Borrowers of mortgage finance have enjoyed low and declining interest rates for some time with the Official Cash Rate (OCR) being in free-fall, trending downwards since June 2015. In recent months, announcements by the Reserve Bank Governor, economists and market commentators predicted a further reduction, so it came as no real surprise when the OCR was reduced yet again to an all-time low of 1.5% on 8th May 2019. This decision to drop a further 25 base points will undoubtedly be well received by some but is perhaps a move that may not be so popular with others.
The OCR is a major contributing factor when the lending institutions establish their level of mortgage interest rates and within hours of the latest announcement, some of the major banks announced a further downward trend to their housing finance rates. Other banks have since followed suit. In an environment where there is already intense rivalry and competition among the trading banks, these latest moves seem certain to re-kindle buyer activity. Some commentators are even suggesting a ‘price war’ among the banks as competition for borrowing clients heats up again, as it seems certain to do.
So how do we see these latest developments affecting the public as a whole – and home buyers and sellers in particular?
Effect on the market: Property sales nationwide for April were at their lowest level for that month in the last five years. This reduction in sales was evident in 13 out of 16 regions throughout NZ and could be attributed in part to the fact that school holidays, Easter and Anzac Day all fell within the month and have traditionally been times when the real estate market has slowed to some degree. A further reduction in the cost of borrowing must surely re-energize the market and encourage more first home buyers into the market.
Existing borrowers: Whilst there will be many who are locked into fixed mortgage rates, these will often be short term arrangements and borrowers will look for some interest relief as soon as their loan terms expire. Borrowers who are on floating interest rates will welcome the Reserve Bank’s decision. Many borrowers (mortgagors) will have a combination of fixed and floating rates so will get some immediate relief with more to come their way at a later date.
New borrowers: Is there ever likely to be a better time to secure a housing loan? With interest rates at an all-time low and with intense competition among the lending institutions it would be difficult to see a better environment from a borrower’s point of view. We recommend that first-time borrowers, in particular, utilise the services of a mortgage broker for guidance and to ensure that they achieve the best deal possible. Tommy’s will be pleased to assist in this regard with an introduction to a reputable broker. Being equipped with pre-approved lending documentation is a huge advantage in a competitive market place. Tommy’s also anticipated an increase in buying activity from property investors capitalising on low-cost interest, particularly now that the debate surrounding Capital Gains Tax has evaporated.
First Home Buyers: Auckland has experienced some recent reduction in house prices, but this is less evident in and around Wellington City. We expect with the current stability in the mortgage market that buyer activity is likely to increase, meaning there is probably a no better time to buy than right now before prices escalate again.
Vendors: While the current interest rates are likely to invigorate the market, buyers are more circumspect and are taking longer to make buying decisions. Demand in our area is still strong and irrespective of national trends, Tommy’s expect to see an increase in activity though we temper our enthusiasm with the knowledge that the fast approaching winter months are historically slower than the other seasons.
Those with money to invest: Lowering the OCR has had an adverse effect on those fortunate enough to have funds to invest. Interest paid by the banks on term deposits and the like has reduced in recent years from a healthy 8 or 9% to around 3% now. This is making life difficult for those outside the workforce who rely on saved funds (on which they have already paid tax) to supplement their pensions but this seems to be of little concern to those in power. Tommy’s welcome investors in this category to discuss with us the advantages of real estate as a means of accruing and preserving those valuable retirement funds.
In summary, low-interest rates combined with strong buyer demand should continue to stimulate the market, particularly before the onset of winter. We invite you to call Tommy’s to discuss how you can enhance your lifestyle and financial position with sound real estate advice.