Joyce cautions potential home buyers to brace for higher interest rates

Wednesday 8th February 2017

Finance Minister Steven Joyce has cautioned potential property buyers from getting too comfortable with New Zealand's historically low interest rates, saying they should consider whether any mortgage debt taken on is still affordable in three or four years if rates rise.

Speaking to the parliament's finance and expenditure committee, Joyce said New Zealand's housing supply shortage was shrinking given the country's "biggest ever building boom" and there were signs Auckland's property market was cooling. All of that suggested "there's not much upside in house prices".

"The bigger risk that people should just think about is the potential for interest rates to now rise in the years ahead - we're seeing that now in bond rates and that's why I think it's important people don't overextend themselves at this point," Joyce said. "It's often in the case of economics that once people have something for a while, whether it's low oil prices, high oil prices, or low interest rates, they seem to assume it will last forever, but it doesn't."

The Reserve Bank will make its first policy review of the year tomorrow, with governor Graeme Wheeler expected to keep the official cash rate at 1.75 percent and retain a neutral bias for the benchmark rate's future track.

Joyce also announced his first budget will be on May 25, and that he wanted the Reserve Bank to do a full cost-benefit analysis of debt-to-income lending limits before adding it to its macro-prudential toolkit.

Treasury secretary Gabriel Makhlouf told the committee house prices had come off, especially in Auckland, as the loan-to-value ratio lending limits and tax changes had started to bite. Because lenders largely raised their money offshore, rising US interest rates had increased the cost of their funding, and even if the Reserve Bank keeps the OCR on hold, mortgage rates will rise, he said.

As inflation heads back towards the 2 percent mid-point of the RBNZ's 1-to-3 percent target band, Makhlouf said he would expect the OCR should move up, and that the market was already pricing in a 60 percent chance of a hike this year.

BusinessDesk.co.nz

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