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…
(information accurate as of 17th November 2022)
After the turbulence of Covid-19 all but wrote off forecasts for the prior two years, 2022 was an ugly year for borrowers.
Here’s what happened in 2022 for mortgage interest rates.
It will come as no surprise to anyone who has watched, read, or listened to a news article in the past 12 months that housing was up in a big way in 2021. 2022, however, was the year of the correction.
The national median across the country was down 7.5% from $892,000 in October 2021 to $825,000 in October 2022.
Auckland dropped 12.7% from $1,249,000 to $1,090,000.
Wellington faired worst, dropping from $1,000,000 to $828,000; a drop of 17.2% to October 2022 (Source).
The Reserve Bank and the government have implemented a range of changes in late 2020 and 2021. These include reinstating the Loan to Value Ratios, particularly for investors, completely overhauling the tax deductibility of interest paid on mortgages, and raising the subject of Debt to Income Ratios. While a couple of banks temporarily used a Debt to Income Ratio in their calculations, at this time none are enforcing it.
But the big change to lending was the implementation of the Credit Contracts and Consumer Finance Act (CCCFA) on the 1st of December 2021. This act vastly changed how banks are required to assess mortgages and it has all but put the brakes on lending. You can read all about the CCCFA here.
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 raises the Official Cash Rate (OCR). If money isn’t flowing enough, then the Reserve Bank may lower the OCR. Inflation in NZ remains stubbornly high at 7.2% which has caused the OCR to be increased to 3.5% at the time of writing. The interest rates at the banks have already factored these price rises in which is why interest rates went up more than the OCR did in 2022.
So where will mortgage interest rates be in 1-2 years? 6% is still a historically-low interest rate (we know, we know, we said that in 2019 and 2018!), the risk seems to continue to be to the upside. In other words, it seems more likely that the interest rates will move towards 7% rather than 2%. The important question is, will it be back up to 8%, 9%, or even (as per 2007) 10%? And if it does increase drastically, can you afford your mortgage at 8%? (Look for our #AimFor8 campaign to see several ways to plan on paying your mortgage at 8% in the near future!)
Having said that, the Reserve Bank continues to pull the various policy levers (LVR, DTI, etc) and therefore, we don’t see 8% for a 1-year rate being a reality in the next 5 years. With a lot of homeowners loaded up with mortgages over the past few years, higher interest rates will likely have the exact effect that the Reserve Bank wants in the shorter term – people will stop spending and inflation will come down.
We don’t see 8% for a 1-year rate being a reality in the next 5 years.
We predict that the most common 1-year discounted fixed rate will be 6.8% by December 2023. At the time of writing, the discounted rates are between 5.89%. This is a small but still meaningful interest rate jump, particularly for those coming off the low 2% interest rates.
The Reserve Bank has reinstated LVR restrictions meaning borrowing over 80% is more difficult (but, importantly, not impossible). Even with property values having dropped so much in the past year, a lot of first-home buyers will still be falling into this borrowing level.
With the banks having largely got their heads (and risk appetites) around the CCCFA, we predict lending to get slightly easier in 2023 than it was in 2022. Applicants will still need to make sure their spending is in control, but it won’t be the dealbreaker that it was if you applied recently.
Tip: A good trick is to use something like PocketSmith to categorise your bank statements and find out where you are spending too much.
Some reprieve came for the lower quartile of first-home buyers when the government adjusted the maximum levels for the First Home Grant and First Home Loan. The tests that a bank must put an applicant through are still onerous however, mortgage applicants must be able to afford their mortgage at a rate of ~8.5% – and there is less room for “a grey area” decisions. We predict that the Reserve Bank will hold off on further bonuses for first-home buyers, although don’t write off the government making homebuying easier as the election approaches.
As always, here’s a scorecard for next year:
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