Reserve bank’s monetary policies throwing spanner in the increasing property prices
CoreLogic’s House Price Index (HPI), the most comprehensive and detailed indicator of property value change in the market, just revealed that countrywide prices experienced the anticipated mini-boom in October, rising 2.1 percent month over month.
According to the latest valuation numbers from property data company CoreLogic, the average value of New Zealand homes climbed slightly over $217,000 in the year to October.
In October, the average value of all Auckland residences was $1,381,456. This was an increase of $288,051 over October of the previous year.
According to the Reserve Bank (RBNZ), recent gains in New Zealand home prices are “at odds” with the market’s basic drivers, and prices are “expected to come under pressure to realign with fundamental values” in the future years.
From November 1, fewer owner-occupiers will be able to access finance at a high LVR (>80%), with the RBNZ-mandated speed limit lowering from 20% to 10% of new loans over 80% LVR.
Senior economic analyst Matthew Brunton states in an RBNZ Analytical note, Measures for Assessing the Sustainability of House Prices in New Zealand, that until 2020, NZ house prices grew against a backdrop of falling long-term interest rates, rapid population growth, and insufficient supply response to the increased demand.
Brunton continues by stating “However, the recent increases in house prices through 2020 and 2021 are more at odds with fundamental drivers. Estimates of serviceability ratios using long-term interest rates are well above their historic average. As interest rates increase towards their long-term values over the coming years, households’ ability and willingness to service mortgages at current prices may be limited.”
Additionally, he says that eliminating tax deductions and broadening the bright-line test will limit the prospective return on existing properties, and hence their sustainable value, for leveraged investors. As a result, investors’ desire for investment homes may decrease until prices begin to match their needed rates of return.
Meanwhile, banks continue to raise mortgage rates at an alarmingly swift pace.
Westpac increased its special rates by up to 30 basis points last week, bringing the three-year rate to 4.49 per cent. BNZ increased its three-year rate to 4.39 per cent.
ASB now anticipates that the official cash rate (OCR) will reach a top of 2%, up from 0.5 percent currently. This meant that the majority of fixed-rate house loans will settle around the 4.5 to 5.5 percent area, according to ASB chief economist Nick Tuffley.
Westpac analysts now forecast that the Official Cash Rate (OCR) will reach 3% by 2023, implying that the Reserve Bank of New Zealand (RBNZ) would need to maintain a “tight” monetary policy for some time.
With tightening of monetary policies such as Debt to Income ratio & increasing OCR, it will likely put pressure on the property prices to steadily slow down in the coming months.
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