Mortgage rates set to rise further after RBNZ lifts cash rate

Property prices rose 25 per cent last year but are set to come under pressure from rising mortgage rates. Photo / File

Mortgage rates are likely to rise further and the property market could see price rises of less than 5 per cent this year, an economist has forecast in the face of another hike in the official cash rate.

The Reserve Bank today lifted the OCR by 25 basis points to 1 per cent - the third increase in the cash rate in the last six months and a return to where the rate was sitting pre-Covid in February 2020.

Kelvin Davidson, chief property economist at CoreLogic, said the RBNZ had also forecast a higher peak for the OCR than they previously indicated.

"It could now nudge above 3 per cent later next year, compared to the previous indicated peak of about 2.5 per cent."

Davidson said mortgage rate rises had flattened off recently after sharp increases last year with much of the future increase in the cash rate already "priced in" to rates.

"This suggests that any further increases in mortgage rates could well be slower and/or smaller than what we've already seen."

He was also wary of assuming the cash rate would go up to steadily given the risk of more business insolvencies this year.

"The resulting loss of jobs could feed back into weaker economic growth and hence a lower/slower path for the OCR – and also potentially mortgage interest rates too."

Davidson said there were already signs that higher mortgage rates combined with tighter credit availability were cooling sales volumes and the pace of value growth.

"And although mortgage rates may not shoot up quite like they did last year, they've undoubtedly still got further to rise."

Davidson said given 50 per cent of New Zealand mortgages were due to roll off a fixed interest rate this year and another 10 per cent were on floating rates, a high proportion of borrowers would face increased borrowing costs soon.

"Looking ahead, if unemployment remains low then the housing market shouldn't be headed for a crisis. But after growth in average property values of more than 25 per cent last year, I'd expect that figure to be less than 5 per cent this year – and the chances of prolonged falls are certainly growing."

But Tim Kearins, owner of the real estate agency Century 21, New Zealand argued that interest rates were still a lot lower than their peaks in past decades and servicing a mortgage remained comparable to or even cheaper than paying rent.

"Interest rates are still a lot lower than when they peaked in past decades. What's more, servicing a mortgage remains comparable, or even cheaper, than paying current record-high rents," said Kearins.

"Yes, the OCR is now at 1 per cent which is the highest it has been for two years. However, let's not forget that in April 2015 it was at 3.50 per cent and in June 2008 it was at 8.25 per cent."

Kearins said historically interest rates of around 6 or 7 per cent were the average for Kiwi borrowers.

"We're coming off a period of extraordinary low interest rates after the OCR didn't move from 0.25 per cent for most of 2020 and 2021."

He said New Zealand's property market remained relatively resilient despite the arrival of Omicron, tighter lending restrictions, rising interest rates, and a softening of prices forecast.

"The speed of growth is certainly slowing, but good properties remain in strong demand and that will continue in the foreseeable future. First-home buyers need to keep in context that compared to past decades, interest rates remain favourable."