt that can be serviced from a given income). The latest Reserve Bank data last week showed that in June less than 4% of first home buyer mortgages had a high DTI (>7), which is down sharply from the more than 9% six months ago. And the change for investors is even more striking: 41% of loans were at a high DTI (>6), down from about 55% in late 2021, and the more than 60% for a brief period early last year. Clearly, anything that curtails the risks borrowers are taking by drawing down large mortgages in relation to their incomes has to be a good thing from a wider financial stability perspective.

5. Recession fears still bubbling

Finally for this week, look out on Wednesday for Stats NZ’s publication of the NZ Activity Index (NZAC), which tracks the economy. Previous releases have shown that the economy has lost momentum in the past few months and another soft result for July would do nothing to calm fears that a recession could still be in our short term future, although for many people “on the ground”, the cost of living problems mean that it probably already feels recessionary (while falls in house prices may not be doing much for home-owners’ moods either).

- Kelvin Davidson is chief economist at property insights firm CoreLogic

Listen to The NZ Property Market Podcast below