KEY POINTS:
Plunging interest rates will not stop house prices falling, but they may help some people hold on to their homes, say economists.
Banks moved quickly to cut home loan rates yesterday after the Reserve Bank dropped the official cash rate to 3.5 per cent.
Economists spoken to by
the Herald said the dramatic 1.5 percentage point cut should put a cushion under falling house prices.
But with banks keeping tough home lending criteria and some 50,000 people expected to lose their jobs this year, they warned buying a property would remain out of many people's reach.
All the major banks dropped interest rates after yesterday's OCR announcement.
- Kiwibank dropped its floating home loan rate from 6.99 to 6.49 per cent, one-year fixed-term rate from 5.99 to 5.69 per cent and two-year rate from 6.99 to 5.99 per cent.
- Westpac dropped its floating rate from 7.49 to 6.89 per cent, one-year rate from 6.8 to 5.79 per cent and two-year rate from 6.85 to 5.89 per cent.
- BNZ dropped its floating rate from 7.49 to 6.99 per cent, one-year rate from 5.99 to 5.79 per cent and two-year rate from to 5.99 to 5.89 per cent.
- ANZ and National banks dropped floating rates from 7.5 to 6.95 per cent.
- ASB dropped its floating rate to 6.90 per cent and all fixed-term loans to 5.95 per cent.
- SBS Bank dropped its floating rate to 6.45 per cent.
ASB chief economist Nick Tuffley said those cuts would be enough to save some people their homes. "At least people who have got a little bit overstretched but have still got their job will now have the ability to refinance at lower rates, and take some of the financial pressure off," he said.
Borrowing for first-time buyers should also become easier. Westpac economist Brendan O'Donovan said lower repayments meant more people would be able to meet banks' income criteria for a home loan.
Massey University property studies professor Bob Hargreaves said more houses would sell, as people with a deposit at the ready took advantage of lower loan servicing costs to invest or buy a home.
But those waiting for a house price recovery could be waiting a while yet.
All three economists spoken to by the Herald said houses prices were still too high relative to incomes, at a time when many people feared losing their jobs. Mr O'Donovan said prices were caught in a battle between falling interest rates on the one hand and people's fear of losing their jobs on the other.
"It's not quite the same as suddenly stimulating a mass of would-be home owners, stampeding out to open homes," said Mr Tuffley. Buyers felt they had plenty of time before the market hit bottom, he said.
Mr Hargreaves said that at the national median house price of $328,500, the average borrower still needed $66,000 to pay the 20 per cent deposit required by many banks.
Mr O'Donovan said house prices would fall another 5 per cent this year before flattening out, which may allow wages to catch up.
The gap between home loan rates and the official cash rate has widened during the economic crisis, as the cost of offshore borrowing has increased. Westpac acting chief executive Bruce McLachlan said yesterday that retail interest rates should be seen in the context of a dramatically worsening international marketplace, which had pushed up the cost of banks' borrowing.