Banks: mortgage rates fall yet again! Experts: house prices will keep climbing this year!

Barely into 2021, Westpac has announced a substantial reduction in its main mortgage rate. From today, its one-year ‘special’ mortgage rate will fall by 20 basis points to 2.29%. Westpac makes no secret of its aim to cater to the current housing market boom.

A bank spokesperson said: ‘We know buying and selling homes may be a hot topic for many Kiwi families over the holidays. So whether you want to achieve your dream of buying a home in 2021 or pay off your mortgage faster, this special rate can help.

‘At the same time two years ago, the special home loan rate was 4.15%. That meant fortnightly repayments of NZ$1,119 on a NZ$500,000 mortgage over 30 years. At the current rate, fortnightly repayments on the same loan would be just NZ$885, saving NZ$6084 a year.’

This is the first cut in fixed mortgage rates by a major New Zealand bank in the 9 weeks since 6 November 2020. But there is reason to believe it certainly will not be the last, and Westpac will not be alone. The Reserve Bank’s Funding for Lending Programme (FLP) is now in place, allowing banks to draw funds for home loans at the OCR of 0.25%. Banks using this funding facility could keep their mortgage rates at around 2%. By the end of last year, banks had already drawn NZ$1,000,000,000 from the FLP. NZ$1,000,000,000 is enough to fund around 2000 home loans.

As discussed repeatedly before the new year, low mortgage rates are a key factor behind the property market’s heat. With signs of another round of rate cuts emerging, what direction will the property market take in 2021?

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House prices will rise 13% to 16% over the coming months

As the new year begins, economists at Westpac, ASB, BNZ and Kiwibank have offered their forecasts for New Zealand’s property market this year. 

Although their specific forecasts differ, the economists broadly agree that low interest rates and strong demand will continue to have an impact in the new year, with the property market rising further in 2021 from last year’s record levels. They believe these forecasts remain valid despite the Reserve Bank’s plans to introduce tighter lending rules for investors in March.

Westpac chief economist Dominick Stephens said house prices would continue rising for some time and expected another substantial increase in the property market this year.

 ‘We expect annual house price inflation to peak at 16% in June 2021, with full-year growth of 12.2% by the end of 2021,’ he said. ‘House prices are being driven by low interest rates, which will remain low or fall further over the coming year. Other factors should not be overlooked either, including net migration and an improving economy.’

This forecast is broadly in line with the views of ASB senior economist Mike Jones and BNZ’s Stephen Toplis, who also predict double-digit house price growth by the end of 2021.

Kiwibank chief economist Jarod Kerr is the most conservative of the major banks’ experts. He believes lending restrictions will limit house price growth in 2021 to around 5% to 6%.

But even this most conservative forecast offers little comfort to buyers preparing to enter the housing market.

REINZ figures show Auckland’s median house price reached NZ$1,000,000 for the first time in October last year. The national median rose 19.8% over the year, from NZ$605,000 to NZ$725,000.

Yet soaring prices have done nothing to dampen buyers’ enthusiasm. Sales in November 2020 reached their highest level since March 2007. Barfoot & Thompson’s average December sales over the previous five years were less than half its sales in December 2020. 

Demand outstripping supply remains a difficult underlying problem

When the Reserve Bank earlier announced that LVR restrictions would return in March, concerns about the housing market running out of control were clear across the board. Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr discussed housing affordability at the time. Some banks responded by saying they would raise investor deposit requirements under LVR restrictions to 30%, while ANZ went as far as 40%.

But ASB’s Mike Jones put his finger on the issue: some adjustments might ease activity in the market, but they would not fully resolve the core problem.

 ‘Several commercial banks have repeatedly called on the government to move the OCR into negative territory, so the outlook for mortgage rates clearly will not be adversely affected by that,’ he said. ‘The fundamental shortage of supply relative to demand remains. In November, unsold housing stock reached a record low, and the sales-to-listings ratio indicates that supply and demand remain exceptionally tight, keeping upward pressure on prices. We therefore have good reason to believe national house prices will continue growing at a double-digit pace through to the end of 2021.’

Westpac’s Dominick Stephens outlined several measures that could curb house price growth.

For example, his calculations suggested that a 10% capital gains tax could reduce prices by about 10.9%. He also proposed solutions including allowing greater urban intensification, restricting mortgage lending, reducing construction costs, increasing land supply and schemes for purchasing according to need.

Tighter lending rules

Kiwibank’s Jarod Kerr believes the Reserve Bank’s proposed reinstatement of LVR restrictions in March is a workable way to cool the property market.

‘The Reserve Bank plans to reinstate LVR restrictions in March, but commercial banks should start restricting lending now,’ he argued. ‘If necessary, the Reserve Bank can adjust LVR limits, for example by raising deposit requirements for investors to 40%.’

Kerr said: ‘LVR restrictions will take the froth associated with housing investment off the top of the market. Continued border closures also mean population growth is slowing. During the second half of 2021, annual house price growth will gradually ease to 5% to 6%. If that does not have the intended effect, we would like to see tighter LVR restrictions to help cool the property market.’

New Zealand’s home ownership rate continues to fall

New Zealand’s home ownership rate has now fallen to its lowest level since 1951, and concerns are growing about the impact of mortgage burdens on people’s lives.

Research by credit agency Centrix shows that the average age at which New Zealanders buy their first home rose from 31 in 2012 to 36 in 2020.

Equally concerning, almost a fifth of people aged over 65 still have a mortgage. At this age, many would normally be thinking about ending their working lives and enjoying retirement.

This clearly shows that the mortgage burden has become a widespread issue across generations. With no end in sight to soaring house prices, the associated burden also appears likely to intensify.