Next week, the Reserve Bank of New Zealand will announce its latest Official Cash Rate (OCR) decision. For people applying for a mortgage and preparing to buy their first home, that would ordinarily be unwelcome news.
Last month, the Reserve Bank of New Zealand raised the OCR from 2.25% to 2.5%, its first increase in more than three years. Financial markets currently put the probability of another rise next week at 90%, with the OCR likely to climb further to 2.75%.
Yet as interest rates continue to rise, a seemingly contradictory picture has emerged in New Zealand’s first-home market: mortgage rates are getting higher, while entry-level housing has become somewhat more affordable.
This is not because borrowing has become cheaper, but because falling house prices have temporarily outweighed the pressure from rising interest rates. For those waiting to buy their first home, an unusual buying window may be taking shape.
Entry-level house prices fall to their lowest in a year and a half
Real Estate Institute of New Zealand (REINZ) data shows that the national lower-quartile house sale price fell to NZ$575,000 in July this year, below NZ$585,000 in June and NZ$600,000 in May. This was the lowest level since January last year.
The lower-quartile house price is the level below which 25% of homes sell, with the remaining 75% selling above it. Compared with the national median price, this measure more closely reflects the entry-level market typically considered by first-home buyers.
The national lower-quartile house price is now NZ$95,000 below its peak in November 2021. Based on the figures above, the price at that time was approximately NZ$670,000.
For first-home buyers, falling house prices mean more than a lower purchase price.
With a 10% deposit, buying a NZ$670,000 home requires NZ$67,000 upfront. When the house price falls to NZ$575,000, the deposit drops to NZ$57,500, a difference of NZ$9500.
For buyers still saving a deposit, a difference of nearly NZ$10,000 has practical significance. A lower house price also means a smaller loan principal, which may offset some of the interest burden even as rates rise.
Rates rise for eight consecutive months, yet weekly repayments fall by NZ$25
Over the past eight months, New Zealand’s average two-year fixed mortgage rate has risen steadily, from 4.49% in November last year to 5.30% in July this year.
The usual expectation is that rising interest rates mean higher weekly repayments and worsening housing affordability. But calculations by interest.co.nz show the opposite result.
For a first-home buyer purchasing a lower-quartile-priced home with a 10% deposit, estimated weekly mortgage payments have fallen from NZ$779 in March this year to NZ$754 in July, a reduction of NZ$25 a week.
In other words, although borrowing rates have risen, lower house prices and smaller loan principals have slightly eased buyers’ repayment burden. The current improvement in first-home buying affordability is being driven by lower purchase prices rather than cheaper loans.
However, buying at a lower price does not guarantee lower borrowing costs in future. Once a home purchase is completed, the purchase price and initial loan principal are largely set. When the fixed term ends, the loan must be repriced at the market rates then available, and costs could fall or continue rising.
This leaves first-home buyers facing a practical question: do they necessarily need to wait for mortgage rates to fall significantly before the right time to buy their first home?
Auckland remains the hardest place to buy, but improvement is more pronounced
Under the criteria used by interest.co.nz, Auckland is currently the only region where housing is still considered “technically unaffordable” for first-home buyers with a 10% deposit.
However, recent price adjustments in Auckland’s entry-level market have also been more pronounced.
In April this year, Auckland’s lower-quartile house price was NZ$800,000. By July, it had fallen to NZ$755,000, a drop of NZ$45,000, or 5.6%, over three months.
Based on a 10% deposit, the amount required upfront has correspondingly fallen by around NZ$4500. With the loan principal also lower, estimated repayments for this type of home are still NZ$46 a week below their April level, even though mortgage rates continued rising over the same period.
This is not enough to transform a household’s finances, but it shows that interest rates are not the only factor determining whether first-home buyers can enter the market. When house prices fall far enough, smaller deposits and loan principals can help buyers offset some of the pressure from rate increases.
A rate rise next week may not bring a matching increase in fixed rates
If the Reserve Bank of New Zealand raises the OCR to 2.75% next week, floating mortgage rates are likely to follow soon afterwards, but fixed mortgage rates may not change by the same amount.
Independent economist Tony Alexander points out that banks’ funding costs for fixed-term loans depend not only on the current OCR, but also on market expectations for future interest rates.
With financial markets already strongly expecting a rate rise next week, that expectation is likely to be reflected in banks’ fixed-term funding costs. If the Reserve Bank of New Zealand simply raises rates as expected, fixed mortgage rates may not change significantly straight away.
What could affect fixed rates is the Reserve Bank of New Zealand’s guidance about what comes next. If it considers inflation risks to have increased further and expects more rate rises to be needed, banks’ fixed-term funding costs could also rise.
Banks’ own lending margins also affect pricing. Tony Alexander’s analysis shows that bank margins on one-year fixed loans are around 0.2 percentage points below their average over the past two years. Two-year margins are broadly in line with the average, while margins for three- to five-year terms are around 0.2 to 0.4 percentage points lower.
This means some banks may still make small adjustments to fixed rates. However, residential sales are currently falling, while borrowing demand from small investors is also weakening structurally. Banks may be more cautious about raising rates as they compete for a limited pool of home buyers.
Even if the OCR rises again, mortgage products may therefore differ between banks and fixed terms. First-home buyers need to look beyond the OCR and compare the actual rates and lending conditions offered by banks.
First-home buyers regain some control
The significance of the current window may extend beyond paying NZ$25 less each week.
In a market with falling residential sales and weakening entry-level house prices, some first-home buyers may have more time to compare properties and try negotiating with sellers. Compared with periods of rapidly rising prices, buyers can also assess a home’s condition, mortgage arrangements and their own financial capacity with less pressure.
This does not mean homes have become cheap, still less that every first-home buyer should enter the market immediately. It does suggest that some buyers have regained a degree of control: deposit requirements are lower, loan principals are smaller and market competition has eased somewhat.
There are certainly sound reasons to keep waiting. If interest rates rise further, first-home buyers may still face greater repayment pressure when their loans are repriced. Households with unstable incomes, or almost no emergency funds left after paying a deposit, should be particularly wary of rushing into a purchase simply because house prices have fallen.
But waiting for interest rates to fall significantly does not necessarily deliver the ideal combination of low rates and low house prices.
Once the market believes the OCR is close to its peak, confidence may return among some buyers on the sidelines and competition may increase. Mortgage rates might improve by then, but today’s pricing and negotiating advantages may no longer be fully available.
An unusual window does not mean buying without careful consideration
Another rate rise next week has become the prevailing market expectation, but a 90% probability does not make the outcome certain. Even if the increase happens as expected, it does not mean all fixed mortgage rates will immediately rise in step.
Meanwhile, the national lower-quartile house price has fallen to NZ$575,000, NZ$95,000 below its peak in November 2021. Auckland’s lower-quartile price has also fallen NZ$45,000 in three months. The resulting reductions in deposits and loan principals are currently offsetting some of the pressure from rising interest rates.
For first-home buyers, the current situation may offer a rare window of choice rather than a risk-free opportunity to “buy at the bottom”.
The best time for an individual to buy may not be the day interest rates are lowest. It could also come when house prices remain weak, competition is limited and buyers have some room to negotiate.
The final decision to buy still depends on income stability, loan approval, the deposit percentage and the ability to manage repayments if interest rates rise further.
So, with house prices falling and interest rates rising at the same time, do you think first-home buyers should seize this unusual window or keep waiting for a clearer signal of rate cuts?