Yesterday's rise in the official cash rate is being described as a kick in the guts for first home buyers.
Inflated house prices and higher interest rates don't bode well for first-time house prices. Photo: 123RF
Banks moved quickly to pass on the hike in the cost of borrowing by adding between 0.15 and 0.2 percent on to floating rates.
First Home Buyers Club director Lesley Harris said the one thing that was keeping the door slightly ajar for those looking to get on to the property ladder for the first time, was record low interest rates.
But now that had gone as well.
"It's hard enough to get a deposit together let alone try and get the lending based on what the properties in New Zealand are now worth. Nothing's really lining up particularly well for first-time buyers and this is just another blow."
Harris said because most first home buyers were just able to afford their house and no more, every percentage point lift in the amount the banks were charging, made a huge difference in terms of what they could afford.
"It's kind of a kick in the guts because people think, right we're just about there, you know, we can afford to borrow $600,000, we've got pre-approval. As soon as interest rates move, that $600,000 that someone can borrow on their income, unless they've had a miraculous you know, pay increase, that borrowing might change down to $550,000 or $500,000."
The Reserve Bank Governor signalled yesterday's hike was the first of many between now and next year as he attempts to keep inflation in check and cool down runaway price rises.
So what about first home buyers who had just got a toe hold on the property ladder, worried they would no longer be able to afford the repayments?
The head of mortgage broker Squirrel, John Bolton, said there was no need to rush out and lock in a long-term fixed rate mortgage as some sort of insurance against rising borrowing costs.
"My advice to homeowners at the moment is to fix short term fixed rates. So I still think that the one-year fixed rate looks attractive relative to some of those longer fixed-rate terms that are quite expensive."
John Bolton, said the banks had already priced in increases in the OCR and the long term fixed rates they were offering now were not about to get much higher, at least not in the next 12 months.
He was picking rising interest rates would do most of the heavy lifting in helping to cool the housing market, meaning other measures such as LVR's, requiring homeowners to have at least a 20 percent deposit, would soon be scaled back.
"The LVR restrictions have been a temporary measure that's been sort of brought in when the Reserve Bank feels like house prices are getting a bit out of control. So it's an appropriate , but I think you'll see that next year they'll be able to potentially wind that back a little bit."
Former Reserve Bank economist and now financial commentator, Michael Riddell, said those who had put everything on the line in order to secure a home were the ones who could end up hurting the most as a result of rising interest rates.
"There's often quite a lot of momentum in house prices, people fear missing out, and will put everything on the line to still be able to afford it. And that's what we've seen a bit of in the last few months, prices keep rising and people say, 'if I don't get in now, I really risk missing out', and some of them will in the end get caught."
But Riddell said there was some good news on the horizon for those priced out of the market.
He was predicting a combination of low numbers of new migrants, more homes being built and some investors deciding to exit the market would see house prices come down by between five and 10 percent over the next 18 months.
A sight for sore eyes for first home buyers.
