17 Aug 2021
What The 2021 Interest Rate Rise Means for the Property Market

With interest rates forecast to rise in August, find out what this means for buyers and owners of residential and lifestyle properties

New Zealanders have been keenly watching the rollercoaster that is the current property market - from preparing for a downturn in sales a year ago during the first lockdown, to seeing a rebound in sales volumes and lift in prices that was faster and stronger than any economists predicted, quickly followed by a raft of new measures from the Government aimed at curbing the steep climb in prices. Even while writing this article, new measures have been announced to slow prices.

Now, a year and a half into COVID-19, with house prices still rising and the market showing no signs of slowing down, the next change from the top is the one most likely to have a real tangible impact: interest rate rises.

TelferYoung Rotorua’s Geoff Edmonds explains how the interest rate rise will affect both owners and buyers of residential and lifestyle properties in the second half of 2021 and beyond.

What’s happened since COVID-19 in the residential and lifestyle property market?

Looking back to the first lockdown over a year ago, there was an expectation that the market would shut down - values would drop, buying and selling would cease - and we’d enter a recession.

However, in merely a matter of weeks, people were buying and selling again at an even higher rate than before COVID-19, and in response property prices went through the roof as supply couldn’t keep up with demand.

“With lifestyle properties in particular we’ve seen strong demand since COVID-19. Having sat through the lockdown in the city, many people are realising how good it can be to live in the country, particularly with more ability to work from home, to have some land to get away from everything, exercise, and have space for the kids.” - Geoff Edmonds, Lifestyle Property Advisor, Rotorua

Aucklanders in particular are having an impact on the lifestyle property market throughout the upper North Island as they realise they can get more for their money than they could in the city, driving up prices in smaller centres such as Rotorua.

“Cashed up local and out of town buyers, who may have already missed out on other properties, are more than willing to pay an extra $50-100K more than the next person in order to secure a specific property.” - Geoff Edmonds, Lifestyle Property Advisor, Rotorua

What impact has government intervention had to date?

In response to the steep climb in house prices over the past year, the government has taken a number of steps to curb this growth.

“They’ve thrown quite an arsenal of things at the market, in the form of regulations. But so far, each time something has been announced and we’ve thought ‘this will slow it down at last’, it hasn’t worked. Within 2-3 weeks of a new regulation or announcement, it’s just taken off again - business as usual - as if nothing happened.” - Geoff Edmonds, Lifestyle Property Adviser, Rotorua

From bright line extensions to new tax rules and higher LVRs, the various interventions implemented by the government may have some impact in the long term, but have had little immediate impact to lower house prices or slow their growth.

The one thing that could make a difference, however, is interest rate rises.

How the interest rates rise will impact residential and lifestyle properties

In August, the Reserve Bank is expected to raise the Official Cash Rate (OCR) in response to the stronger than expected growth of New Zealand’s economy over the past year.

Some banks have already raised their longer term fixed mortgage rates in anticipation, and it’s predicted that this rise in rates could potentially deter some new buyers in a way that the other legislative changes could not.

“In July, the Reserve Bank announced that they would terminate their quantitative easing policy (QE) almost a year earlier than expected. Major banks have predicted that the OCR will lift in August, and are already pushing their long term interest rates up by around 0.3%.

“That in itself probably won’t do much, but if these increases keep happening, then over time it could slow things down for people who are highly leveraged, particularly those who bought during the price boom in the past 12 or so months.” - Geoff Edmonds, Lifestyle Property Adviser, Rotorua

Any interest rate rise will affect homeowners and buyers in a tangible way, diverting more from their weekly paycheck and potentially cutting into other savings or expenses to cover higher mortgage repayments. Every percentage change adds more pressure to repay debt, making an already large mortgage even harder to pay off.

Banks are well aware that this recent period of growth has been buoyed by record low interest rates, and have already been stress testing well above their current interest rates for new loans. As interest rates rise, those stress tests will be pushed even higher, raising the barrier for entry to new homeowners trying to get a foothold in the market.

What homeowners and prospective buyers can do

The primary impact of the interest rates rise on prospective buyers will be an increased awareness of what they can afford - especially considering 2020’s sobering reminder about job security and what redundancy or reduced hours could mean for their ability to pay higher mortgage repayments.

“For example - with a $500,000 mortgage on an interest only loan (floating), a 0.25% lift in the interest rate would add around $104/month to your mortgage. A 1% lift would add a hefty $417/month. For many homeowners this has a direct impact on their ability to spend in other areas.” - Geoff Edmonds, Lifestyle Property Advisor, Rotorua

However, if you’re a current property owner with a large mortgage you don’t have to panic about what this could mean for you - any changes will likely be phased in slowly, so as not to negatively impact the overall economy and New Zealand dollar.

We may start to see an increase in the number of people fixing for longer terms, however forecasts often prove incorrect and hence it may be prudent to still keep a portion floating.

The main thing that buyers and owners can do is take a pragmatic look at their finances and what they can comfortably afford, even at a higher interest rate, before committing to a new property, job, or lifestyle.

TelferYoung specialise in valuations in specific market sectors as well as localities - we know our areas inside and out. Whether you’re buying, selling, or investing, our team can offer in-depth advice and valuations that can help you make the right decisions for your future.

Call TelferYoung now, your team on the ground