KEY POINTS:
Q: We are saving for a house and every time the Reserve Bank Governor raises the interest rate, our goal gets a little further away. Is this what he's trying to achieve - make a first home buyer's lot even harder? And should we believe him when he says he is unlikely to raise rates again this year?
A: Nick Tuffley, ASB chief economist, replies: The Reserve Bank is trying to make debt-servicing cost higher for everybody - potential first home owners, existing homeowners, property investors, and businesses alike. Increasing the Official Cash Rate discourages us from borrowing money (to buy houses, consumer goods, or capital equipment). It also leaves those of us with pre-existing loans, less money to spend on other things once our mortgages are reset at the higher interest rates. That reduced tendency to spend and build homes will reduce inflation over time.
Is this the last hike? Never say never: the Reserve Bank said a similar thing at the end of 2004, yet interest rates are now much higher. But there are early signs the booming housing market is cooling. If that cooling continues it will increase the likelihood the Reserve Bank is done with raising interest rates.
Don't be discouraged. Keep saving for that deposit and keep your eye on your goal. Interest rates won't stay this high forever (the popular two-year rate is currently 9.25 per cent but averages around 7.6 per cent). Once the Reserve Bank has got on top of inflation it will eventually allow interest rates to fall to a less restrictive level, making mortgages more affordable.
For anyone financing a property at the moment I would suggest fixing for no more than two years; long enough to protect you from any further mortgage rate increases but not so long that you miss out once rates eventually fall.
