Friday 17th of October 2008

Home loan rates will no doubt be the focus of much news in the next week. Expectations are that the Reserve Bank will, on Thursday, slash the official cash rate (OCR), with some predicting a cut of up to 100 basis points (1%).

Whatever happens, home loan rates will fall.

I have been thinking that the sorts of cuts we are seeing in mortgage rates will be a trigger for a pick-up in house sales and possibly even prices. Under such a scenario the so-called real estate crash would be reasonably short-lived. Much shorter than the normal cycles.

This view is being challenged by the massively unusual circumstances we see in financial markets. As we have been reporting on GoodReturns.co.nz banks are tightening their lending criteria and some are withdrawing their lo-doc loan products.

Added to that the non-bank sector is shrinking at a reasonably rapid place and many of those that still exist have withdrawn many of their fixed rates as they are too hard to price in these volatile market conditions.

The upshot of this is that if you want to borrow some money you are nearly forced to go and visit your bank.

But instead of just giving money away, as has been the norm for many years, they are reverting to their old ways.

When I was a young lad and started my first job in a big bank on Featherston Street in Wellington, customers had to come in and nearly grovel for money. If they weren’t a pillar of society then getting an approval was a long shot.

Well I use a bit of hyperbole here, but it is getting much harder.

This change in attitude is bringing the credit crunch onto New Zealand’s shores. This will no longer be just something happening offshore. It’ll be here in New Zealand.

As a result, buying property will be limited to those with at least a 20% deposit and a good credit history and job. Any major uplift in house prices and sales volumes now looks less likely – for now.