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Rising rates, quieter market

Higher mortgage rates will have a more sustained impact on the housing market than the LVR restrictions have, according to Westpac.

Friday, December 16th 2016, 12:12AM 1 Comment

by Miriam Bell

The bank’s latest Home Truths report has just been released and it is predicting a more subdued housing market outlook in 2017.

Following two years of double-digit house price gains, Westpac recently revised its forecasts and is now expecting growth of just 5% next year.

Westpac acting chief economist Michael Gordon said there are at least three compelling arguments for a softer housing market over 2017.

“One is that the latest round of LVR restrictions has finally broken the back of the market.

“Another is that mortgage rates are now rising instead of falling.

“Lastly, some have argued that the housing market is simply a bubble ready to burst.”

However, while the LVR restrictions have clearly had an impact on activity in the housing market, it’s less clear whether the restrictions have been effective in cooling house prices.

Gordon said they would expect the LVRs to limit the number of potential house buyers, but to have little impact on the maximum that bidders are willing to pay.

“The latter is driven by factors such as rental yields, borrowing costs and the tax treatment of investment property – none of which are affected by LVR restrictions.

“We suspect that debt-to-income (DTI) restrictions, were they to be added to the Reserve Bank’s macro-prudential toolkit, would suffer the same drawback.”

Rather it is rising interest rates that are the more compelling argument for a slower, cooler housing market for Westpac.

Gordon said that in recent years mortgage rates have been steadily declining and this has underpinned the price that investors are willing to pay for properties.

But the situation is changing, with global interest rates turning higher in the last few months and New Zealand being taken along for the ride, he said.

“In addition, a slowdown in deposit growth means that local lenders are now having to seek more expensive sources of funding.

“Consequently, mortgage rates have risen by around 20 basis points from their lows for a two-year fixed term, and around 40 basis points for a five-year term.”

Westpac expects the OCR to remain unchanged over 2017 but suspects that longer-term interest rates will face further upward pressure over the coming year.

That will mark a clear break from what the housing market has experienced over the last couple of years, Gordon said.

“And it’s the key reason why we’re forecasting a much more subdued pace of house price growth next year.

“In our view, higher mortgage rates will have a more meaningful – and sustained – impact on house prices than lending restrictions alone ever could.”

When it comes to the housing market bubble argument, Gordon said there is a speculative element to property prices.

This was in the sense that today’s land prices reflect that value of houses not yet built and that there’s some uncertainty around the future value of those houses.

But that speculative element still has a basis in the fundamentals of demand and supply, he said.

“New Zealand’s burgeoning population, especially in Auckland, has created a demand for new homes that the market is struggling to deliver.

“The accumulated shortage of housing and the building industry’s limited capacity suggest that there’s little risk of an oversupply of homes any time soon.”


Tags: banks interest rates LVR Macro Prudential Tools mortgages OCR property investment Westpac

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Comments from our readers

On 16 December 2016 at 11:38 am DT said:
How about adding a bit of reality to the discussion about the housing market?
Does anybody really believe that very small increases or decreases in mortgage interest rates make a difference to prospective buyers?
I know many prospective buyers who have attended house auctions with their finance all set to go from their bank to cover the expected sale cost, only to be blown away by an overseas buyer prepared to pay much more, who has the money to pay cash
Where is the comment about the 20,000 houses sitting empty in Auckland, bought by investors waiting for the right time to re-sell and walk away with their profits?

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Mortgage Rates Table

Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
AIA 5.95 4.85 5.35 5.65
ANZ 5.94 5.95 6.40 6.59
ANZ Blueprint to Build - - - -
ANZ Special - 5.35 5.80 5.99
ASB Bank 5.85 5.35 5.80 5.99
Avanti Finance 5.95 - - -
Basecorp Finance 6.95 - - -
Bluestone 5.89 7.49 8.09 8.19
BNZ - Classic - 5.35 5.69 5.99
BNZ - Mortgage One 5.94 - - -
BNZ - Rapid Repay 5.94 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Std, FlyBuys 5.94 5.95 6.29 6.59
BNZ - TotalMoney 5.94 - - -
CFML Loans 6.45 - - -
China Construction Bank 5.50 5.40 6.14 6.40
China Construction Bank Special - 4.45 5.19 5.45
Co-operative Bank - First Home Special - 4.75 - -
Co-operative Bank - Owner Occ 5.85 4.85 5.35 5.65
Co-operative Bank - Standard 5.85 5.35 5.85 6.15
Credit Union Auckland 5.95 - - -
First Credit Union Special 5.85 ▲5.35 ▲5.85 -
Heartland Bank - Online 4.10 ▲4.90 ▲5.29 ▲5.59
Lender Flt 1yr 2yr 3yr
Heretaunga Building Society 6.10 ▲5.35 ▲5.80 -
HSBC Premier 5.89 4.39 5.15 5.39
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 5.25 4.39 5.09 5.45
Kainga Ora 5.43 4.57 5.58 5.85
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 5.50 ▲6.19 ▲6.69 ▲6.79
Kiwibank - Offset 5.50 - - -
Kiwibank Special 5.00 ▲5.19 ▲5.69 ▲5.89
Liberty 4.84 - - -
Lender Flt 1yr 2yr 3yr
Nelson Building Society 6.45 5.55 6.15 -
Pepper Money 4.49 - - -
Resimac 6.19 5.60 6.16 6.29
SBS Bank 5.79 ▲5.65 ▲6.09 ▲6.19
SBS Bank Special - ▲5.15 ▲5.59 ▲5.69
Select Home Loans 4.09 4.29 4.86 5.09
TSB Bank ▲6.30 ▲5.65 5.79 ▲6.45
TSB Special ▲5.50 ▲4.85 4.99 ▲5.65
Unity 5.65 4.95 5.55 -
Wairarapa Building Society 5.74 4.95 5.75 -
Westpac 5.94 5.95 6.29 6.59
Lender Flt 1yr 2yr 3yr
Westpac - Offset 5.94 - - -
Westpac Special - 5.35 5.69 5.99
Median 5.87 5.35 5.77 5.99

Last updated: 30 June 2022 9:19am

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