Lending rules and rising interest rates calms the rising property market

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Lending rules and rising interest rates calms the rising property market

CoreLogic NZ’s latest Property Market & Economic Update reveals that the New Zealand property market is anticipated to have reached its peak growth rate late in 2021, following a number of government interventions aimed at cooling the overheated market.

At the end of Q4 2021, the overall value of residential real estate was $1.72 trillion, up from $1.35 trillion at the end of 2020, with loans secured against 19 percent of that value and the remaining 81 percent in home equity.

While the market remains robust, the rate of growth is slowing across all areas, indicating that the new lending requirements and increased listing activity are beginning to have an effect.

This offers little relief to first-time buyers, since the benefit of somewhat reduced prices at the bottom of the market was almost totally offset by increased mortgage interest rates.

In particular, the amendment to the Credit Contract and Consumer Finance Act (CCCFA) on 1 December 2021 – which requires stricter scrutiny of borrowers’ financial health – seems to have had an immediate effect.

CoreLogic data had already indicated a reduction in sales activity due to mortgage rate increases and changes to lending and tax requirements.

Kelvin Davidson, CoreLogic’s chief property economist, stated that when property sales decrease, prices often follow suit. “Some areas are probably a little more vulnerable to outright house price falls than others, but in general anyone hanging out for a major bargain may be disappointed,” he said.

Numerous households will face an unpleasant economic shock in the coming few years as the cheap interest rate fiesta winds down and consumers are left with a terrible financial hangover.

Mortgage interest rates ended a 14-year decline in May last year, when the average of the major banks’ two-year fixed rates bottomed out at an all-time low of 2.52 percent.

Consumer prices grew 5.9 percent in 2021, the strongest growth in more than 30 years, confirming the next increase in the Official Cash Rate (OCR) on February 23 and possibly a 0.5-point increase rather than the normal 0.25-point increase.

If that pattern of prices calming continues, there may be little relief in sight for first-time home buyers struggling to afford a home of their own. While housing prices are expected to soften over the next year or so, mortgage rates are expected to continue rising, diminishing any benefit from lower prices.

The February/March quarter is typically the peak season of the year for the residential property market, therefore auction results over the next several weeks should provide a better idea of how the market may perform as the year unfolds.

For professional mortgage & insurance advice, speak to our experienced advisers for a free consultation and no-obligation quote today. Contact the team at Professional Financial Solutions on 09 846 9934 or email on info@pfsl.co.nz

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Prachi Makwana