Mark Lister, 23 September 2022

A housing market story in the NZ Herald during the week made for ominous reading.

Citing data from credit agency Centrix, it reported that more than 100,000 borrowers had mortgages of $1m or more. That’s about 8.5 per cent of the total and more than double the number from three years ago.

It doesn’t surprise me. According to the Real Estate Institute’s house price index, national house prices increased a staggering 45.3 per cent in the two years to the end of 2021.

That saw the median price in Auckland rise to almost $1.3m and the national average hit $905,000. It’s meant we’ve needed much bigger mortgages to purchase a house.

This wasn’t a major issue until recently, as interest rates consistently declined from 2008 until the middle of 2021.

Despite people having much bigger mortgages, the cost of servicing these (as a percentage of disposable income) hit its lowest level in decades.

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However, things have changed. The one-year mortgage rate hit a record low of 2.2 per cent in June last year, and since then it’s more than doubled to 5.1 per cent.

For someone with a $700,000 mortgage, let alone a million-dollar one, the difference between these two rates would mean the weekly payment increases from $614 to $881.

The full effect of this hasn’t been felt across the economy yet, but with almost 45 per cent of fixed rate mortgages set to mature in the next 12 months, it will be.

People don’t tend to change their behaviour until they feel it in their back pocket, which is why monetary policy operates with a lag.

The Official Cash Rate was 0.25 per cent a year ago, and today it’s 3.00 per cent. Depending on which economist you ask, it’s headed to between 4.00 and 4.75 per cent in 2023.

This will have an impact on short-term mortgage rates, although it’s harder to predict where longer-term rates are going as these can take their lead from international trends.

On that front, there isn’t a lot of good news either.

In the US, the two-year Treasury yield recently hit its highest level since 2007, while the 10-year yield has risen to the highest since 2011.

Auckland house prices have declined for nine consecutive months, with the house price index 16.3 per cent below its November peak. Prices for the rest of the country are 9.0 per cent below their highs.

While that sounds dramatic, Auckland prices are merely back at January 2021 levels, while elsewhere things are where they were in July of last year.

They've simply given back ten and four months of gains respectively, which is a reflection of just how crazy prices were in 2020 and 2021.

If you bought late last year, you probably feel you were unlucky enough to pick the top of the housing market and the bottom of the interest rate cycle.

Don’t despair. I bought my first home in May 2007, just before the GFC took hold, so I know how you feel.

As long as you’re able to keep paying the mortgage, it won’t matter. Prices will eventually recover, and interest rates will stop rising, if not fall.

In the meantime, higher interest rates and a slower property market will be felt across the broader economy, and there’s probably still a bit of pain to come.