Wide-reaching impact of OCR increases

The impact of the latest official cash rate announcement by the Reserve Bank to increase the OCR by 75 basis points (0.75%) to 4.25% is starting to be felt in the market. Two major banks – ANZ and Westpac – have raised their fixed and floating home loan rates, along with their deposit rates. Other banks are expected to follow.

Both ANZ and Westpac stopped short of passing on the full 0.75% rise to their customers, which enabled them to keep their headline interest rates below 8%. While special rates for customers with 20% deposit or equity now sit below 7%, standard rates for both banks are now over 7%.

There are predictions of further rate increases in the first half of 2023, which will push rates higher. ANZ economists published a report recently that showed forecasts of floating mortgage rates at 8.6% by March 2023 and 9.6% by June 2023, with them holding that level for the following year. Fixed interest rates will reach, or possibly exceed, 7%.

Fixed interest rates close to 7.5% by mid next year

Commentary from the Reserve Bank over the past two weeks has shed some light on what homeowners can expect from interest rates in the coming months and year, with the OCR being tipped to go as high as 5.5% by the middle of next year.

Fixed rates are on average around 2% higher than the OCR here in NZ, which means we can expect these to be sitting close to 7.5% or above by the middle of next year before plateauing. Those who have had the wisdom or good fortune to fix their mortgages on long term rates will bear the fruit from this decision.

However, prospects look daunting for those planning on taking out a new mortgage, or whose mortgages are coming up for renewal next year.

The Reserve Bank has commented that the OCR will remain high for a longer period than previously anticipated and – when it starts coming down – the rate of the fall will not be as dramatic as the rise.

Worldwide recession tipped for mid to late 2023

This means that mortgage interest rates will reduce slowly and over a longer period. Which prompts the question what the right length of time is to fix your home loan right now. While no-one has a crystal ball to accurately predict the best option, signs are pointing to 2–3 year fixed rates as being the best choice.

It is likely that NZ will enter a recession at some point next year, along with other economies around the world. This may happen between the second and third quarter of 2023 and feature little or no wage growth and increased unemployment.

The increased cost of servicing a mortgage, high cost of living, marginal wage growth, and higher unemployment will squeeze many households financially. This will likely force them to start prioritising their spending; in particular by cutting back on big ticket items like building, renovating, and buying new cars.

Construction sector fall out

The construction sector in NZ will undergo a metamorphosis next year and it is likely many construction companies and builder will either fold or have fewer construction projects in the pipeline. Those who are building with a view to selling after completion may struggle to find buyers or, at least, buyers willing to pay the prices they’re wanting.

The imbalance between housing supply and demand will finally tilt in favour of supply, where there will be more houses on the market than there will be buyers.

This perfect storm may lead to house prices plunging further, by up to 10%, in city centres and returning to levels last seen in late 2020 or early 2021. This will present good buying opportunities for first home buyers who haven’t been able to get onto the property ladder yet.

This assumes, of course, buyers are brave enough to weather the storm of high mortgage repayments, which may be double the rent you’re currently paying.

The likely impact of the upcoming economic storm will be far reaching and affect us all. It is always best to speak to an adviser about your own personal circumstances and how you can plan and prepare for the changes ahead.

The information and articles published on this website are true and accurate to the best of the Global Finance Services Ltd knowledge. The information given in articles on this website should not be substituted for financial advice. Financial advice should always be sought.  No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or their employees liable.