While it appears (at the time of writing) that we are about to get an idea of how the new centre-right coalition to run New Zealand over the next three years will look, we are still in the dark as to how negotiations have progressed, and which policies will be shelved and what compromises will be made.
They increased their projection for the OCR for the seventh time over the last two years. However, I suspect at this stage that this may be posturing to encourage households, in particular, to show restraint through the Christmas season, as the Bank would not want to see signs of inflation moving in the wrong direction on the back of green shoots in the housing market and the most significant net gain through immigration on record in New Zealand in the 12 months until the end of October.
How the Bank acts across the year, not just in the decisions it makes in regards to the actual cash rate settings but the language it uses across next year, will play a leading factor in how we see the property market play out as I do suspect at some stage when rates clearly show signs of dropping that we will see more considerable activity from property investors who have had a very quiet 2023.
Secondly, the factor I am more interested in for next year is what the Reserve Bank decides to do regarding debt-to-income restrictions (DTIs). Grant Robertson, while finance minister, allowed DTIs to be added to the RBNZ’s ”macroprudential toolkit” (which, from the public’s view, was previously dominated by the loan-to-value restrictions) back in 2021. The National Party has previously openly not supported this, with them turning down the ability to add them to the Reserve Bank’s “toolkit” under the Key administration. Thus, it will be interesting to see if the RBNZ decides to push ahead with the utilisation of these without the now current Government’s backing as they are legally allowed to do so, or if they look to seek agreement with Nicola Willis as the new finance minister before implementation in the spirit of having a more cordial relationship moving forward.
Using them as a tool is unlikely to achieve much because the high test rates (the interest rates that the banks test clients on when applying for further borrowing) that the banks currently utilise are doing this job for them.
The argument, however, changes if interest rates (and thus test rates which follow actual mortgage rate trends) start dropping, which we saw previously enabled some borrowers to buy at high debt-to-income levels, especially on the back of the meagre mortgage rates experienced through the COVID period.
If I was having a bet at this stage, I would lean towards the Reserve Bank putting them in place at some stage next year in a setting which initially will have minimal impact on the market, and around about the same time, we will see further relaxation the of the loan-to-value rules probably with investment lending on existing properties being pushed from the existing maximum of 65% out to 70% and an increase in the amount of lending with less than a 20% deposit that the banks can do from the current setting of 15% out to 20% to assist more first home buyers into the market.
Over time, the flow-on effect to the non-bank mortgage market will be worth following. A large portion of these lenders are funded through the New Zealand banks at an institutional level and, to an extent, fall under the same “macroprudential” arena as the main banks. How a debt-to-income restriction implementation will affect these lenders is yet to be seen. Still, it will likely encourage new entrants with alternative funding methods outside the Reserve Bank’s remit.
The decisions and actions undertaken by the RBNZ are likely to significantly impact both activity and price in the residential property market over the next 12 months.
A recommended New Year’s resolution is for mortgage borrowers to understand how their position may be adversely affected so they can potentially make the necessary changes before these rule changes occur.
If you would like to do this, please get in touch with me HERE
