Summary.   Just over a year ago if you were looking to lock in a mortgage interest rate, you’d have paid about 2.3% to fix for one year. The rate to fix for three years was close to 2.7% and the five year fixed rate was at a record low of 2.99%. My suggestion at the time was that if I were borrowing I would lock in for five years at 2.99% even though it would mean paying a lot more than fixing one year.

Property market changes accelerated this cycle

Tony Alexander

Monday 18 July ‘22

The data show very few people did in fact lock in for five years and most took the 2.3% candy and now face resetting at rates ranging from 5.2% for one year to almost 6% for three years and 6.2% or more for five years.

If I were borrowing at the moment I would probably lock in for just 12 months. That is not because the rate is the lowest on offer. My current preference for fixing one year reflects the way in which the pace of growth in our economy and underlying inflationary pressures are being crushed quickly by the Reserve Bank’s belated but aggressive tightening of monetary policy.

The last time we had a proper tightening cycle from 2004-08 it took three years for fixed mortgage rates to rise as much as they have just done in a one year period.

Monetary restraint is being quickly applied and we can see the effects in numerous areas.

Assisted by the soaring cost of living the net proportion of people in my monthly Spending Plans Survey who plan to buy more things over the next 3-6 months has fallen to a net negative 21% from -11% in February and +17% in December. House prices have fallen 7.7%, sales continue to fall away, and my monthly survey of real estate agents alongside REINZ shows a record low reading for FOMO and record high for FOOP (fear of over-paying).

One quarterly measure of consumer confidence has in fact fallen to a record low. Things are so bad that a 20 minute use of Google News search produced 47 things recently described in New Zealand as being in “crisis”.

This all sounds quite depressing and makes us think that a lot of people will soon move to Australia. But there are two aspects to the current malaise in our housing market. First, the extent of the turnaround in prices, sales, and soon construction is unusually large. Second, because things are happening so quickly the turning point in the housing market is going to come a lot sooner than most people are currently thinking.

I am still surprised when people look at my interest rate forecasts and ask why they show interest rates falling from 2023. With rates rising and warning signals abounding from our central bank the average person can see little other than high and rising interest rates for many years. But economies and housing markets move in cycles and because the speed of monetary policy tightening this time around is so rapid, the downward leg of the cycle will be shortened in time – though deepened because of the pandemic-induced high starting point from late last year.

History tells us that picking exactly when price cycles bottom out and what those prices will be is impossible to reasonably predict. But the way things are going I expect mortgage rates to have peaked before the end of this year with only minor increases remaining from current levels for all but the one year term.

House prices and sales are likely to bottom out (current best guess) by the middle of next year.

Yes, there is large uncertainty surrounding issues such as Russia’s war on Ukraine and the impact on global growth and inflation, China’s pursuit of a failed eradication strategy for Covid-19, the extent to which house construction will fall away, and cost of living changes. But the message to those looking to make a house purchase is clear. Price movements for now are on your side. But it would be better to focus on the rapidly rising stock of properties one can choose to meet your requirements for the next 10-30 years rather than trying to pick when prices hit their lowest levels.

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