The Screws are Tightening – Rising Interest Rates and Tighter policy
Average house prices around New Zealand increased by 2.2% in July then by another 2% in August when for almost half the month we were in lockdown. Has the lockdown dented prices growth? In September prices rose by another 2% so the answer would appear to be not.
However, here is something interesting to consider. Outside of Auckland average prices rose by 1.7% in July, 1.7% again in August, then jumped 2.9% in September. In Auckland the changes respectively were 2.9% then 2.4% then 0.9%.
So, a very strong case can again be made for lockdown suppressing prices – given that is the continuing status unfortunately for Auckland – but that being freed from lockdown causes a prices jump. It would seem reasonable to expect that Auckland will experience some price growth catch-up once it exits lockdown – whatever form that might take in a few weeks time.
The other key development this past month beyond divergent price inflation in and outside our biggest city, has been the Reserve Bank raising its official cash rate 0.25% to 0.5%. This still leaves mortgage rates at very low levels, even after banks had lifted them between 0.6% and just over 1% for the 1-5 year terms ahead of the October 6 rates rise.
Those rate rises before the actual cash rate change have been driven by two things. First, banks borrow fixed when they lend fixed and the markets they borrow in are forward looking and have been anticipating tighter monetary policies here and overseas. Second, banks have embarked on a period when they will be rebuilding fixed lending margins.
Across the board these margins are about 0.5% below average, and borrowers should consider that when they make calculations of how high fixed rates might go based on the Reserve Bank pencilling in a 2% cash rate from mid-2023.
And borrowers should perhaps take into account the tendency for our central play to downplay the extent to which interest rates will rise at the start of an extended tightening cycle. Personally, I would suggest allowing for the cash rate rising to 2.5% rather than 2%, which when we add in bank margin rebuilding suggests the one-year fixed mortgage rate could reach 5% a couple of years from now.
For additional information on the economy, housing market, and interest rates, you can subscribe to Tony’s free weekly Tony’s View publication at www.tonyalexander.nz
Changes to the CCCFA came into affect in October. What is the CCCFA and how does it affect me?
CCCFA stands for Credit Contracts and Consumer Finance Act. Quite a mouthful. How is it going to affect you? Well, from October, lenders will be under a more prescriptive regulatory regime, and will be required to place more scrutiny than ever on borrower affordability – that is, can you afford to pay the lending back over a set 10,20 or 30 year term. This translates into, if you thought it was tough to borrow money now, it is about to get harder. The regulators are prescribing to banks what needs to be verified as expenses against evidence and what needs to be allowed for. How many assets you have or how rich you are is helpful, but almost irrelevant.
This has impacted on client’s affordability. Previously, expenses like Netflix, Spotify, going to the gym, eating out and items we consider discretionary expenses must be accounted for. Not just accounted for but, calculations done to see if clients can afford to continue paying for these and a mortgage. A bank is reported to have bots going through clients’ statements to ensure what clients declare matches what they actually spend.
If you are looking to borrow in the future here is a list of things you can do to help your application:
- Review your expenses in detail (estimates are no longer any good)
- Deduct your monthly expenses from your monthly income
- Deduct what you expect your mortgage to be (We have calculators to assist on our website)
- If you end up with a negative balance look at what expenses you can remove from your budget. You’ll need to do this for a period of 3 months prior to applying for finance.
Lastly. Don’t shoot the messenger. If you need to borrow money, unfortunately you need to adhere to the lender’s requirements. They hold the pots of gold you are after.
Lastly, work with a mortgage adviser. We have access to most lenders in the market. If we can’t help you find a solution now, we’ll work with you to position you well for a future application.
- Posted by Isbister
- On October 15, 2021