This year, 2021, may feel like it's a year of treading water with both social and economic uncertainty as we slog through extended Covid-19 lockdowns and restrictions for the second year running.
However, house prices have continued rising and with the emergence of inflation, the Official Cash Rate (OCR) has been increased for the first time in seven years, kicking off a broader game of rising borrowing rates.
Alongside this, the Kiwi dollar has been performing strongly against the Australian dollar.
Now, as Covid restrictions ease, interest.co.nz sought out some views on what’s ahead in 2022 for housing, interest rates and the Kiwi dollar.
Interest rates and the OCR
Brad Olsen, principal economist at Infometrics, expects the OCR to be sitting at 1.75% to 2% at the end of 2022, with interest rates continuing their way up, pitching one year fixed mortgage rates to approach 4%, and borrowers to seek certainty through fixed-term mortgage rates.
Despite this clamour for the safety net of predictability, the lending space remains fluid with the potential to be re-influenced by the wiles of Covid in future.
"I don't think we can discount the fact we might well need to pause and take a breath at some point if we see another outbreak or new variant," said Olsen
Jarrod Kerr, chief economist at Kiwibank, predicts a lot more OCR rises in the pipeline, suggesting one at every Reserve Bank review next year.
"We should see the cash rate at 2% or higher and that will continue to put upward pressure on mortgage rates, [up] from emergency settings where you could get one for near 2%, or a bit over, and heading to 4% to 5% next year."
Kerr said this will hit hardest for those with higher levels of debt, particularly if they have taken on more in recent years.
Hannah McQueen, founder of enable.me, said it was important to consider the potential for more lockdowns in 2022, when reflecting on interest rate levels, but that a shut-down would be the worst way to see rates drop.
“I think [rates] will go up 1% in the next 12 months, another 1% in the following 12 months, then rest a little, come back a bit. If [lockdowns] include Auckland, the economic hub of the country, the impact has to be felt at some point which might reduce the inflationary pressures, in a bad way.”
Housing
On housing, Kerr said pent up demand coming out of lockdown will see the market quite active in the short-term, but it’s important to consider the other factors weighing in, including interest rate increases and bright-line tests.
"LVR [loan to value ratio] restrictions we know have already played a part, the CCCFA regulations [Credit Contacts and Consumer Finance Act] and the threat of debt-to-income ratios [DTI] are coming through [along with] interest deductibility," said Kerr.
“But the good news on this is the substantial increase in [housing] supply. The biggest problem for decades has been the undersupply in affordable dwellings."
Olsen also spoke of the “substantial amount of tighter restrictions on people” such as tightening credit access and availability, LVR and DTI restrictions, which would be likely to crimp investment and could be a key driver to flattening off growth.
“We're on a better path for housing long-term, in the short-term there’s a considerable ride left to go. House price growth is expected to soften back, flatten off given that we've had huge activity in the market.”
Olsen also pointed to other factors such as building delays during Covid and the pause on migration during the last 18 months while we fought Covid.
“I’d caution those who say the housing crisis is all but over to take a step back and look at the current settings. We might be building lots now but we didn't for such a long time there's s till a backlog. It’s taking longer to build houses and net migration is expected to pick up next year,” said Olsen.
McQueen said that the demand would likely drop for certain properties next year, as their potential buyers would no longer qualify for lending.
She expected to see this mostly at the lower end (first home buyers), rather than for medium and high-value properties.
“The cost of funds will increase and people won't spend as much on properties. Or they will but won’t spend as much on discretionary things because they’ll commit to wealth strategy rather than living for the day,” said McQueen.
The Kiwi dollar
On whether the New Zealand dollar was likely to reach, or exceed, parity with the Australian dollar in 2022, our experts had mixed views.
Kerr believed there was a good chance and, should it happen, it would benefit importers but harm exporters.
“We're seeing our central bank tightening, good export prices, very high terms of trade, favourable interest rate differentials and basically our essential banks are assertive, our economy is performing much better than Australia.”
Olsen said parity was not likely next year, but something we might see in 2023.
“Although New Zealand is in a strong position, Aussie will go back a bit. There’s definitely a position there where we could at current levels be close-ish, but [I] don't see it coming to parity [yet].”
Daily exchange rates
Select chart tabs
25 Comments
But 10 years after that should have occurred. Imagine how much less Gross Debt the country would have to service (especially by households) if we'd held the property line in 2012.
We didn't - when it was obvious that was needed and possible at the time. "Stability" has shown itself to be illusive. Perhaps only a savage reminder of what any market in excess can do when it corrects is what we have coming instead?
Time, as always, will tell.
The reality:
Most agree that continuation of the levels of recent increases of house prices are unsustainable. For the short to medium term house prices are likely to be relatively flat or quite likely possibly have some correction.
Short term market fluctuations are irrelevant to home owners as home ownership is long term (albeit usually including trading up).
