But borrowers' budgets remain tight, lender and adviser say
The Reserve Bank has held interest rates for a third time but is not ruling out a further hike in the future.
While the decision does not come as a surprise to the mortgage industry, it is bracing for the possibility of a further rise over the months ahead as the RBNZ continues its efforts to rein in inflation.
In what is its last call before the General Election, in a Monetary Policy Review announcement released on Wednesday afternoon, Reserve Bank (RBNZ) governor Adrian Orr opted to leave the official cash rate unchanged at 5.50%.
The decision to pause was widely anticipated by economists, ANZ and ASB telling NZ Adviser that despite a stronger than expected GDP result over the second quarter, their forecasts were for no change to the official cash rate in October.
Having lifted the wholesale interest rate by 525 basis points since October 2021, the Reserve Bank said that higher interest rates were constraining economic activity and reducing inflationary pressures.
Acknowledging that second quarter GDP was stronger than expected, Orr said that the growth outlook remained subdued and that spending growth was expected to decline further.
“Globally, economic growth remains below trend and headline inflation has eased for most of our trading partners,” Orr said.
He note that core inflation had also eased, but “to a lesser extent”.
“Weakening global demand is putting downward pressure on New Zealand export volumes and prices. Apart from oil, global import prices have eased,” Orr said in the statement.
Avanti Finance CEO Mark Mountcastle (pictured above right) acknowledged that borrowers were still grappling with escalating interest costs and cost of living pressures.
A further pause in the official cash rate would be met with a “collective sigh of relief” and would remove “one risk to borrowers’ capacity” in the short-term, he said.
“With remaining talk about the possibility of further future increases, I would expect a level of anxiety to remain, but a hold in October at least pushes the issue out a little and allows more information to come in that may support the fact that RBNZ has done enough,” Mountcastle said.
Float Mortgages financial adviser Naylon Cassidy (pictured above left) said that while a further hold was positive, borrower pain would largely continue.
Existing mortgage holders rolling off lower rates onto higher rates would have “little respite” over the short-to-medium term, he said.
“At present, all Float advisers are having daily conversations with their clients around refixes and are noting significant household cashflow pressure becoming evident,” Cassidy said.
Budget pressures persist for borrowers
Against a backdrop of higher living costs and rising interest rates, Mountcastle said that the Avanti Finance customer base had shown “an impressive amount of resilience”.
Referring to increased requirements under the CCCFA, which has undergone several rounds of amendments since December 2021, Mountcastle said that overall, borrowers were responsible and were cutting back where needed.
“This resilience makes something of a mockery of regulations that force all lenders to interrogate borrowers over expenses and demonstrates the vast majority are responsible in taking on commitments and ensuring suitable buffers against things that can go wrong,” Mountcastle said.
Referring to inflation, which current StatsNZ figures show reduced from 6.7% the previous quarter to 6% over the year to June, Mountcastle said that it should be remembered that a decrease did not necessarily mean that prices were reducing, rather that they were increasing at a slower rate.
This meant that the pressure on budgets would continue.
“Our experience is that the impact of the cost of living crisis is most keenly felt at the lower income end of the market (not surprisingly) and borrowers in this demographic have largely pulled back from purchasing assets that give rise to lending demand (i.e. motor vehicles, property, etc),” Mountcastle said.
“We have some hardship requests, but not at materially elevated levels, and we’re working with customers as required to assist in times of need.”
Cassidy said that requests from mortgage borrowers to change their repayments to interest-only were becoming increasingly frequent.
“Quite often, Float advisers can help with this, however sometimes client's need to engage with their bank directly for genuine hardship request,” Cassidy said.
Home loan activity picking up
As the real estate market stabilises after a period of rapid monetary policy tightening, Mountcastle said that Avanti Finance was starting to see some improvement in housing transaction volumes, but noted this was off a “very low base”.
“It should be remembered that the peak for house prices passed in around six months, so purchasers facing material drops in wealth are relatively small numbers, and most just face a paper loss from what were elevated valuations,” Mountcastle said.
He said that long-term mortgage holders holding steady jobs appeared to be able to adjust their household budgets.
“There appears to be a belief property prices have bottomed out which is bringing a little life back to the market however talk of further OCR increases means this is tentative,” he said.
Borrowers hindered by stress test rates
According to the latest CoreLogic House Price Index, property values flatlined in September, national values stabilising at $905,445. From the peak of March 2022, CoreLogic said that the total fall in property values was 13.2%, noting that average values remained 24.3% higher than in March 2020 (pre-COVID-19).
While he acknowledged that the drop in property values supported the housing affordability equation, Cassidy said that this had been offset by significantly higher mortgage test rates applied by lenders.
“Borrowing capacity for would-be home buyers is currently at sub 2 year lows,” Cassidy said.
“As soon as mortgages test rates start coming back down, borrowing capacity will jump, which will put pressure on house prices and "housing affordability”.
How are mortgage borrowers coping with higher interest rates and cost of living pressures? Share your thoughts in the comments section below.
