Independent economist Tony Alexander believes Wednesday’s 0.75% official cash rate increase by the Reserve Bank of New Zealand (RBNZ) will further “scare off” home buyers and will “exert some extra downward pressure on house prices”.
Alexander, therefore, believes the “turning point” for New Zealand’s housing market has been pushed back from Autumn to Winter 2023.
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The Reserve Bank yesterday raised its official cash rate by 0.75% which was largely expected. They also increased their projected peak for the cash rate from 4.1%. But at 5.5% that peak is ahead of market pricing before the decision which was 5.1%…
The Monetary Policy Committee which sets the official cash rate discussed taking the cash rate up by 1.0% but decided that 0.75% is enough for now.
Of importance in the comments made by the Reserve Bank were references to the way household spending is remaining “robust” despite rising debt servicing costs, falling house prices, and low consumer confidence…
Because of the extra tightening in monetary policy now deemed necessary by the insufficient crunching of consumer spending, a recent lift in inflation expectations, and higher than expected inflation recently, the Reserve Bank now feel that they need to put the economy into recession…
With the official cash rate now headed towards 5.5% it seems reasonable to expect that the one year swap rate at which banks borrow to lend fixed will rise from the recent 5% to around 5.5%. On that basis the one-year fixed mortgage rate looks like heading towards 6.5% assuming banks continue to tolerate below average margins.
This will clearly exert some extra downward pressure on house prices as more people choose to sell because they signed up at a much lower rate and their bank only made sure they could service a rate of 6%.
The turning point therefore for New Zealand’s housing market now looks to be something coming in Winter rather than Autumn as I was previously thinking…
Interest rate levels and expectations for where they are going traditionally have a big impact on housing markets. Rates have just risen, and some buyers have been scared back. More will be scared off now in coming months as a result of the small extra rises in rates to come because of yesterday’s 0.75% rise in the official cash rate to 4.25% and the expressions of concern about inflation made by the Reserve Bank.
But eventually monetary policy will gain traction. When the consensus view shifts to people believing interest rates have peaked they will see what their worst case debt-servicing scenario is and the solidity they gain will bring some back into the market. When rates are widely seen as likely to fall, the backlog of buyers which has been building up for a long period of time will become active – investors particularly although some are currently selling as rates rise. We are not there yet for people feeling that interest rates are peaking.
