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...
