How Are Mortgage Market Dynamics Taking Shape In New Zealand?

Wednesday, 1 June 2022, 6:31 pm
Opinion: Kalkine

Summary

• In May, the RBNZ conducted its fifth interest rate hike, taking the official cash rate to 2%.
• The central bank expects the interest rate to reach a peak of 3.9% by June 2023.
• Rising rates have been passed on to consumers, with many facing financial turmoil due to a highly inflationary environment.

With the central bank embracing several interest rate hikes over recent months, mortgage holders are facing a tough road ahead in their home loan journey. The Reserve Bank of New Zealand (RBNZ) conducted its fifth interest rate hike in a row in May, taking interest rates to 2%. Rapid rate hikes in New Zealand have created higher pressure on mortgage holders, worsening the unaffordability issues plaguing the NZ housing sector.

The tide has now turned in favour of those with a savings deposit as they can now obtain higher returns. The large hike of 50 basis points has created a dichotomic effect, with loan holders facing the most heat. Though the market is largely poised for interest rate hikes, commentators suggest that the RBNZ could take an even tougher route in the following months.

The RBNZ’s rate hikes have arrived at a crucial time when declining affordability and rising costs have been denting consumers’ spending capacity. Here is a closer look at the factors shaping up in the mortgage market amidst rising interest rates:

ALSO READ: Kiwis gear up for more mortgage rates as RBNZ raises OCR

Banks embracing high mortgage rates

As a matter of fact, the Reserve Bank is in charge of raising the official cash rate (OCR), which is then passed on to consumers in the form of higher interest rates. In line with this usual process, commercial banks have lifted mortgage and deposit rates after the big rate hike by the RBNZ in May.

Kiwibank was the first bank to raise rates, which lifted its headline rate for the two-year fixed mortgage to 5.19% per annum. Additionally, it moved its deposit rate to 3.15% for a minimum of NZ$10,000 and a one-year term.

ANZ has also raised its floating interest rate and flexible Home Loan interest rate by 0.4% to 5.95% per annum and 6.05% per annum, respectively. Bankers suggest that rising wholesale rates have contributed to increasing home loan rates. Overall, these banks understand the challenges associated with a higher cost of borrowing. Concerns loom that the higher OCR could inevitably translate into higher mortgage rates across all banks.

Scary projections for interest rates

The central bank has projected that the OCR could reach a peak of 3.9% in June 2023, potentially leading to a rise in the one- and two-year fixed mortgage rates. Alternatively, forecasters expect that the OCR might not rise above 3% because of the immense impact each rate hike has on the housing market. Thus, the risk of falling into a recession might keep the interest rate peak at 3%.

However, this forecast has also fuelled speculations of further turmoil for mortgage holders. Banks and economists have sensed the risk that borrowers might have to cut spending to a larger extent than they currently have. Meanwhile, higher borrowing costs could work as a double-edged sword, prompting a drop in housing prices and urging buyers to delay their decision to buy a house as mortgage rates soar. In the given situation, all eyes are glued to the Reserve Bank’s future interest rate decisions.

Will rising interest rates take a breather anytime soon?

The interest rate momentum is likely to continue for some time, forcing consumers to stay on a budget. The total impact of rising OCR will become increasingly pronounced as months pass by. Experts believe that the home loan rates are more likely to stay below their long-run average rate over the past two decades.

Kiwibank experts recently reported that around half of the bank’s mortgage holders have rolled onto new interest rates. As a result, these mortgage holders are paying almost double what they had been initially paying. With inflation showing no signs of slowing down, higher mortgage rates would mean a bigger financial crunch for borrowing households.

Overall, households may find it increasingly difficult to choose between lower borrowing costs and other conveniences. Many individuals prefer opting for those loans that have greater flexibility rather than simply selecting a low-interest rate loan.

Additionally, buyers seeking a home loan in the present climate can choose fixed rates. A good idea could be to opt for a mix of fixed rates for two or three years and eventually move to variable rates. However, in case the RBNZ reduces rates earlier than expected to boost economic growth, these fixed-rate borrowers could face a huge loss. But chances of low-interest rates in the near term are very less.

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