Private Property Issue #14

"Interest rates"
2nd June 2022

Last week’s Reserve Bank announcement was a banger.

Lots changed. But the really interesting stuff didn’t get reported by the main newspapers.

Here’s what you need to know.

The headline announcement was that the OCR rose by another 0.5%. So, it now sits at 2%.

But, this move was expected … and just confirmed what banks had already priced into their interest rates.

The big, interesting changes were in the central bank’s updated forecasts.

House Prices to fall more than previously thought

3 months ago, the Reserve Bank’s forecast was that house prices would drop 8.9% from their peak (November 2021) before recovering.

In last week’s announcement, that widened to an 11.8% total drop, a drop of an extra 2.9%.

We are about halfway through that drop, depending on which data you look at.

Though these forecasts need to be taken with a grain of salt.

As the Reserve Bank governor said at the press conference, this forecast “will be proved wrong, some way or the other.”

So it’s more important to pay attention to the direction of house prices (they’ll go down and then come back up) …. Rather than the exact percentage.

My advice remains the same for people wanting to snag a bargain for an investment property.

The time to negotiate a good price is when house prices are falling. If you try to wait for the bottom of the market –

  • You’ll miss it. Because you don’t know it’s the bottom until prices are rising again,
  • you’ll miss the best time to negotiate hard, which is when prices are falling, and sellers are nervous. Once prices start to recover, that nervousness goes away.

Interest rates will rise more than initially thought.

While last week’s OCR move didn’t bring anything new to the table, their updated “OCR tack” did.

This is where the Reserve Bank gives a sense of where the OCR is likely to head … (assuming no other major global event happens).

The latest forecast sees the Reserve Bank raising interest rates higher and earlier.

Rather than hitting an average of 3.33% in March 2024, the bank sees it moving up to 3.95% by September 2023.

For mortgage holders, interest rates will go higher than initially thought before trending down.

Independent economist, Tony Alexander, projects this move will mean the 1-year interest rate peaks at 5.75%, up by half a percent from before the announcement.

But this increase in interest rates will be temporary.

As Adrian Orr (Reserve Bank Governor) said at the announcement …

Once the economy is more balanced and inflation comes down, “the official cash rate can return to a lower, more neutral level.”

We see that both in the Reserve Bank’s forecasts and Tony’s modelling.

What does it mean for you?

There is a real risk that some borrowers will see higher interest rates coming and rush to lock in a long-term rate (e.g. 5 years), thinking it will be cheaper.

But since rates will rise and then fall again, there is a sizeable risk that today’s 5-year rate will look expensive in 3 years' time.