About 60% of home loans will need to be refinanced over the next year and for many borrowers that will mean their interest rates will double, according to CoreLogic’s latest economic and housing market update.
CoreLogic’s chief real estate economist, Kelvin Davidson, said in the middle of last year that fixed-term interest rates were between 2% and 2.5% and that in mid- 2022, they would probably be between 4% and 5%.
With fixed-term periods generally spread evenly throughout the year, Davidson said up to 20% of fixed-term borrowers could be affected by this doubling as well as those with floating rates.
Davidson said the change in interest rates could have a “significant impact on household budgets” and would be another factor holding house prices down or even contributing to falling house prices. .
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Some might say the interest rates Kiwis were facing were still relatively low, historically speaking, but the evolution of the financial burden would be compared to last year, not back, he said. .
Financial adviser Hannah McQueen said the rapid rise in interest rates was concerning, given that most borrowers weren’t good at saving (unless they were stuck) or viewing their finances in a downturn. longer term.
She said most would not be practicing the behaviors they would need to “navigate the choppy waters we are about to enter”, and that when the crisis hits, they may be forced to take out mortgages. short term or quickly cut discretionary spending – possibly harming the economy.
McQueen said that after working with economists, she predicted interest rates would rise 1% per year, for perhaps the next three years, before stabilizing at around 5% to 5.5%. .
She didn’t expect higher mortgage interest rates to directly drive many people to sell their homes, but financial stress could lead to relationship breakdowns, which could lead to some sales.
“I think people will start selling, but it’s probably in a year or two, rather than immediately, because you can save time in the first place. You can postpone your debts, you can contract short-term debts.
Fears over rising interest rates have caused homeowners to lock in more and more to longer-term fixed rates.
Fears may be justified, with ANZ economists now forecasting an official exchange rate (OCR) of 3% by April next year.
This trajectory was to lead to the return of a floating interest rate of 6% on mortgages by September.
One- and two-year fixed rates are also expected to reach 4.6% and 4.9% respectively over the same period.
“This has fueled our expectation of a 7% decline in house prices in 2022,” said ANZ economist Finn Robinson.
Market commentator Tony Alexander says people’s preferences for long-term interest rates are changing
The galloping market in figures
CoreLogic’s report highlights the impact of the runaway real estate market, with the total value of residential real estate reaching $1.72 trillion at the end of last year.
This was 27% above the total value of all residential properties at the end of 2020, when the market was valued at $1.35t.
Davidson said about a fifth of that $1.72 billion was mortgage debt.
He warned that although looking quite healthy overall, household debt was high relative to income.
“To some extent, debt has only recently been sustainable due to low mortgage rates,” he said.
“However, rising OCR and rising interest rates on home loans mean that households are going to have to adjust their finances fairly quickly to ensure they remain balanced as the lending environment changes for everybody.”
“Homeowners now face a much reduced availability of low deposit loans, while CCCFA (Credit Contracts Consumer Finance Act) regulations have caused far more disruption than expected.”
Data from credit reporting agency Centrix showed that the number of home loans issued per month fell by almost a quarter (23%) after the CCCFA came into effect.
Moving to a buyer’s market
Data from CoreLogic also showed the imbalance between supply and demand was changing, with more properties appearing on the market even as fewer people were buying, suggesting a shift to a buyer’s market.
“We suspect that by mid-2022, the balance of power may tilt toward buyers,” Davidson said.
The company blamed this on the market in reaction to previous increases in mortgage rates and previous changes to lending and tax rules.
“Wellington and Dunedin have seen total listings increase quite significantly as new stock has flooded into the market, but transactions have eased. However, this increase in available property will take some time to be more clearly reflected in price metrics,” Davidson said.
Traditionally, when sales slow, prices follow, he said.
“Some regions are probably a bit more vulnerable than others to an outright fall in property prices, but in general anyone looking for a bargain may be disappointed. With unemployment still low, the story is more that of much slower price growth than significant declines.
“But of course there will always be opportunities, and the tighter lending environment may work in favor of those with cash/equity at the expense of others.
CoreLogic’s Regional Vulnerability Index for areas likely to experience falling house prices, suggesting that prices in provincial and smaller regions are likely to fall, but major hubs are somewhat safer.
The increase in real estate listings was reflected in a marked increase in listings on RealEstate.co.nz, which saw 30% more homes on the market in December than a year earlier (equivalent to 4,000 homes from more for sale) with stock more than doubling in four regions.
Investors buy less
CoreLogic’s Buyer Ranking series showed that in the last three months of last year, investors increased their share of buys slightly from 24% to 25%, but that was down from the first quarter. , when they accounted for 29% of the market.
“Clearly mortgage investors’ appetite for buying property has waned, although they will no doubt continue to look to new construction,” Davidson said.
“Clearly, the LVR and the tax system are now inducing both homeowners and investors to seriously consider buying new construction. And that should give developers the confidence to keep building new homes.
However, Davidson said the industry is already hot and costs are rising rapidly.
“Even despite strong demand, it’s likely we could see new housing consents dip a bit this year as the cost of construction just gets too high for some households,” Davidson said.
The Omicron effect remained “a wildcard” in projections for the housing market, he said.
“The recent turn red is a clear signal that the Covid disruption is not over yet, which could cause turmoil for the New Zealand economy and property market in the months to come,” he said. he declares.
Market fall remains a possibility
Davidson said he wouldn’t be surprised if house price increases slowed to single digits this year.
“The potential tipping factor in whether or not we see property values falling more broadly is probably unemployment.”
Any slowdown in the labor market later this year could put property prices at risk, he said.