Rising Inflation: What it means for mortgages and the property market

You probably first noticed it at the petrol pump. And now the cost of your weekly shop is skyrocketing. Yes, the cost of living is on the increase. Inflation shot up to 5.9% in the last quarter, the highest it’s been since 1990. Household budgets are undoubtedly being stretched. However, struggling Kiwis will take little comfort from the fact that inflation is rising globally. But what does inflation mean for mortgages and the property market? Let’s take a look.

Impact of inflation on the property market  

One direct impact of inflation is the rising cost of construction. House building has been booming in NZ. However, huge demand for building materials, supply chain disruptions and a tight labour market have seen costs soar. Some estimate construction costs increased by as much as 14% last year.  

However, alongside inflation, there’s a storm of changes brewing in the property market. The combination of tighter lending conditions ushered in by the CCCFA, debt-to-loan income caps and LVR changes are starting to impact house prices. The boom we saw throughout 2021 may well be in the past.

The latest data from REINZ indicates that while January saw a significant drop in the number of house sales, prices show signs of slowing. According to REINZ, in January, nationwide median sales prices increased by just 1.4% in December.

Impact of inflation on mortgages

Rising inflation means the cost of borrowing goes up. The Reserve Bank was widely tipped to increase the official cash rate (OCR) at its review on 23 February, and indeed they did. It rose by 0.25%, to 1.0%. Earlier in the week, others were even suggesting it could be bumped up by 0.5% as the Reserve Bank tries to curb inflationary pressures.

One thing for sure is any increase in the OCR will trigger a fresh round of hikes to mortgage interest rates. The country's largest home loan lender, ANZ, has already announced increases to its fixed rates, ahead of the Reserve Bank’s decision.

What can I do?

Cutting back on spending and shopping around are tried and tested ways to ride out inflationary headwinds. Plus, good people are currently in short supply, so now may be the time to ask your boss for a pay rise.

With mortgages taking up a big chunk of household budgets, you may well be wondering what’s the best option for you. Contact your Loan Market adviser today for personalised, expert advice.