Home loans will continue to get more expensive in 2022, but the sharp increases in 2021 mean much of the pain has already been felt, economists say.
At the start of 2021, the average two-year mortgage rate for new borrowers was 3.49%, according to data from the Reserve Bank. By November, that figure had risen to 4.65%.
The pace of rising mortgage rates has surprised some commentators and has been described as the fastest in 15 years.
The central bank has indicated that it remains on a path of further increases in the official exchange rate (OCR), which stands at 0.5%.
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Nick Tuffley, chief economist at ASB, expects OCR to peak at 2%, below the Reserve Bank’s forecast of 2.6%.
The previous peak was 3.5% in 2014/2015. He said the market has already absorbed much of the effect of the planned OCR increases.
“We’ve had a lot of interest rate hikes already and pretty substantial movement already from what we think is likely to happen.”
He said the two-year rate could rise an additional half a percentage point and that one-year rates could reach a low of 4 percent over the next two years. Long-term rates could move depending on international pressure, he said.
Infometrics chief forecaster Gareth Kiernan said he expected four increases in the official cash rate next year.
“The risks are definitely on the rise, and we see a potential for OCR to reach 2.25 percent. However, we are skeptical of the Reserve Bank’s courage when it comes to increasing the risks. interest rate – they seem to find it much easier to reduce than to increase.
“In terms of other interest rates, by the end of next year, the floating mortgage rate will increase by about one percentage point, in line with OCR increases, to around 5.6%. The lowest mortgage rate will be the one-year fixed rate, going from about 3.5% to 4.2%.
Sharon Zollner, ANZ chief economist, said she also expected OCR to peak at around 2%.
She said while variable rates and one-year fixed home loans might increase a bit, other terms were already near or at their peak.
“As it stands, there is no doubt that inflationary pressures are really strong. But there is no doubt that the interest rate hikes we have already seen have had a direct impact on the housing market and on discretionary household spending.
This impact would continue to be felt as borrowers move from fixed maturities to more expensive maturities.
“If we’re right, our forecast indicates that the dramatic upward movement in interest rates could be happening. For rates at two, three or four years, if we are right, they are at the maximum.
“But predicting anything in two, three or four years is fraught with pitfalls. You could tell a story where something goes horribly wrong and we are talking again about negative interest rates or inflation does not stop and goes up much higher than the market expected.
She said households’ ability to cope with higher interest rates was lower than in the past, due to higher borrowing levels, and the changes seen so far were quite restrictive.
Tuffley said there was no clear argument for setting longer durations at this time.
“From a pure cost perspective, because so much is already built into long-term tariffs, there’s not really much cost benefit to choosing them.
“Short-term fixed rates seem like the best bet right now. When you set those terms for the longer term, you’re essentially locking in a cash rate that might end up being higher than what we ultimately see the cash rate hitting.
“The ability to lock in something that looks cheap is pretty elusive right now.”