Home owners will have seen considerable CG in their home value (especially currently as many centres get their new RVs) but will appreciate that the CG is paper only - it is still the same home. They need to remember this if a correction does occur - any correction will be short term term whether it be a year or two or even a number of years and it will remain the same house and home.
The more important point for recent FHB nd those with large mortgages is that the outlook is for rising interest rates and the ability to service the mortgage is the most important immediate consideration. If I was a recent FHB with a large mortgage I would be looking at being prudent, by starting to limit large discretionary spending now and begin paying the mortgage down.
For those potential FHB, they face a double uncertainty of the future for house prices and interest rates. Personally, as with any market, I would be less concerned about timing the market (and the housing market over the past eighteen months illustrates the folly in this) and look to buying both well and to meet one's needs while ensuring that one can service the mortgage with likely increase in interest rates in the medium term.
All very sensible. But, as Terry Sperpisos and Dave Henderson found out - "short term" property fluctuations can bankrupt you just as surely as long term ones can.
How much is today's $15 million/7 property portfolio worth tomorrow? Answer: It depends on any debt that underpins it, because, as we all know, whatever the revaluation of the asset, the debt remains a fixed amount.
Kind of makes sense for owner occupiers but this simply doesn't work for investors. Investors make up a large chunk of home owners in this country and if you don't need the home to physically shelter you from the elements, it's much easier to walk away and sell up locking in some of those CG. They will sell in unison and the downward pressure gains momentum just like it does when everyone wants to buy.
We really are at the top. As you correctly point out it's all about serviceability and with rising interest rates people simply cannot borrow more than the last person did to buy their house so this is where the Ponzi party stops. No shortage of willing victims lining up to try pay more than you did for your house, just despite their best efforts to put themselves into more debt they actually can't because of tighter credit conditions aka higher interest rates.
My advice to anyone who is considering buying a house, take your time to find the right one after all you are about to enter at the peak.
It probably depends on whether the phantom market believes in the value of discrimination or not?
Though I'm guessing the govt is one step ahead... import more people to replace the kiwis it no longer requires...
Nice country, when your own country gives more rights to a non citizen...
Anywhere From Here
Things could in any direction from here. It's a bit like following the All Blacks under Fozzie - it's a 50/50 proposition at best. Today's ultra-interconnectedness means we are globally all in this together whether we like it or not. Things happen over there & they will affect things over here. That's the world today.
China's property ponzi has been both underwritten with debt & if not encouraged by Beijing, certainly let go beyond what is sustainable... until recently. The debt in their housing system & the way it operates will mean that the developers already with their backs against the wall (no pun intended) have a chance of getting out of jail. How? They take huge buyer deposits before the ink is dry on the new plans, meaning that the average Chinese worker who has worked hard & saved hard & put all their savings into real estate because they don't trust their own banking systems, has handed over most of their life savings, probably to a developer who is struggling to pay back their corporate debts (including a lot of US$) at a time when no one is buying these new-builds, because no one is living in them... & even worse, which they have to return to the govt after 70 years anyway. In other words, the average Chinese worker, who has done very well out of all of the last 30 years (up to 200 million of them) has just handed over everything they've saved hard for to a system which cannot deliver. If I were one of these people I would bloody angry right now & here's my point, should this situation get out of control, & my guess is that it could, then all the CCP's resources will be facing inward to protect the red elite (the top 100 million) as Mr Xi & his faithful will have their hands full trying to prevent another revolution in China (& they've had a few). Think the 21st Century is a bloodless century? Think again. Will this effect the rest of the planet. Hell yes. China is number two in the numbers. What will be the end result? Who knows exactly, but get used to the chaos.
I like the idea when people are surprised when people sees a curve ball.
A ball is spherical by nature and made up infinite curves in every direction and the balls in nature that we encounter or attempt to make are never perfectly weighted in all proportions.
However, we expect the ball we have in hand will travel perfectly straight when we want it to.
There's still room for upward valuations in house prices.
Be quick!
What's instore for hosting market?? It's another 30% increase this year. So don't wait.. Buy now or be left behind.
Just keep buying to your last cent. What else you got to spend your money in NZ. Just buy houses and be happy. They will give you millions in cash when you retire and don't have all the teeth to enjoy good food and don't have straight back so you can travel. But you will have money to enjoy yourself.. A nice typing nurse to help you pee and wee.. She will then make you sign all your money to her at some point and you will die a happy man or a woman.
Just keep buying and become millionaires.
"Brad Olsen, principal economist at Infometrics, expects the OCR to be sitting at 1.75% to 2% at the end of 2022, with interest rates continuing their way up, pitching one year fixed mortgage rates to approach 4%, and borrowers to seek certainty through fixed-term mortgage rates."
Pardon?...have a look at the one year fixed rates Dec 2021 with an OCR of 0.5%
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.