1. OCR cuts - we're just getting started
As expected, the Reserve Bank duly cut the official cash rate by 50 basis points to 4.75% last week, highlighting its belief that inflation has returned to the target band of 1-3%. With the economy still weak and spare capacity opening up, the path looks set for more cuts.
It seems likely that lower mortgage rates will arrest the recent falls in property values. But don't expect a sudden, sharp rise in prices either. After all, it’s still a buyer’s market out there, jobs are being lost, and the debt-to-income ratio limits are poised to curb any out-of-control price lifts. While the herd can be a powerful force in the housing market, those fundamental forces should not be dismissed.
2. Short-term fixes rising in popularity
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In this environment of falling interest rates, it’s no major surprise that many new borrowers (and, we suspect, many people rolling over existing loans) are choosing shorter terms. Indeed, as recently as December last year, only 7% of new loans by value were on six-month rates. By July that had risen to 20%, but in August it rocketed up to 39%. Admittedly, it’s not a straightforward decision about which term to choose, because the shorter rates (e.g. six months at 6.7%) remain quite a bit higher than even the slightly longer terms (e.g. 12 months at 6.2%). However, borrowers are voting with their feet and hoping that shorter rates will fall sharply enough in the coming months to make them better off on a rolling series of short fixes than just taking a slightly longer (and cheaper) mortgage rate now.
CoreLogic chief economist Kelvin Davidson: "Borrowers are voting with their feet and hoping that shorter rates will fall sharply enough in the coming months." Photo / Peter Meecham
3. All eyes on inflation
On that note, those looking for further sharp interest rate declines will no doubt be watching the next CPI release closely on Wednesday. The Reserve Bank’s latest forecasts are that the headline inflation rate will have dropped from 3.3% in Q2 to 2.3% in Q3, the first time it’s been in the 1-3% target range since the March quarter of 2021. If anything, there's a fair chance that inflation might come in a bit lower than 2.3%, adding to the case for further steady falls in the cash rate, starting with another (probable) 50 basis point cut on November 27.
4. Migration and rents continue to cool
Meanwhile, other data released last week showed that net migration into New Zealand continues to fade pretty sharply, as new arrivals drop and resident departures remain at record levels. To be clear, demand for property isn’t falling. But it’s certainly not growing as quickly as it used to be, and at the same time, there’s generally plenty of supply available too – whether that’s houses to buy, or to rent in the private market. Indeed, Stats NZ also reported last week that the flow/new tenancy measure of property rents was only up by 1.2% in the year to September, well below the average of 3.2%.
5. More weakness in the economic data?
Finally, we’re likely to get more confirmation that the economy is still in the doldrums. In particular, the BNZ-BusinessNZ services indicator and Stats NZ’s electronic card transaction figures will likely remain subdued. That’s far from ideal, given that the broad services sector accounts for about two-thirds of our economy, and it all suggests a risk of further job losses and restraint on the housing market.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
