It’s been a few weeks since our last monthly check-in, and with the Reserve Bank set to give another OCR announcement this week, we thought now was a good time to share our views on the market and what to expect in the coming months.
The OCR (Official Cash Rate) is expected to go up again, so let’s talk about what that means for mortgage interest rates, plus I’ll dive into the latest house price stats.
What’s likely to happen with the OCR on October 5th? And what does that mean for mortgage rates?
There’s a pretty unanimous sense in the market that the Reserve Bank is going to push through another double increase this time round – its fifth consecutive one – taking the OCR up from 3.0% to 3.5%.
Borrowers always kind of panic about what these increases mean for mortgage rates. So it’s worth noting this upcoming OCR increase has very much been priced into the fixed rates out there now.
In fact, I’d say the market has already priced in a predicted OCR of about 4.75%. So, even though the OCR is still making its way up, that doesn’t mean these increases are going to have much of an impact in real terms.
What would make a difference to fixed rates is if the outlook for the OCR were to change – so if the market gets the sense that things could peak even higher, that would certainly trickle through. And that could always happen.
But as it is, I’m still holding strong in my view that mortgage rates will settle between 5.50% and 6.00%. There will be some short term volatility, but I’d expect rates to eventually settle around 5.50%.
And where might the Reserve Bank take things from there?
After this week, we’re due just one more OCR announcement before the end of the year, on the 23rd November.
And it’s fair to say the market’s expecting a bit of a “rinse and repeat” from the Reserve Bank with that one, probably pushing through another double increase to take us up to an OCR of 4.0% going into Christmas.
The next announcement after that isn’t scheduled until late February 2023. And I reckon that’ll be the point where the Reserve Bank starts to back off the pretty aggressive approach it’s taken lately.
My sense is that inflation is starting to come under control, and there’s a feeling that higher interest rates are really starting to bite. A lot of clients I’m dealing with right now, while they’re not struggling to pay the mortgage, are finding higher payments really eating into their discretionary income.
As we see that have a greater impact in the market, I think the Reserve Bank will take a slightly more cautious approach – so I'm not expecting to see much in the way of OCR changes throughout 2023.
I’m definitely not part of the majority with that view, though. As I mentioned earlier, the market (including a number of the major banks) is betting on the OCR getting as high as 4.75%.
What’s happening with house prices?
The latest figures suggest house prices are down about 18% from peak last year. Vendors have been slow to adjust their expectations, so it can still be a frustrating process for buyers, but if you're prepared to search far and wide, there can be good deals to be had.
I think the fall’s now largely done and dusted - and we'll begin to see a number of stabilising forces increasingly coming into play.
The reality in New Zealand is there’s always a shortage of “good” properties in the market that people are competing for. And with high inflation (which will eventually translate into wage and salary increases), interest rates settling, and immigration levels picking up (albeit slowly)… that’s all helping to encourage people back into the market.
We're seeing sales volumes gradually increasing off very low numbers, as people attempt to get in before the masses come back into the market. I’m not expecting to see the market take-off at all. It just won’t feel as dreadful as it did over winter, and buyers will start to get on with their lives.
It’ll be a slow journey, but things are definitely starting to settle down – so looking to mid-2023, there should be a bit more to feel positive about.