Interest rate rises end tailwind

Between May and June the average standard one-year mortgage rate (published by the RBNZ) lifted 17bps, two-year +5bps, three-year +5bps and four-year up 1bp. The five-year rate was stable at 6.78 per cent.

The main driver of higher mortgage rates has been the gradual rise in wholesale interest rates over May and June, with the bellwether two-year swap rate up around 0.50 percentage points since early May.

The shape of the mortgage curve, on average across the big-four banks, is now a lot smoother, with floating marking the high point, six month and one-year rates broadly on a par with one another, and the five-year the low point.

Despite higher interest rates, recent LVR and Credit Contracts and Consumer Finance Act (CCCFA) tweaks have contributed to an upturn in the housing market, although it had some one-off factors nudging it along.

In its latest Property Focus, ANZ says last month’s data confirmed a turn in the house price cycle.

ANZ chief economist Sharon Zollner says the June figures were stronger than the bank’s expectation. “Now the question is whether this is just a noisy start to the turn, or if the upswing has a bit more oomph than we’ve been expecting.”

There are multiple drivers of the house price cycle. But one in particular stands out for last month: easing loan-to-value ratio (LVR) restrictions, which took effect 1 June, says Zollner.

Also, further tweaks have been made to the CCCFA recently after it was materially tightened in December 2021.

Zollner says anecdotes suggest slightly looser financial conditions stemming from LVR changes and CCCFA tweaks have coincided with a small uplift in demand for mortgage borrowing.

“Even if the direct impact of recent policy tweaks is small, that’s not to say a loosening in LVR settings for owner occupiers and CCCFA changes will have no effect on the market whatsoever.

“The impacts of various housing drivers are likely to be time-varying to some extent, and subject to prevailing market conditions at the time. For example, we have noted numerous times the housing market can be influenced quite heavily by ‘animal spirits’ (fear of missing out, or FOMO, being one manifestation of this).

“Tweaks to owner-occupier LVR settings for example, while perhaps not enough to materially change the housing demand calculus for would-be buyers, could still have contributed to a change in ‘mood’ last month that may not have occurred during previous LVR tweaks. In other words, if buyers and sellers were just waiting for confirmation that the wind is changing direction, recent LVR tweaks may well have provided it,” she says. 

June was also the first full month of data since the RBNZ called a halt to rate hikes. This likely had an impact on perceived interest rate risk, Zollner says, which can also influence the broader housing vibe, with some households potentially viewing current mortgage rates as a worst-case scenario.”

She says, “The bank’s OCR call disagrees, but views on the outlook differ, with some expecting the next move to be a cut, and others (like us) expecting it to be a hike.”

Significant housing headwinds remain, with housing still unaffordable relative to history, the unemployment rate set to rise, and more recently, some renewed upward pressure on mortgage rates.

“So while it’s possible June prices received a larger bump than anticipated from the tweak to LVR settings, recent CCCFA changes, and the RBNZ declaration of a cessation of hostilities, at this stage we don’t think this points to stronger housing momentum persisting into the medium term.”

Recent changes to mortgage rates corroborate this view. Two, three, four, and five-year standard mortgage rates had been trending lower this year until May, as the two-year moved broadly sideways. On the other hand, the one-year rate – typically a relatively popular term – has continued to trend higher this year.

Zollner says whether or not this recent mix of mortgage rate changes has been a tailwind, headwind, or neutral is somewhat uncertain. But what is clear is that over the past month or so, most mortgage rates have shifted higher.

Recent auction clearance rates, in particular, suggest ANZ’s forecast for about 3% growth in house prices over the second half of this year is a touch soft.

That may well be true, Zollner says, but buyers and sellers can’t lose sight of the broader economic backdrop: the RBNZ is wanting to engineer higher unemployment in order to tame CPI inflation, and if it doesn’t achieve this with the OCR at 5.5% it will hike by more.

She says the bank’s expectation is that CPI inflation will prove harder to tame than the RBNZ anticipates, pushing it back into hiking mode come November.

That’s likely to lead to renewed upwards pressure on mortgage rates later in the year, and could even see housing headwinds dominate tailwinds going into 2024.