Check out JB's latest NZ property market update below, or scroll down to read the full article:
The Reserve Bank (RBNZ) has kicked things up a notch.
On 9th October, it delivered a 0.50% reduction to the Official Cash Rate (OCR)—twice what it had forecast back in August—taking us down to 4.75%.
Large parts of the market had been pushing for the move, arguing that with inflation now under control, and the economy in tatters, a slow and steady approach would be tough to justify and would only delay much-needed relief. So, the RBNZ has seen that and responded appropriately.
I’ve been saying for a while now that the RBNZ has tightened monetary conditions too hard and too long. All the weak economic data we’ve seen in recent months (including our latest GDP and unemployment figures) is ample proof of that.
Of course, the RBNZ hasn’t said as much, but to me this week’s decision feels like an acknowledgement that it may have gone too far.
And so, now, it’s being forced to make some big moves to get us back to a ‘neutral’ OCR of around 3% as quickly as possible—a level which neither restricts nor stimulates the economy.
The Federal Reserve’s call to slash US rates by 0.50% last month will have made the decision easier. That’s given the RBNZ the green light to proceed with larger rate cuts without tanking the NZ dollar and majorly driving up the cost of imports (which can be problematic for inflation).
What’s the outlook on mortgage rates from here?
Following this week’s announcement, I expect one-year fixed rates to drop below 6% relatively quickly.
With more aggressive rate reductions in the pipeline, it feels increasingly likely that we'll get another 0.50% cut at our final OCR announcement of the year on 27th November. That would mean an OCR of 4.25% going into Christmas.
Now, the one-year swap rate (i.e. the rate at which banks borrow money, which is a big factor in how they set mortgage rates) is sitting at around 4%.
But if things play out as expected, we could easily see one-year swap rates down close to 3% by the end of the year, and that would translate into one-year fixed mortgage rates near 5.50%.
What could be interesting, though, are the potential implications for some of those longer-term rates
If we see a series of big OCR cuts over the coming months, that will help drive longer-term swap rates back to more ‘neutral’ levels faster, starting to make that a competitive space for the banks.
It’s a bold call at the moment, and by no means guaranteed, but I wouldn’t be surprised to see three-year fixed rates below 5.00% either before the end of this year, or sometime early next—which will make that quite an attractive option for borrowers.
Of course, we’ll have to wait and see how things play out over the next few months, but it does feel like that light at the end of the tunnel is getting closer.
A note to borrowers on the future of interest rates
Now that rates are trending down again, I’d caution borrowers to be realistic about their expectations around what a “good” rate looks like in the current market.
You don’t want to get caught in the trap of using the insanely low rates we saw during COVID-19 as the benchmark for comparison.
Never say never, but those were highly unusual times, so it feels pretty unlikely that we'll see rates that low again any time soon. And considering it’d take something pretty big, scary and unpredictable to get us there, it’s probably not something we're hoping for anyway.
The RBNZ has said that, moving forward, a ‘neutral’ OCR is 3%. That means that when we start to see rates around 5%—or indeed anything with a 4 in front of it—that’s going to be a pretty good deal.
How are things looking out in the wider economy?
Things felt a little more positive after our last OCR cut in August, but any sense of euphoria was short-lived.
We've been verging on recessionary territory for a while now, even if the official GDP numbers haven’t reflected that recently.
Huge parts of the economy are feeling it. Construction, meat exports, retail and tourism are all weak. And with China’s economy off the boil at the moment, that’s having significant flow-on effects for our forestry sector, too—where cutting down trees for Chinese export is now a loss-making exercise.
With the unemployment rate trending upwards, many people are also feeling less secure in their jobs as well.
So, while rate cuts will provide some much needed relief for borrowers and businesses, we’re coming back off a very low base confidence-wise. And there’s no quick fix for that.
Households and businesses will need time to rebuild their balance sheets—paying off debts and growing their savings—before things really starts to bounce back, and people start to feel comfortable spending money again.
The saying “Thrive in 25” has become a bit of a mantra of late, but I think the reality is probably more like “Survive through 25”. That’s why the RBNZ is ramping up the pace of rate cuts: it knows that the outlook for next year isn’t great.
Things will certainly improve as rate cuts start to come through, but it feels unlikely that we’re going to see any significant economic recovery until sometime in 2026.
What’s happening in the housing market at the moment?
For those who read my last monthly update, you might recall that I picked a 0.25% OCR cut as the most likely outcome this time around.
The thinking behind that was that the RBNZ would want to temper the surge of enthusiasm that emerged in the housing market immediately following our last OCR cut and avoid us getting ahead of ourselves.
But again, that enthusiasm has worn off quickly over the last few weeks.
There’s still a glut of listings out there, meaning it’s very much a buyers’ market, but with house prices still tracking downwards at the moment, that’s proving to be a pretty big deterrent. No one wants to catch a falling knife.
Couple that with New Zealand’s rising unemployment rate, and the fact that rates are still pretty high comparatively speaking, and people are opting to step back again.
Even with a 0.50% decrease this time round, and the prospect of another 0.50% decrease in November, I can’t see the housing market taking off again in a big way anytime soon.
Activity will start to pick up again, as people who have put their plans on hold for the last couple of years—waiting for interest rates and house prices to settle—start to make moves again.
But all that’s going to do is help get us back to some sense of “normal”, after the anaemic levels of activity we’ve seen over the past few months. It won't be the start of a major recovery in house prices.