New Zealand’s central bank has raised the official cash rate (OCR) by 50 basis points to 4.75 percent following the devastation caused by Cyclone Gabrielle. The monetary policy committee noted that it was too early to accurately assess the monetary policy implications of the disaster and that the timing, size, and nature of the government’s fiscal response were yet to be determined. However, they agreed that the OCR still needed to increase to return inflation back to its target range. They noted that there would be an immediate upward pressure on prices, but they decided to look through the short-term direct price pressures and focus on the medium-term impacts on inflation and maximum sustainable employment.
The reserve bank expects New Zealand to experience a one percent peak-to-trough decline in GDP over several quarters in 2023. Despite the decrease in house prices, housing affordability in New Zealand remains significantly stretched due to the 19-month increase in the OCR from 0.25 to 4.75 percent. The share of mortgage repayments that have fallen behind is expected to increase as the economy contracts.
Property researcher CoreLogic found that Kiwis are spending over half of their incomes (53 percent) on mortgage repayments when servicing an 80 percent loan-to-value ratio mortgage, which is well above the long-term average of 38 percent. However, the pressure on homeowners could begin easing once mortgage rates plateau, house prices continue to fall, and wages rise.
Westpac noted that the most popular mortgage rates had reached their peak and the remaining cash rate hikes had already been factored into the market. The Real Estate Institute of New Zealand found that house prices in January were declining at a slower rate, with the national median sale price decreasing by 13.3 percent to $762,500 (US$475,000) over the 12 months to January 2023.
The change in financial situation has driven some owners to sell after holding for just 19 months on average, with four percent of properties sold in the last quarter of 2022 going for a price lower than its buy price. This was most pronounced in Auckland, where almost seven percent of owners sold at a loss, particularly apartment owners who made up a quarter of the homeowners who lost money.