What a cash rate hike in 2024 would mean for homeowners

1. Reserve Bank still talking tough

As expected, the official cash rate was held at 5.5% last week, but also as anticipated in advance (and noted in this column last week), the Reserve Bank was very clear that financial markets should not be racing to factor in OCR cuts anytime soon. Indeed, they actually slightly revised up the possible future track for the OCR, to the extent that there might now be a 75-80% chance of another increase in this cycle, maybe the first half of 2024, if required.

Part of their concern that there might be upside risks for inflation – and hence a possible need for another OCR increase – stems from housing rents and construction costs. And as noted in the various documents released with the decision, the extended period we’ve already had with inflation well above target means monetary policy can have little tolerance for any more price pressure.

More encouragingly, at least most of their core macroeconomic projections were broadly the same as last time – they don’t anticipate a recession (albeit almost no growth in the next 2-3 quarters), employment should continue to edge higher (meaning an increased unemployment rate is all about a bigger labour force), and CPI inflation is still expected to be back within the 1-3% target range by Q3 next year. House prices are forecast to rise slowly, by about 5% p.a. over 2024-26.

All in all, another OCR increase still remains far from certain. But the RBNZ remains in tough-talking mode, and isn’t expecting to reduce the OCR until sometime in the first half of 2025. The upshot? There’s unlikely to be generalised/significant falls in mortgage rates for at least another year or so.

2. House prices still rising

My own view on where house prices go over the next few years is very similar to the Reserve Bank – positive growth over the medium term, but restrained by factors such as elevated mortgage rates, and probable caps on debt to income ratios for mortgage lending. For now, we’ve certainly entered that ‘next phase’, with the CoreLogic House Price Index for November released last week, and showing a monthly rise in average values of 0.7%, following on from October’s 0.4% lift.

3. More jobs filled

Consistent with the Reserve Bank’s relative optimism about employment, last week’s filled jobs figures from Stats NZ showed another rise in October, this time by 0.5%. To be fair, they also noted that October’s figure was boosted by temporary hiring related to the election, such as vote counting. But even so, the overall message from the jobs data is still reassuring for now, helping existing mortgage-holders negotiate the rises in their repayments as they reprice to current interest rates.

CoreLogic chief economist Kelvin Davidson: "Another OCR increase still remains far from certain. But the RBNZ remains in tough-talking mode." Photo / Peter Meecham

4. Economy a mixed bag

Jobs figures might still be encouraging, but other recent data has been patchier. Dwelling consents dropped further in October, while the NZ Activity Index (a timely indicator for overall economic growth) has stagnated in the past couple of months. Meanwhile, consumer confidence on ANZ’s measure is ‘ok’ without being great, although their business sentiment indicator has strengthened. On the whole, it leads me to conclude that the economy is treading water in many ways, and while that might help to bring down inflation, it does suggest some risks to business profitability in 2024. In turn, if some job losses did come through, it would just become that little bit harder for households to adjust to higher debt repayments as their mortgages roll over.

5. Shorter fixes likely to remain the popular choice

Finally, on Tuesday this week, the RBNZ will publish loan data by the term chosen. Lately the shorter fixed rates (1-2 years) have become even more popular again, giving borrowers some certainty at a decent interest rate, but also reduced risk of over-paying if mortgage rates fell more sharply than expected over the medium term. It seems likely we’ll see more of the same in the next data release.

- Kelvin Davidson is chief economist at property insights firm CoreLogic