I hope you’re all staying in safe out there and all you Aucklanders on the front-line, staying in your bubbles, getting tested and vaccinated! What times we are all living in!!!
It’s hard to catch a breath at the moment in the mortgage and property world as well. Rates on the increase, property prices are out of control, change the financial services world is constant and Delta is here, though hopefully not for long. There is a so much to talk about I don’t really know where to begin. Might as well start with the usual then! 😊
Interest rates, the property market and inflation
What is going to happen next? It’s a moving target as always, and more so with Delta in play and an uncertain outlook both at home and abroad. Before the recent outbreak the OCR was expected to jump from its record low of 0.25% up to 1.25%-1.50% in between now and the end of 2022, with much of the increases before the end of 2021. These increases have been pushed out due to Delta, but the overall trajectory will likely remain unchanged unless the economy starts to struggle.
While this might seem like an alarming jump, the OCR was at 1.50% in June 2019 and 1% in Feb 2020 just before Covid hit. We are really just giving up the drops that were intended to stimulate the economy post Covid, which is no surprise to the market. What was unexpected were property prices going crazy post-Covid with prices for the year to July up 30.6% in Auckland and 32.9% for the rest on New Zealand … these are risk to financial stability increases and are forcing the government and Reserve Bank’s (RBNZ) to act.
This surge was caused by the lower interest rates, the LVR limits being scrapped, the ongoing shortage of listings and NZ’s non-stop love of property investment over other asset classes … you can add plenty of other factors to this list if you wish! The government responded by re-introducing the LVR limits, removing interest rate deductibility on rental properties, increasing the Brightline Test to 10 years … and still the property prices have marched on. Now the Reserve Bank (RBNZ) have Debt-To-Income (DTIs) tool at their disposal, which seem sure to follow given ever increasing house inflation.
However its done, house price increases must be quickly brought down to flat or very low increases for an extended period of time to allow wages and the economy to catch up, or we risk major financial problems that will take many years to rectify … if we haven’t already reach this point.
Now interest rates (i.e. increasing the OCR) are not a tool the RBNZ can use to influence house prices. The OCR is used to manage inflation, which is starting to rear its head again after a long time sitting under the RBNZ 1%-3% threshold and target of 2%. This is why the RBNZ has forecast a hike in interest rates, which will also help cool the property market.
There is some debate around this increasing inflation and whether this is just because of the supply issues being created by Covid – building materials for example have jumped around 20% which is causing all sorts of problems for the construction industry. Most offshore markets believe this will settle down once Covid becomes less problematic, as our populations become fully vaccinated and our systems improve, but the RBNZ has taken a different view. I’m sure the added benefit of slowing the property market is not lost on them!
What is interesting is that the US 10 year T-Bill rate (the barometer for offshore wholesale funding costs) which got down to just over 0.5% in July last year, jumped back up to 1.72% in March this year and has dropped back to around the 1.30% mark. Our banks borrow huge amounts of money from overseas to fund their NZ lending, so their funding costs are coming down there. But falling wholesale rates suggest global markets are seeing things differently from the RBNZ in terms of inflation. The RBNZ does have a track record of talking up interest rates increases to cool the market, then economic reality forces their hand, so it will be interesting to see what happens this time.
But for it seems highly likely that the OCR will increase by 1% in reasonably short time, which will take 2 year rate into the low to mid 3%s. Whether this pushes higher remains to be seen and this will depend on what happens with inflation and how the economy handles Covid pressures and the higher interest rates. I myself am a little dubious about how much the OCR will increase beyond this initial jump to 1.50% or thereabouts, and if it does go much higher than say 2%, how long it will stay there. I really hate putting these things in print, but this is an opinion piece after all so there you have it!
Closing thought on interest rates: 2 years fixed is generally recommended, 3 years is ok as well if you want some more certainty. Be very careful about 4 and 5 year rates, these can be much riskier than what people realise and as I’ve hinted at above, continued increases are at the lower end of the probability scale. And should rate go up and then come down, then the cost to exit a higher 4 or 5 year rate can be horrendous on a large mortgage. Please call myself or Kurt before you make any decision around these longer term rates.
Fixed Rate Refixes
They’ve been a lot of changes to loan refix processes recently and many of you will have already experienced. Increasing use of the Banking Apps is creating faster processing for borrowers, brokers and banks and for the most part Saving Kiwis think they’re brilliant and we want you to use them, in conjunction with advice.
We are here to provide you with advice around where interest rates are going and what are the most suitable terms for you. Advice is extremely important in these rapidly so if you are looking to get this done via the app and we haven’t been in touch already, please call or email us to ensure you are on the right track. It can be expensive to undo after the fact, especially if you’ve locked in for a longer term.
Some important things to note with banking pricing and the apps:
- Current bank specials are generally the banks best rate
- Generally we don’t have access to lower rates that offered on the app – in the past banks have not put their best foot forward with pricing, so brokers have been able to improve. However, in most cases the rate offered on the app will be the best rate. But please check with us because this isn’t always the case.
- You still remain our client if you refix through the app
- Most of the apps do not allow you to:
- make lump sums repayments
- split a loan into more than rate
- refix an interest only loan
So please call or email before you lock anything in.
An Award and a Massive Thank You
Some great news for Saving Kiwis, Nick made the Top 50 Advisors in New Zealand out of a group of well over 1,000 broker, coming in 39th for the year to March 2021. These are challenging and rapidly changing times to be providing mortgage advice in New Zealand, so pretty stoked to make this group. This was only possible due to all of you who chose my services during this time, so I’d like to say a massive thank you to you all for your continued support of Saving Kiwis!
Good luck Auckland for the rest of lockdown and to the rest of New Zealand enjoy the freedoms of level 2, we are so jealous up but glad you’re all getting back to normal and if you’re a business making some money again.
(09) 5353 620 0274 404 230