It’s the time of the year when the Mortgage Lab buffs up our Crystal Ball, gazes into the infinitely complicated world of economics and comes up with sufficiently generic interest rate forecasts/predictions to wow and amaze the crowd. But first…
As a recap, our predictions in early 2019 were:
4 out of 5 ain’t bad although skeptics would be right to point out that first home buyers “in the same situation” is fairly generic. I’m taking the win on these predictions and allowing myself full bragging rights.Growth from January 2019 to January 2020 in Auckland City Growth from January 2019 to January 2020 in Wellington City Growth from January 2019 to January 2020 in Christchurch City
2019 was the year of the "new-norm" for low-interest rates. These days, a reduction in interest rates barely merits media coverage and banks have started advertising other incentives (cash contributions, trips to Fiji etc) to differentiate themselves. We don't see a remarkable change in the interest rates happening throughout 2020.
At a very simple level, in the property market, interest rates are about controlling the lending flow. If money is a little too easy to borrow (often causing inflation), the Reserve Bank may raise the Official Cash Rate (OCR). If money isn't flowing enough, then the Reserve Bank may lower the OCR. This usually causes the banks offered interest rates to rise and lower in line with the OCR.
The Reserve Bank continues to pull different levers to control money flow. If you own property, or are looking to purchase, there are still LVR restrictions in place to stop you borrowing too much. The Reserve Bank has also continued with their "speed limits" for high LVR borrowers (buyers with a small deposit). These levers are particularly great because the Bank can target specific people - in this case Investment Buyers - and still offer more money to first home buyers.
So where will interest rates be in 1-2 years? With historically low interest rates now (I know, I know, I said that last year and the year before!), the risk seems to be to the upside. In other words, it seems more likely that the interest rates will move towards 5% rather than 2%. The important question is, will it be back up to 7%, 8% or even (as per 2007) 10%? And if it does, can you afford your mortgage at 8%?
The Reserve Banks continues to loosen the LVR restrictions and therefore I still don't see 8% being a near-term (5 year) risk. They have plenty of options to cool a housing market if they need, without raising interest rates significantly.
My prediction is that the most common 1 year discounted fixed rate will be 3.5% by December 2020. At the time of writing, the discounted rates are around 3.35% so this would represent a small lift but no major shifts. I do, however, also predict that at some point in 2020, you will see a 1 year interest rate of <3% (probably 2.99%).
Any likely severe change in interest rates will come from overseas pressure. It may be the US elections or coronavirus but domestically, NZ is sitting pretty.
Average house prices in Auckland were practically flat in 2019 but we are starting to see a warm up in the market. My prediction is that the market will rise by 5% (+/- 1% from December 2019).
As expected though, the rents in Auckland escalated a lot as a result of the LVR restrictions, insulation requirements and even the recent Interest Only restrictions. This was a one of market adjustment and I would expect rents to rise by 3% in line with inflation.
Wellington continues to see record prices. Some of these were from the long period that prices were flat and some of these are the result of a supply shortage. We've seen cities have trouble with this before. A home-owner wants to sell their house but there aren't enough other houses on the market. So they don't list theirs. And so the cycle goes on...
But consents for new builds in Wellington are up and with it should come the release of some existing houses for sale. And when this ball gets rolling, it really takes off. I expect Wellington houses to jump another 8% this year once the shortage of quality houses for sale has been sorted.
Christchurch seems to still be suffering from a lack of excitement and is long overdue for a jump in prices. I think 2020 will bring better growth of around 5%.
The Reserve Bank has continued to relax their restrictions, particularly on the first home buyer market, however they have continued to make it more difficult to service a mortgage. The tests that a bank must put an applicant through are getting more difficult and there is less room for "grey area" decisions.
My prediction is that first home buyers the Reserve Bank will continue to hold off on most bonuses for first home buyers. As discussed here, the low deposit borrowers are all but fully back in the market.
I would still like to see the government adjust the upper limits (maximum purchase price and maximum income) for the First Home Grant and the First Home Loan. These have not been adjusted for well over 6 years and are representing a smaller and smaller part of the market. In Auckland, you are precariously balancing on the border of the Waikato to find a property under $600k.
As always, here's a scorecard for next year.
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