The slowing of the market is mainly off the back of affordability pressures, the 40% deposit requirement, extended bright-line test for investors, the tightening of interest deductibility rules, as well as the approval for the Reserve Bank to look at debt to income restrictions.
Perhaps most urgently, the housing market is likely to be affected by economists’ predictions the Reserve Bank will probably lift the OCR soon.
The major trading banks have already started raising fixed-term mortgage interest rates.
Crunching the numbers
The lift in interest rates by ASB, ANZ, BNZ and Westpac will impact new borrowers.
For example, a 0.36% increase resulting in a 2.95% initial interest rate equates to additional repayments of $1,824 per year ($152 per month) across a recent home buyer’s $800,000 mortgage on a 30 year home loan term.
Should interest rates keep rising, and reach the long-term average of 6% – which for now is a scenario-based indication, rather than an actual forecast – that same new buyer would pay an extra $19,164 in mortgage repayments per year ($1,597 per month). This would total about $4,800 per month in repayments across the balance of the home loan term.
Even a new borrower with a lesser mortgage, say $500,000, will need to find another $246 to $388 a month ($2,952 to $4,656 a year) in repayments if rates move up to 3.5% or 4%.
CoreLogic chief property economist Kelvin Davidson says those who have entered the housing market since 2014, the last time the OCR increased, have only experienced low interest rates.
The effects of a pattern of increases will likely come as a shock to many of those with a hefty mortgage, which includes many who have bought recently in Auckland and Wellington – the most expensive markets.
“For those still trying to buy their first home, interest rate increases will raise the bar to entry.”
Mortgage interest rate increases could have quite a strong dampening effect on the market.
Mortgaged investors’ share of property purchases has fallen in the past two to three months.
Notable shifts in market patterns
After a hot start this year, CoreLogic’s data shows sales volumes have eased back a little, running at about the same levels as 2019.
The continued lack of listings is still a restraining influence on achieved sales volumes. But valuations ordered by banks – as an early indicator of borrowers applying for loans – also suggests demand has eased too.
Davidson says CoreLogic’s analysis of the mortgage market suggests activity has held up better than anticipated.
He believes this is likely due to other lending such as top-up loans, bank switches, and possibly early breaks of fixed loans.
The monthly gains on the CoreLogic House Price Index have also eased a little in recent months – from 3.1% in April, to 2.2% in May, and 1.8% in June.
“As sales activity dips over the months, it’s also likely that a slowdown for values will become more evident, although house price falls still seem unlikely in this cycle,” says Davidson.
CoreLogic’s Buyer Classification series shows a clear drop in market share for mortgaged investors since March.
But it is suspected most of that is due to the 40% deposit requirement rather than necessarily the extended bright-line test or removal of interest deductibility.
“However, as the months pass, it is anticipated the tax changes will have a greater effect, and certainly push investors towards new builds rather than existing properties – especially if the ability to claim interest as a tax deduction applies indefinitely for the first owner (investor) of a new build.”
On the flipside of the investor situation, Davidson says, “There are signs that first home buyers have become more successful in accessing the market in the past few months, after a struggle in the first quarter of the year.
“However, they’ve traditionally been quite keen on new builds, so an influx of investors may not be ideal from a FHB’s perspective.”
The outlook for the economy and inflation will also have a large bearing on the housing market, Davidson says.
New Zealand’s GDP expanded strongly (1.6%) in the first quarter and the unemployment rate has now fallen for two consecutive quarters to 4.7%.
“Solid demand hitting up against supply/capacity pressures, such as Covid-related shipping delays, is starting to create higher inflation – 3.3% in the second quarter – which in turn will see the OCR and mortgage rates rise.
“More increases are likely, and given that mortgages are larger than before in dollar terms, any rate rise will tend to have a greater impact on household finances.”