The NZ housing honeymoon is over

September 27th, 2013 at 12:00 pm by David Farrar

An advertorial from the BNZ:

The housing honeymoon is over

Mortgage rates are rising – but all is not lost for home buyers.

It’s often said that all good things must come to an end, and this certainly seems to be the case with the recent period of record low mortgage rates in New Zealand. With all four major Australian owned banks in NZ having raised their long term mortgage rates recently, prospective home buyers look set to suffer a setback in their spending power. At first glance, a third of a percentage point may not seem like a lot, but to many would be home owners, that tiny incremental difference over a period of a 30 year mortgage can make the difference between being able to afford the house of their dreams or not.

With recent mortgage rate comparisons indicating that the hike in mortgage rates looks to  be increasing over the next 5 years to between 6.3% and 7.1%, it is becoming imperative that new home buyers ask themselves just how much house they really can afford. When one takes into consideration the fact that a 1% increase in mortgage rates is equal to around a 10.75% drop in purchasing power, home buyers, including those who were pre-approved a few weeks ago, will now find that they are in fact eligible for a good deal less than their pre-approved amount.

A common error in evaluation those new to the housing market often make is to confuse a house’s ‘sticker’ price with its affordability. The true cost of home ownership lies in not only the ‘for sale’ price but also in the monthly carrying cost – of which tax, home insurance and of course the mortgage all comes into play.

Faced with the prospect of progressively rising mortgage rates (and therefore higher monthly home payments), existing home owners would be advised to hold off on refinancing their homes, and if they are on a floating home loan scheme to switch over to a fixed rate. Those in the market for a new home would be best off by securing a fixed home rate, as projections are all indicating that the mortgage rate only looks set to increase from here on out – thanks to raised international borrowing costs and the tightening of borrowing guidelines by lenders.

Of course, home owners and buyers alike need not suffer the inevitable rise of mortgage rates by simply reaching deeper into their pockets every month to shell out for higher monthly payments. Homebuyers can instead opt to raise their down payment amount in order to maintain an otherwise constant monthly payment in the face of rising rates. This may be difficult or even impossible for some first time home buyers and recent homeowners, but it is a smart move to make for those with the capability.

A second option is to lower their bid price on a home. Generally, higher mortgages lead to a declining demand from house buyers, so some home sellers may opt to accept the lower bid instead of sitting with a house to sell in a market where the mortgage rate looks set to increase for the next 3-5 years.

So, whilst the mortgage rates offered by all the major banks, including , look set to head north for the foreseeable future, home buyers are still left with some options to stay ahead of the inflationary curve. Provided they assess their home’s affordability accurately, maximize their equity and attempt to lower the bid price on the house, they should be able to afford the monthly repayments on their dream home. 

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12 Responses to “The NZ housing honeymoon is over”

  1. RightNow (6,994 comments) says:

    FU BNZ.

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  2. Inky_the_Red (759 comments) says:

    If demand falls due to the higher cost of borrowing, will house prices also fall? If price fall won’t some people have negative equity?

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  3. wreck1080 (3,905 comments) says:

    The RB should have moved 2 years ago.

    They were too late in the early 2000’s, and too late now.

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  4. Jafa (38 comments) says:

    Maybe the long overdue housing bust that NZ desperately needs is finally here. Reality check on it’s way. Don’t folks appreciate that buying property at record low interest rates is asking for trouble? Guess we are all going to have to put up with the moaning and groaning over the next 3-4 years as the RB gets us back to ‘normal’ interest rates. Agree that RB has left it too late. When will the RB folk ever learn. Greenspan, Bollard and Brash all missed by at least a year or two in putting rates up.

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  5. dime (9,972 comments) says:

    A rate increase of 1% would effect Dime :(

    However, if the rates can stay low for another 6-7 months, Dime is sweet :D

    I know youre all rooting for me!

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  6. Viking2 (11,467 comments) says:

    Typical Tony Alexander bullshit.

    He never misses a chance to say rates are rising. Conversley he never says they are going down.

    NZ has had and still has some of the highest interest rates in the OECD.

    Why should we be like that?

    Too much spending of hard earned cash. Govt. should stop the spend up, people should stop buying new cars and allow our exporters to have a lower dollar so we earn more money.

    Given that Fonterra is going to bring a wad of cash to the table this year and the economies from a lot of countries including Spain,Italy,France,Greece The USA are about to collapse and their borrowing is not safe why wouldn’t our rates go down?

    Meanwhile The BNZ says this today.
    NZ 2-year swaps approaching “value” range while 5-year swaps would need to drop 60bps to achieve same

    At the bottom of this page their is the swap rate graph. Not that the trend has turned down.

    http://www.interest.co.nz/bonds/66571/nz-2-year-swaps-approaching-value-range-while-5-year-swaps-would-need-drop-60bps-achieve

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  7. edd (157 comments) says:

    Higher cost of borrowing in NZ isn’t going to change the mortgage rates in Japan now is it… So any softness in the market will be sucked up by foreign investors… We really are a small fish in a big ocean…

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  8. Bullitt (140 comments) says:

    Retail yield curves are looking very steep after the current round of long term increases. When you work out what rates would have to be in 1-3 years time the implied rates would crush the economy…ie its not going to happen to the extent its currently priced in.

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  9. Monique Angel (291 comments) says:

    It all sounds like rubbish. Check out the 2 yr swap rate. It’s down a kite load, below the dip in Dec/ Jan that indicated the best value in a year.

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  10. Anthony (796 comments) says:

    Not sure why this worth blogging about DPF? If Tony Alexander wrote that article then it is about as accurate as marking various spots on the lawn and seeing which one the dogs poops closest to!

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  11. Anthony (796 comments) says:

    Tony Alexander was saying two years ago that we should all fix our mortgage rates because interest rates were about to rise. I took no notice and left mine floating. Of course he will be right one day but a broken clock is right twice a day!

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  12. Meatloaf (196 comments) says:

    At the moment, interest rates are at a record low, or at least close to it. People can expect interest rates to go up. So if someone is lucky enough to have the same rate fixed for five years, they should know that after those 5 years the cost will be higher. If people have got a mortgage, only able to pay just enough, then it is imprudent for a bank to lend. Banks typically say that a third of your income can go to debt repayments, and that’s cause they understand the rate of interest will go up at times.

    So this is a thing that borrowers should have thought about, and if they can’t afford an extra 1 or 2%, they shouldn’t have borrowed to begin with. And why would they, maybe its the real estate people who go on and on, exaggerating the houses value, that’s the real problem.

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