The floor for mortgage rates is approaching fast

1. The OCR is dropping faster

Clearly, the biggest news on the economics front last week was the Reserve Bank’s decision to cut to Official Cash Rate from 4.25% to 3.75%. More important was the Reserve Bank's prediction that the OCR will fall to around 3% by the end of 2025 rather than the end of 2026. That’s a big pull-forward in terms of timing and seemed to reflect the Reserve Bank’s view that there’s more spare capacity in the economy than previously thought – hence more underlying, disinflationary pressure than before.

Not much else changed in terms of big-picture economic projections: GDP growth is set to improve slowly this year; the unemployment rate is now thought to be more or less at its peak this cycle; and house prices are set to rise by around 4% this year and by 5% next year. Headline inflation may bump upwards temporarily in the near term, as the lower the dollar pushes up imported prices, but the Reserve Bank thinks it will be able to "look though" that blip.

So in a nutshell, look for more OCR cuts over the coming months, perhaps a series of 0.25% falls from April onwards, depending on how the data evolves. The revised OCR forecast also suggests there are also further falls to come in mortgage rates, but they’re unlikely to be as large or fast as those seen to date – especially since banks were already cutting in advance of last week’s OCR change anyway.

In other words, the floor for mortgage rates (possibly in the range of 4.5-5% for many rates) is now a lot closer, and at some stage soon more borrowers may well start to fix longer again – after a flurry of floating or short-fix activity in recent months.

2. First-home buyers losing their edge

The latest CoreLogic data shows that first-home buyers’ share of property purchases dropped a touch in January, with relocating owner-occupiers (movers) and mortgaged multiple property owners (including investors) taking a higher share. At face value, that’s not a great result for first-home buyers. But as we’ve been highlighting often in recent weeks, market share isn’t the full story – with the overall number of deals still trending higher, I think first-home buyers have every chance of buying more properties in 2025 than 2024, even if their share edges lower.

CoreLogic chief economist Kelvin Davidson: "Look for more OCR cuts over the coming months." Photo / Peter Meecham

3. Property market still in a holding pattern

Speaking of sales volumes, we recorded just short of 4,300 deals across real estate agents and private activity in January. That was around 7% higher than the same month last year – the 20th rise in the past 21 months – but still below the long-term average. And with values generally still not rising just yet (albeit not falling much either), the data continues to point to a market in something of a holding pattern. On one side, most vendors aren’t in a forced selling position, yet on the other side many buyers don’t seem willing or able to meet their price expectations – and hence the stock of available listings on the market remains elevated.

4. Net migration finding a floor?

Last week’s Stats NZ figures showed that the 12-month running total for net migration continued to drop in December, hitting 27,100 – the lowest since December 2022 (24,900). However, looking at the recent ‘run rate’, departures from NZ have just slowed a little, and arrivals have edged higher – meaning the net figure has stabilised at around 2,000-2,500 per month, which is consistent with long-run norms. In other words, migration has certainly dropped a long way from a very high peak, which has taken the heat out of property rents (alongside a rise in the supply of rental listings), but it is now showing signs of stabilising.

5. Borrowers still shopping around

There’s plenty of interesting data coming up this week – including ANZ business and consumer confidence surveys, as well as the NZ Activity Index and filled jobs figures from Stats NZ – but we’ll also get my favourite (non-CoreLogic!) dataset on Thursday, which is the Reserve Bank’s detailed mortgage lending figures for January. Will high debt-to-income ratio lending have ticked up as mortgage rates have fallen further? But alongside that, I’ll also be focusing on the bank switching data, with recent months having seen a lot of borrowers jump ship to a competing lender.

- Kelvin Davidson is chief economist at property insights firm CoreLogic