Needless to say, the hottest topic regarding the economy and property market in the past few weeks has been the official cash rate (OCR) cut, and the associated falls in mortgage rates—which were already happening anyway. What underpins the OCR change, and how might the housing market react?
With inflation proving very stubborn in the past few years (remember that inflation is a rate of change, not the level of prices), the Reserve Bank (RBNZ) has been right to keep the pressure on regarding interest rates. But now the headline inflation rate is back very close to the 1-3% target band; the RBNZ has decided that the risks to the economy and labour market from a delayed cut outweigh any lingering price pressures – the particular areas of concern here have been insurance and council rates.
Indeed, the RBNZ’s press release accompanied its decision to cut the OCR on 14 August and noted the sharp deterioration in timely economic indicators such as electronic card purchases, manufacturing and services surveys, and property sales activity. Meanwhile, of course, the unemployment rate has begun to rise (albeit so far due to a greater labour supply rather than widespread job losses).
From here on, the RBNZ’s forecasts suggest that the OCR might drop another 1.25% by the end of 2025, reaching 4%. This implies a ‘typical’ mortgage rate of maybe 5.5%, although the degree of competition amongst the banks for market share and what happens to wholesale interest rates in global markets will also have a say in local mortgage rates.
At face value, then, there’s scope here for a bit of upward pressure on house prices to re-emerge. Certainly, the post-COVID period has reinforced how powerful an influence interest rates are in the housing market, even though in the near-term, it could be via a boost to sentiment rather than a dramatic improvement in the actual day-to-day position of households’ finances.
Personally, I wouldn’t rule out some kind of short-term lift in property values altogether. But there are also plenty of reasons to be cautious about the scope for a strong or lasting upturn. For a start, many housing affordability measures, including both mortgage payments and rent as shares of median household income, remain at or near their lowest (worst) levels for at least 20 years.
In addition, there’s still plenty of stock sitting on the market available to purchase. On top of that, although the arrival of OCR and mortgage rate cuts might dissuade some cash-strapped investors from a possible selling path, others who have found themselves off the hook for capital gains tax sooner than they expected (due to the reduction in Brightline Test) may well choose to list.
Meanwhile, most forecasts suggest that falls in employment will now take over as the main upward influence on the unemployment rate. That will tend to subdue the housing market, even if, for most people, it’s actually due to the adverse impact on their feelings of job security (rather than an actual job loss). Indeed, the unemployment rate could ‘only’ rise to perhaps 5.5%.
Finally, the faster mortgage rates fall, the quicker the debt-to-income ratio restrictions will bind—tying prices more closely to incomes over the cycle and slowing down the rate at which investors can grow a portfolio unless buying new builds (which are exempt). Yes, there are high DTI allowances or speed limits, but they might end up being reserved for expensive markets and/or first-time home buyers.
All in all, many people will be relieved that interest rates are finally falling (albeit not savers). However, there remain reasons to be cautious about the next housing upswing starting straightaway.
Kelvin Davidson
Kelvin Davidson is the Chief Economist of CoreLogic New Zealand.
Add Comment