1. The OCR cuts aren’t finished yet
Clearly, the biggest news event in relation to the economy and property market last week was the Reserve Bank’s Official Cash Rate cut to 4.25%, the lowest level in almost two years. But perhaps more interesting were the hints that there could be a “front-loaded” cut to the OCR in February next year, when the Reserve Bank next meets. The idea is that we’d get one more big cut of 0.5%, and then smaller cuts thereafter.
But whether we get a 0.25% cut in February or 0.5%, what might all of this mean for the housing market? There will still be pressure on banks to reduce their own rates, although perhaps more so at the short end rather than the longer term 3-5 year rates.
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Lower interest rates tend to boost property sales and house prices to a decent degree. However, when you factor in the likes of a soft labour market, an overhang of listings, and debt to income ratio rules (especially if banks further reduce their internal serviceability rest interest rates), it’s difficult to imagine a genuine housing boom in 2025. Indeed, the Reserve Bank itself is projecting growth in average property values of around 7% next year (which I’d broadly agree with). That would be a decent rise, but not a rampant surge.
2. The recent economic data backs up the RBNZ’s cutting plan
Last week’s economic figures really just reiterated the tough times still being endured by many households and businesses, with retail sales for example edging lower again in Q3 (albeit not by as much as in previous quarters) and filled jobs dipping for the seventh consecutive month in October. Nothing here to argue against further OCR cuts in 2025.
3. More evidence of an investor comeback
Meanwhile, as mortgage rates fall, we’re now seeing the expected growth in overall lending activity, and it’s interesting that investors are just showing hints of making the stronger comeback – it’s nothing overwhelming yet, but is certainly consistent with what we’ve been seeing in our own Buyer Classification data lately. Perhaps of most note was that the share of lending to investors at a debt to income ratio >7 rose from 3.0% in September to 4.0% in October; clearly not a major change, but possibly the start of a new trend that I’ll be watching closely in the coming months.
CoreLogic chief economist Kelvin Davidson: "Lower interest rates tend to boost property sales and house prices to a decent degree." Photo / Peter Meecham
4. Decisions, decisions
On Thursday this week, we’ll get another breakdown of the same lending data, this time split by the terms/rates chosen by borrowers. Over the past few months there’s been a strong preference for the shortest fixed rates (or even floating) – as people look to ride the interest rate wave down, despite the fact these shorter rates are higher than the longer durations. There seems every chance this stampede towards the shorter terms will have continued in October’s data, and it may well remain the case for a while yet, given the RBNZ’s strong indication of more rate cuts to come.
5. Construction in the limelight this week too
With data on new dwellings consented (October) and actual building work put in place (Q3) due from Stats NZ this week, the residential construction sector will be back in focus. The downturn has been deep and prolonged, and isn’t over yet. But we’ve nevertheless seen hints in the consents data for the past few months that they’ve at least reached a floor (at a much higher level than after the GFC) – a good first step on the road to recovery.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
