Articles by Kris Pedersen.
The Reserve Bank (RBNZ) surprised at their recent Official Cash Rate review on the 29th of November with their adoption of a relatively hawkish tone and the suggestion that we may not have seen the end to cash rate increases.
They increased their own projection for the OCR for the seventh time over the last two years, although I suspect at this stage that this may be posturing in order to encourage households in particular to show restraint through the Christmas season. The Bank would not want to see signs of inflation moving in the wrong direction on the back of green shoots in the housing market and the largest net gain through immigration on record in New Zealand in the 12 months to the end of October.
How the Bank acts across the year, not just in the decisions it makes in regard to the actual cash rate settings but also the language it uses, will be a leading factor in how we see the property market play out. I suspect at some stage, when rates clearly show signs of dropping, that we will see more activity from property investors who have had a very quiet 2023.
The factor that I am more interested in personally for next year, is what the Reserve Bank decides to do in regard to debt-to-income restrictions. Back in 2021 when he was finance minister, Grant Robertson allowed DTIs to be added to the RBNZ’s “macroprudential toolkit” (which from the public’s view was previously dominated with the loan-to-value restrictions). The National Party has openly not supported this previously – they turned down the ability to add them to the Reserve Bank’s toolkit under the Key administration. Thus it will be interesting to see if the RBNZ decides to push ahead with the utilisation of these without the current Government’s backing as they are legally allowed to do, or if they look to seek agreement with Nicola Willis as the new finance minister before implementation in the spirit of having a more cordial relationship moving forward.
At present, the use of DTIs as a tool is unlikely to achieve much because the high test rates (the interest rates the banks test clients on when applying for further borrowing) that the banks currently utilise is doing this job for them.
The argument changes, however, if interest rates (and thus test rates which follow actual mortgage rate trends) start dropping. In the past we've seen that this enabled some borrowers to be able to buy at high debt-to-income levels, especially on the back of the very low mortgage rates experienced through the COVID period.
If I was having a bet at this stage, I would lean towards the Reserve Bank putting DTIs in place at some point next year at a setting which initially will have very little impact on the market. Around about the same time, we will see further relaxation of the loan-to-value rules, probably with investment lending on existing properties being pushed from the existing maximum of 65% out to 70%, and an increase in the amount of lending with less than a 20% deposit that the banks can do from the current setting of 15% out to 20% to assist more first home buyers into the market.
The flow-on effect over time to the non-bank mortgage market will be worth following. A large portion of these lenders are actually funded through the New Zealand banks at an institutional level, and so to an extent fall under the same “macroprudential” arena as the main banks. How a debt-to-income restriction being implemented will affect these lenders is yet to be seen, but it is likely to encourage new entrants with alternative funding methods that sit outside the Reserve Bank’s remit.
Summary
All things considered, the decisions and actions that are undertaken from the RBNZ are likely to have a large impact on both activity and price in regard to the residential property market over the next 12 months.
A recommended New Year’s resolution is for mortgage borrowers is to get an understanding of how your position may be adversely affected so you can potentially make the necessary changes prior to these rule changes coming into effect.
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