When will home loan rates tumble?
Discusses the five things you need to know about the housing market this week.
1 . Inflation isn’t dead yet, but it’s dying
There was good news last week in the form of the further slowdown for consumers price inflation, which eased from 5.6% in Q3 last year to 4.7% in Q4 – still above the 1-3% target range, but moving in the right direction. Not only does this mean that the cost of living pressures are dissipating a little, but it also reduces the chances that the official cash rate will be increased again. That’s one reason to be even more confident that mortgage rates have peaked, although of course offshore factors also matter for longer term fixed rates in NZ.Indeed, the market chat is actually quickly turning towards when the OCR might be cut, perhaps as soon as August this year. If that becomes the consensus view, then actual market interest rates – such as for mortgages – might drop even sooner. I wouldn’t get carried away just yet, but certainly look out for a bit more insight into the possible near-term path for interest rates when the RBNZ Chief Economist, Paul Conway, gives a highly anticipated speech at 9am on Tuesday.
2. Debt to income ratios loom, but deposit/LVR rules set to ease
From around the middle of the year, the Reserve Bank may be giving to mortgage borrowers with one hand, and taking with the other, with caps on debt to income ratios set to be introduced, but the loan to value ratio rules eased at the same time. The RBNZ proposes to allow up to 20% of lending to be done at a high DTI (>6 for owner-occupiers and >7 for investors), while allowing more borrowers into the market with low deposits, <20% for owner-occupiers and <30% for investors.
For me, there are three key points. First, it’s no surprise that DTIs will function alongside LVRs. Second, the DTIs may be fairly neutral in the first instance, though, because high mortgage rates are doing the work of capping loan sizes for now. Third, this means that the net effect of the proposed policy changes could be to boost market activity in the second half of the year, via the easing in deposit requirements.
3. A record year for first home buyers in 2023
With the full calendar year figures now available, CoreLogic’s Buyer Classification figures show that first home buyers took 26% of property purchases in 2023, a new record high (albeit the number of deals wasn’t a record). They’ve been tapping KiwiSaver for at least part of the deposit and also making full use of those low deposit lending allowances at the banks, as well as enjoying less competition from other buyer groups, such as mortgaged multiple property owners (investors).
But although I wouldn’t anticipate a flood of investor activity in 2024, things might still be starting to look a little more tempting for them, including rising rents, easing deposit requirements, potentially lower mortgage rates, and also mortgage interest deductibility going back to 80%. It could be a very interesting year in terms of the market shares for first home buyers and investors.
4. Still watching those recession risks
The NZ Activity Index for December was 0.9% higher than the same month last year, after a 1% rise in November. This suggests that the economy isn’t exactly racing away, but equally we might just sneak a positive GDP growth figure for Q4, of perhaps 0.3%. That would mean no technical recession, which is good, but of course it might be cold comfort for those households who feel like they’re in a downturn. For the housing market, clearly a more positive GDP figure bodes well, if it reduces the chances that firms start to lay off some workers. But there’s still some tough times ahead for the economy I suspect.
5. More jobs and confidence data to come
On the same note, we’ll get fresh economic information this week, with filled jobs data for December due Monday, and both of ANZ’s sentiment indicators (business and consumer) out too for January. Any signs that jobs growth and/or economic sentiment have softened would just keep those recession warning lights flashing.