Rate cuts could ease house price falls
Interest rates that are being cut, rather than increasing, could be the first step to moderate the country’s falling house prices, one researcher says.
Over the course of Tuesday and yesterday, ANZ, Westpac and BNZ all cut their two-year interest rates.
The falls have been relatively small but are notable after months of sharply rising rates. Banks have been able to pass on the lower rates due to a reduction in their wholesale funding costs.
Higher interest rates have been blamed for the slowdown in house prices. CoreLogic’s latest data shows that house prices fell 2.3% in the three months to June, the biggest drop since February 2009.
Auckland and Wellington had the biggest drops, at 4.9% and 4.7%, which took their average prices to $1.44 million and $1.07m respectively.
CoreLogic head of research Nick Goodall said affordability was a key constraint on house prices.
‘‘People can’t get the same amount of borrowing that they could six or nine months ago,’’ he said.
Banks have increased the rates at which they test whether borrowers can afford to repay a home loan. A $500,000 loan on a 2.3% interest rate would cost $1012 a fortnight. Now, on a 5.35% rate, it would cost $1396.
‘‘On top of that there is their willingness to pay those prices even if they can,’’ Goodall said. ‘‘Sentiment is falling.’’
Goodall said the drops in mortgage rates could have a moderating effect on buyer sentiment and house price declines.
‘‘Perhaps not immediately, but one of the key constraints right now is affordability, so moderating interest rates should flow through to a reduction in the rate of value falls eventually. With the official cash rate still set to increase further, including next week though, it is unlikely to have a significant effect just yet.’’
He said expectations were growing that the Reserve Bank would not need to raise the official cash rate as much as it had forecast. That would mean that some of the longer-term rates on the market were higher than they needed to be.
Goodall said that if people could see that the interest rate cycle had peaked, it would help prices to plateau. ‘‘People might say ‘prices won’t fall much further’ and get back into the market.’’
‘‘People might say ‘prices won’t fall much further’ and get back into the market.’’
Nick Goodall
CoreLogic head of research