New Zealand Raises Interest Rate to 4.75 Percent, Eating Into Housing Affordability

Houses for sale and sold in central Auckland suburbs in New Zealand, on Nov. 25, 2015. (Fiona Goodall/Getty Images)

New Zealand’s central bank has raised the official cash rate (OCR) by another 50 basis points to 4.75 percent after Cyclone Gabrielle destroyed the livelihood of many Kiwis.

“It is too early to accurately assess the monetary policy implications of these weather events, given that the scale of destruction and economic disruption are only now becoming evident,” the committee said.

“The timing, size, and the nature of funding the government’s fiscal response are also yet to be determined.”

The monetary policy committee agreed that the OCR still needed to increase to return inflation back down to its target range.

The February statement revealed that the effects of Cyclone Gabrielle had been up for discussion, including its economic damage to employment and trade and damage to property. They expect there will be an “immediate upward pressure” on prices.

But they noted that it was too early to estimate the disaster’s full economic impact while monetary policy was set with a medium-term focus in mind.

“Given this, the committee decided to look through the short-term direct price pressures stemming from these extreme weather events and focus on the medium-term impacts on inflation and maximum sustainable employment,” they said (pdf).

The reserve bank maintains its expectation that New Zealand will fall into a recession of a one percent peak-to-trough decline in GDP over “several quarters” in 2023.

Housing Affordability Remains Low

Housing affordability in New Zealand remains “significantly stretched” despite plummeting house prices due to rising interest rates.

The OCR has increased from 0.25 to 4.75 percent over 19 months from August 2021.

While the share of mortgage repayments that have fallen behind remains low, it is expected to increase as the economy contracts.

Property researcher CoreLogic found in its latest housing affordability report that Kiwis are spending over half of their incomes (53 percent) on mortgage repayments when servicing an 80 percent loan-to-value ratio mortgage.

The long-term average income percentage needed to service a mortgage is 38 percent.

“The falls in property values that we’ve seen in recent months will in part have helped the required debt servicing costs for a homebuyer, alongside higher incomes, but these effects have been outweighed by the rise in mortgage rates themselves,” CoreLogic New Zealand Chief Property Economist Kelvin Davidson said.

“In other words, this measure is signalling that housing is still as unaffordable as ever.”

This mirrors the observations of interest.co.nz, which found that housing was now the most unaffordable for first homebuyers since it began tracking housing affordability in 2004.

However, the pressure on homeowners could begin easing once mortgage rates plateau, house prices continue to fall, and wages rise.

“It’s fair to suggest that the worst has passed in this cycle for housing affordability, and as mortgage rates peak, the next few quarters (at least) should look more favourable for home buyers,” he said.

Westpac noted that the most popular mortgage rates—one to two-year fixed terms—had reached their peak, and the remaining cash rate hikes had already “baked into the market.”

“However, changes in interest rates take some time to have their full impact on house prices, and the low pace of turnover is likely slowing that process,” Acting Chief Economist Michael Gordon said.

“For that reason, we’re expecting further price declines before the housing market bottoms out—around another seven percent over the rest of this year.”

Properties in New Zealand are currently valued at 7.8 times the average household income, which is well above the long-term average of six but down from the peak of 8.8 seen in the first quarter of 2022.

According to the Real Estate Institute of New Zealand, house prices in January were declining at a slower rate.

The national median sale price decreased by 13.3 percent to $762,500 (US$475,000) over the 12 months to January 2023, driven mainly by the Auckland market.

Short-Term Holders Sell at a Loss

The change in financial situation has driven some owners to sell after holding for just 19 months on average. Rising interest rates drove many of these sales, as well as other factors such as divorce and death.

CoreLogic found that four percent of properties sold in the last quarter of 2022 went for a price lower than its buy price.

This was most pronounced in Auckland, where almost seven percent of owners sold at a loss.

But Davidson said it was apartment owners that sold at the greatest loss, despite making up just a quarter of homeowners who lost money.

“Apartments are a small segment of the overall property market, but they’re clearly a property type worth keeping an eye on over the next six to 12 months, given a tendency for them to be owned by investors—who may be more financially minded, and willing to rejig their portfolios in a low yield/high interest rate environment,” he said.