The Reserve Bank have raised their official cash rate by 0.5% to 3.0% and projected that they will take it to just over 4% by the middle of next year. On the basis of the rise and the warning, we have seen media commentary regarding extra pressure coming on the already weakening housing market.
But what the journalists by and large have missed is that the changes made to the official cash rate strongly affect floating mortgage rates, but when it comes to fixed rates it is expectations for what will happen with monetary policy that truly matter.
In that regard the expectation after this most recent rate rise is essentially the same as before – namely that the Reserve Bank will probably need to start cutting the cash rate before the end of 2023 because of the weakening economy and falling inflation.
The importance of this is that the wholesale borrowing costs which banks face when setting the interest rates they charge mortgage borrowers were essentially the same after the cash rate rise as before.
The change in cash rates is already factored in, attention is on rate cuts, and that helps explain why fixed mortgage rates have actually fallen by 0.2% to 0.4% over the past two months.
Will these rate reductions be enough to stem the ongoing monthly decline in house prices and sales?
Not for a few months yet. Few buyers feel that they need to be in a hurry to make a purchase given that the stock of listings nationwide is 104% ahead of a year ago, vendors are slowly becoming more willing to negotiate, the country’s net migration flow is outward and getting more so, and the unemployment rate is predicted to rise from 3.3% to somewhere above 4.0% next year.
But as mentioned here previously, the seeds are nonetheless being sown for the downward leg of the housing cycle to end within the next 6-9 months and buyers more focussed on purchasing a home than eking out the last 5% of the fall in prices should be actively looking.
One of the things moving towards conditions eventually strengthening is increasing willingness by banks to lend. This willingness is partly showing through in hefty discounting of the currently popular one year fixed mortgage rate. The margin which banks are making on their one year rate is running at about half the five year average of 2.3%.
Why the bank aggressiveness?
Because non-banks are starting to grow their market share, we are heading into the traditionally busy spring period, and the low level of dwelling sales is causing mortgage sale targets to be missed.
This intense competition means that interest rates are in essence no longer acting as a deepening constraint on house buyers – just a cash flow problem for those who already have a mortgage.
Another sign of things becoming less bad (as opposed to outright better) is increasing purchasing interest being shown by some investors. The increasing probability being assigned to National winning next year’s general election is interesting some investors because National would restore interest expense deductibility and take the brightline test back to two years.
There are also reports that many of the working visa migrants being granted the special pandemic residency visa are in the marketplace looking to make a purchase of a property now that they can legally do so.
These things will take quite a few months to outweigh the negatives which are still quite strong currently and will remain so for the rest of this year. But we are likely to soon see a slowing in the pace of house price falls and it will be interesting to see how quickly the many tens of thousands of buyers standing back in the shadows with their secure jobs return to the market in an active manner.
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