What is the OCR and how does it impact the housing market?
For potential home buyers, the state of the economy plays a crucial role in determining how easy it is to buy a home and how much you will pay. One key factor that significantly influences the housing market is the Official Cash Rate (OCR).
What is the Official Cash Rate (OCR)?
The Official Cash Rate is the official interest rate set by the Reserve Bank of New Zealand (RBNZ). It is set as the rate for overnight loans to commercial banks, and serves as a benchmark for interest rates in the broader economy, affecting everything from mortgage rates to savings accounts.
The OCR allows the Reserve Bank to control inflation and stabilise our currency. Changes to the OCR can influence the overall economic activity by making borrowing more or less expensive, and can impact how Kiwis spend their money.
How is the OCR Determined?
The Reserve Bank takes into consideration all of the current economic factors and indicators, which include inflation, employment rates, GDP growth, and exchange rates. From here they adjust the OCR which almost immediately starts to influence how Kiwi’s spend their money - therefore being able to cool the economy or encourage economic activity.
Impact on Homeowners
Mortgage Interest Rates: When the OCR is lowered, commercial banks often reduce their mortgage rates, making home loans cheaper and repayments more affordable. This allows borrowers to pay down their loans quicker, or gives them additional money to spend, therefore stimulating the economy.
On the flip side, a higher OCR can lead to higher mortgage rates, increasing the cost of borrowing and therefore increasing repayments which can make things tighter and less spending generally occurs.
Equity and Property Values: Changes in the OCR can affect the overall value of real estate. Lower interest rates can boost housing demand, therefore leading to increased property values and potentially increasing most homeowners’ equity. This can lead to additional property purchases using equity or upgrading the current home. Likewise, a higher OCR can dampen demand, potentially lowering property values.
Impact on Prospective Homebuyers
Affordability: An increase in the OCR can make it slightly harder to get finance. Like homeowners, higher mortgage rates result in higher monthly payments which can challenge the debt-to-income ratio for potential buyers, making homeownership less affordable, and for some, out of reach until the rates begin to drop again.
Loan Approval and Conditions: The OCR has an effect on how banks' assess lending criteria and conditions. Depending on how the market is going, banks may tighten or loosen their lending criteria, affecting how easily buyers can secure loans.
Competition: A higher OCR may reduce demand for housing, leading to less competition among buyers. This decrease can cause property values to fall, creating opportunities for first-time buyers to enter the market. A lower OCR can increase demand, and make it harder for first home buyers to secure a property in their pricing bracket.
Why Should You Care About the OCR?
By keeping a close eye on the OCR and working with trusted professionals, such as Loan Market Agile, you can make informed decisions that align with your homeownership goals and financial circumstances.
While the OCR has remained stable over the past few months, it’s expected it could rise again in the near future if the RBNZ isn't satisfied with the level of inflation. If you’d like to discuss how current and future market conditions can affect you, then get in touch with our Christchurch mortgage advisors today.