New Zealand may now be in “phase two” of the property market downturn, Corelogic says, and rising interest rates could add $12,000 a year to the cost of a $500,000 home loan.
The Reserve Bank raised the official cash rate by 75 basis points on Wednesday, to 4.25%.
Corelogic economist Kelvin Davidson said the fact that this had been anticipated by the banks meant fixed mortgage rates might not move much straight away.
“However, floating rates will no doubt rise again shortly, and with more OCR increases in the pipeline, fixed rates are unlikely to have peaked yet either.”
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He said the Reserve Bank’s prediction that the OCR may need to hit 5.5% next year was a sign of further pain for borrowers.
“After some ‘green shoots of optimism’ had started to emerge through the first half of October, the stubborn inflation reading for the third quarter and expected higher peak for the OCR – and mortgage rates – have in some ways pushed us into ‘phase two ‘ of the current property market downturn.
“With another 0.75% increase in the OCR seemingly on the cards for February 22 next year, with further increases after that too, it’s very likely fixed mortgage rates – for example a high-equity one-year loan – will push towards 7% or above over the coming months, adding to the current pressures on household budgets and mortgage serviceability.
“Indeed, based on the current average fixed mortgage rate across the stock of loans of 3.8%, the fortnightly mortgage repayment for every $100,000 of debt (30-year term) is around $215 – or roughly $5590 per year. But somebody then refinancing to a current rate of 6% would see that repayment jump by $1602 per year – or more than $8,000 if they had a $500,000 loan.
A potential future rate of 7% would see a change of almost $12,000 for a $500,000 loan. On that note, it’s important to point out 20% of home loans in NZ are currently fixed but due to reprice in the next six months.”
Gareth Kiernan, chief forecaster at Infometrics, said he would expect one-year rates to push up to about 7.2% with the OCR at 5.5%, with two-year rates at a slightly lower level.
Infometrics expects an OCR peak of 5.75%, but sees it potentially needing to go to 6%.
“An OCR of 6% could equate to one-year rates of about 7.6%. The risk for borrowers having to refix their mortgages is that they start to become spooked by the seemingly endless upward march of rates and jump into longer-term fixed rates for two reasons: they provide certainty and protection against further interest rate rises, and towards the peak of the cycle they can often be lower than the one-year or two-year rates.
“However, we saw in the late-1990s with the Asian Financial Crisis and again following the Global Financial Crisis in 2007/08 that there was very quickly a lot of regret for people who had fixed for five years. For example, in April 1998, fixing for five years at 9.4% ending up being very expensive compared to five years of rolling over one-year rates, which averaged about 7.7% and got as low as 6.1% as soon as April 1999. Again , fixing for five years at 9.5% in April 2008 was an even worse decision compared to rolling over one-year rates, averaging 6.7% over the following five years.”
Davidson said a key factor in how the next few months played out would be the performance of the labor market.
“If unemployment can stay relatively low, most borrowers will continue to service their loans even at higher mortgage rates and as negative equity becomes more prevalent, and this should help to limit the risk of a rise in bad debts and the downward spiral that could be kicked off by an increase in mortgagee sales.”
“Overall, it’s likely the weakness for property sales volumes will linger well into 2023. Indeed, after perhaps around 67,000 sales this calendar year, the lowest since 2010, there may only be a small revival next year to about 68,000 – as rising wages and net migration are offset by a soft economy and higher mortgage rates.”
He said property values would continue to fall. Corelogic expects prices to be down 20% from their peak by the end of next year.
“We’ll be watching the labor market very closely, but also any signs the OCR is ‘overshooting’ and therefore the likelihood rates could need to be cut again fairly sharply.”