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What does 2022 hold for New Zealand housing and interest rates – and the dollar?
The last twelve months has, to many, felt like spinning our wheels in regards to both the economic uncertainty as well as the extended Covid-19 lockdowns and ongoing complications of the pandemic.
Despite this feeling of treading water, house prices have continued to rise and the official cash rate had increased for the first time in seven years which has - in combination with the emergence of inflation - impacted the borrowing rates.
The NZD has been performing well against the AUD but this doesn’t necessarily mean that this strength will continue in to the new year.
2022 Interest Rate Expectations
The principal economist at Infometrics, Brad Olsen, has expectations for the OCR (Official Cash Rate) to be sitting between 1.75% and 2% by the end of 2022 in combination with increased interest rates.
If interest rates do continue up then fixed rate mortgages will likely approach 4% - and borrowers are expected to follow a desire for certainty towards fixed term rates.
Regardless of a drive towards predictability, borrowers are likely to be influenced by the fluctuations in the market thanks to covid and the direction the pandemic takes.
Olsen warned that outbreaks or variants that may emerge might require a revaluation of the situation.
In a similar speculation, enable.me Hannah McQueen founder has said that the consideration of further restrictions, lockdowns, and problems caused by the pandemic is needed when we think about 2022 interest rates but also stated that a lockdown would be the worst way for rates to drop.
McQueen states that they believe that 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.”
Jarrod Kerr, chief economist for Kiwibank, has predicted that there may be an OCR rise 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 has also said that this will impact people with larger debts and even more so if they have taken on more debt recently.
Housing in 2022
The housing market is expected to see a surge of activity post-lock down. However, it is most likely that this will be only a short term increase in activity and that other factors will dampen the demand including interest rate increases and bright line tests.
Kerr commented that the Loan to Value Ratio restrictions, stating that they have already affected the CCCFA regulations (Credit Contacts and Consumer Finance Act) and that the “threat of debt-to-income ratios [DTI] are coming through [along with] interest deductibility,"
Kerr goes on to say that the substantial increase in housing supply should make up for it, as the undersupply in affordable homes has been one of the most pressing problems for New Zealand in decades.
There are a few potential flattening factors in the growth department, according to Olsen, such as tightening credit access and availability, LVR, and DTI restrictions. Which promises for a rocky short term outlook but a better long term path for housing. With huge activity in the market house price growth is expected to soften back. In addition to these factors, other things such as Covid delays on building and migration pauses over the last year and a half.
Olsen would “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 still a backlog. It’s taking longer to build houses and net migration is expected to pick up next year.”
Though McQueen cautions that the demand may drop for some types of property – primarily lower end borrowing such as first home buyers as opposed to properties in higher price brackets - next year due to the fact that potential buyers may no longer qualify for mortgages.
The cost of funds is likely to increase, meaning that people may be more likely to commit to a wealth strategy instead of spending on discretionary or luxuries in their builds.
The Kiwi Dollar in 2022
Experts are divided on whether or not the NZD with rise to parity – or even exec – the AUD in the coming year.
While some believe that it is likely – benefitting importers and harming exporters – others think it is more likely to happen in 2023.
With the central bank tightening, improving export prices and high terms of trade, the favourable interest rate differentials the Kiwi economy is performing better than our Australian neighbours.
The overall effect
While interest rates directly effect lending and the Kiwi’s looking to buy homes, the knock on effect on the economy is significant. The softness in the housing market as well as the higher exchange rates influences investment opportunities both international and domestic. Though both business and personal investment may be influences, and pessimism in the market at large can see significant impacts on consumer spending as well.
While the economy is currently showing decent resilience, the pandemic as well as other factors make expectations tough to manage.