Is the housing market a casualty of the Reserve Bank’s war on inflation?


While a 0.5% increase to the official cash rate (OCR) came as a surprise to some, taking it to 5.25% – its highest level since 2008, others say it is still workable

CoreLogic Chief Economist Kelvin Davidson says the increase was larger than he and many other commentators had been anticipating, but it reflects the Reserve Bank’s (RBNZ) continued concerns about inflation.

“Weighing on this is the effect Cyclone Gabrielle may have on pushing up consumer prices and economic activity via the rebuild.

“In the short statement that accompanied the decision there was an acknowledgement of some early signs of economic slowdown, as well as the potential threat from recent global banking issues.

“But these were deemed to be less material than current (and future) inflation pressures across the NZ economy, which necessitated another sharp OCR increase.

“The statement also gave little away about what’s next for the OCR, but a reasonable assumption for now seems to be that we get one more 0.25% rise on May 24, with the tightening cycle potentially ending there,” Davidson says.

“So what might this all mean for mortgage holders and the housing market?

“Generally speaking, the flow-through from the OCR change to mortgage rates is likely to be pretty limited, as tighter monetary policy has already been ‘priced in’ by the banks.

“In other words, it still seems likely that mortgage rates are at or close to a peak, which is probably the first hurdle now cleared in terms of the housing market downturn getting closer to ending.

“That said, it’s still too early to sound the all-clear and suddenly expect sales volumes to pick up and house prices to find a floor.

“After all, new borrowers are still facing tough serviceability testing and a continued wave of existing mortgages are yet to be repriced to current rates of around 6.5%.

“These will remain challenges for the housing market for a few months yet – especially with the RBNZ wanting to emphasise that they’re not about to ‘go soft’ on inflation and suddenly lower the OCR anytime soon.

“However, net migration is now rising, and businesses are looking to retain their current workers at all costs because of skills shortages. These factors could bolster the housing market.

“Meanwhile, although the election is a long way away, some scope for a potential change of government could see mortgage interest deductibility reinstated and also some investor demand returning.

“All up, uncertainty is still high, but there still remains light at the end of the tunnel for the housing market later in 2023,” Davidson says.

Century 21 New Zealand Owner Tim Kearins says, however, that the 0.5% hike was not unexpected.

“In fact, it’s getting close to what the Reserve Bank forecast.”

RBNZ earlier forecasted a peak of 5.5% this year. Historically, six or seven percent rates have been about the average for Kiwi borrowers, with one and two-year rates at retail banks now starting to stretch to the top end of that.

“Given so many had locked in at two or three percent, it will be a tough winter for a lot of homeowners re-setting with a much higher interest rate,” says Kearins.

Another concern is first and next-home buyers’ access to credit.

“Here’s hoping the banks assessments and stress testing of applicants doesn’t get too prohibitive that fewer and fewer are able to borrow in the first place. That would only exacerbate any issues in and around the real estate market.

“The Government promised last year that it would get slightly less prescriptive with home loan lenders, but stories from the frontline remain mixed,” says Kearins.

More than ever, it’s important for prospective borrowers to know that it doesn’t all begin and end with the big banks. Mortgage brokers can often deliver more competitive rates and greater borrowing flexibility.

“For first-home buyers who can cobble together a deposit and secure finance, one small mercy is that in a softer market they can often make up some ground with a good sale negotiation by their real estate agent,” says Kearins.

He says as well as more opportunities out there for buyers, it’s potentially a prudent time for some renting to take the plunge, with rents continuing to head north not helped by shortages caused by summer’s weather disasters.

MBIE’s Tenancy Services Rental Bond Data released in March showed that median rents nationwide are up $175 per week since 2017 – reaching $575.

“For tenants sick of paying sky-high rents, who are fortunate enough to possibly buy, they should do their initial sums on a mortgage calculator. Despite rising interest rates, they might still be surprised. Then they need to shop around to get the best deal,” says Kearins.