1. Reserve Bank cuts the OCR
The Reserve Bank’s decision to cut the Official Cash Rate (OCR) from 5.5% to 5.25% came earlier than many had anticipated. I was expecting the cut to happen in October, others picked November. The RBNZ reasoned, however, that the risks to New Zealand’s struggling economy by delaying a cut outweighed any lingering inflation concerns.
The RBNZ’s forecasts suggest that the OCR might drop another 1.25 points or so by the end of 2025, reaching 4%. This implies a typical mortgage rate of maybe 5.5%. So will this be enough to jumpstart the housing market? Some kind of short-term bounce can’t be ruled out, given that lower interest rates tend to have an immediate effect on household sentiment, even if the actual impact on household finances is months down the line.
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But it’s hard to see the housing market running away again: the odds of a lingering recession are high, unemployment is rising, the number of homes for sale is greater than the current buyer pool and banks are now operating with debt-to-income ratios.
2. Affordability is still very stretched
Another reason for caution is affordability. Even though house prices are well below their post-Covid peak, they are still out of step with Kiwi incomes by quite a large margin. CoreLogic’s latest Housing Affordability Report, covering the second quarter, showed the following pressures in the market:
- The value-to-income ratio across NZ was 7.7, down from 10.2 at market peak, but above the 20-year average of 6.8;
- The number of years it takes to save for a deposit is 10.2, down from a 2021 peak of 13.6, but above the long-term average of 9.1;
- Mortgage repayments as percentage of median household income across NZ hit 54%, down a bit from the worst reading of 57% in Q2 2022, and above the long-term average of 43%;
- Renting is difficult too, absorbing 28% of median household income in Q2 2024, hovering at around a record high, and above the long-term average of 26%.
Lower interest rates and flatter rents will clearly help over the medium term. But wage growth has slowed too, and although property values may not spike higher, they’re unlikely to fall much further either. In other words, housing affordability could be a significant problem for a while yet, although the Government’s strong push on housing supply at present may well pay dividends in the long term.
3. Migration and rental growth continue to ease
Speaking of rents, the latest Stats NZ figures showed growth on the flow/new tenancies measure of just 2.5% in the year to July, below the average of 3.3%. In light of the reducing migration pressure (with arrivals slowing and departures continuing to rise), this isn’t a surprise. Meanwhile, the high starting point for rents will also tend to limit any further growth, and there’s also been a sharp rise in available rental listings, perhaps due to factors such as the continued shift of first-home buyers out of rentals and into their own property and new-build investment stock hitting the market.
CoreLogic chief economist Kelvin Davidson: "Housing affordability could be a significant problem for a while yet." Photo / Peter Meecham
4. The ‘partial’ economic indicators remain sluggish ...
Measured across so-called partial variables (timely/monthly stats which aren’t ‘official’ benchmarks), such as electronic card spending and the performance of manufacturing index (PMI) – which were both published last week – the economy remains soggy. That just adds more weight to the RBNZ’s decision, and also to signal more OCR cuts in coming months.
5. More bad news to come this week?
And on top of all of that, this week we’ll get the performance of services index and Stats NZ’s retail sales data for Q2. It’s difficult to imagine either of these measures recording a strong result. That simply adds to the wider story about NZ being in need of lower interest rates.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
