A two-year home loan fix might not be a bad option right now, ANZ’s economists say.
The bank has released its latest Property Focus report, which notes that it expects further small declines in house prices through the rest of this year, and growth of about 2 percent next year.
It said rising interest rates, both locally and offshore, were the main driver of a slowdown in activity this year. ANZ expects three more 25 basis point increases to the official cash rate, to take it to 3.5 percent.
Banks have been increasing many of their fixed home loan rates, but have often left their two-year rates unchanged, or even reduced them.
ANZ’s economists said some borrowers might be tempted to fix for longer in an environment where rates were rising, but there would be trade-offs in that decision.
They said a two-year fix might seem a good option to some borrowers.
“Given where we expect floating and shorter-term mortgage rates to go over the next few years, the two-year rate has some appeal. It is long enough that it provides some certainty but is not significantly more expensive.
“Breakevens show that fixing for two years at 5.39 percent will be cheaper than fixing for one year at 5.15 percent and re-fixing for another year as long as the one-year rate is above 5.63 percent in a year’s time.
“Given that our projections, based on our wholesale interest rate forecasts, have the one-year mortgage rate rising to 5.6 percent in a year’s time, the certainty of fixing for longer may appeal. Fixing for three years or longer may also appeal, but the step up into those longer terms is more than it was a month ago and some borrowers may not want to be locked in for that long if they see mortgage rates coming down in a couple of years, if oil prices fall and inflation is tamed. A mix of terms may also appeal given heightened uncertainty.”
ANZ said there was a mixed picture around the country. In Wellington, declines in house prices have accelerated since March while in the South Island there were signs that the previous upward trend in prices had lost steam in the last few months.
On Tuesday, Treasury updated its forecasts and said housing prices were expected to be weaker than previously thought, with growth of just 0.6 percent in 2027 compared with 4 percent forecast in the Budget.
It put that down to higher interest rates, growth in housing supply and lower net migration.
ANZ senior economist Matthew Galt said Treasury had pulled back from what had previously been a stronger view than many other forecasters.
He said a weaker housing market would have an impact on the economy.
“It makes households less likely to spend… those wealth effects, even though they’re not always nice for different groups, particularly renters, they do have a real impact on the economy as a whole, with homeowners tending to spend more when the housing market’s stronger.
“But they’re not the whole economy by any stretch of the imagination. The export sector’s really strong at the moment, and there are other drivers of growth working through with the economy showing good signs of recovering. So we can still have a very decent economic recovery without house prices rising.”
He said it was notable how much the global situation as affecting New Zealand.
“With persistent inflation pressures in a lot of countries overseas and higher oil prices all pressuring central banks around the world to hike interest rates. And we can’t avoid those pressures either, and so those global forces are really transmitting to our housing market and contributing to some of the weakness.”
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