ANALYSIS: The Reserve Bank has cut the Official Cash Rate by 1.25% from 5.5% to 4.25% this year and most pundits believe it will reduce the rate further to around 3.5% by the middle of next year. As a result, the wholesale rates at which banks fund their fixed-rate lending have also dropped as have fixed mortgage rates.
The common rate for a one-year fixed rate loan has declined around 1.5% to near 5.8%; the three-year fixed rate has dropped about 1.4% to almost 5.6%, and the five-year rate has fallen around 1% to the same level.
It seems reasonable to expect that by mid-2025, when there is a strong chance that the easing cycle will reach its end point, the one-year fixed rate will be just above 5%. The three- and five-year rates probably won’t go that low and will bottom out maybe near 5.3% - if borrowers are lucky.
Even if we ignore the silly period from 2019 to 2022 when interest rates were pushed to unusually low levels by a) deflation fears and then b) the pandemic, some of these low points for mortgage rates in 2025 may seem high.
Start your property search
The average one-year fixed rate over 2017-18 was 4.4%; the three-year rate was 4.9%; and the five-year rate was 6%. It’s worth remembering that the cash rate was around 1.75% over the same period, so the scope for current fixed mortgage rates to fall all that much in 2025 when the cash rate may only be sitting at a low of 3.5% is a lot less than what I have indicated here.
The bulk of the removal of monetary policy restraint on the economy which the Reserve Bank is seeking to achieve is already in train. Does this mean the upturn in the housing market seen in REINZ sales and price data will stall given that people seem optimistic rates will fall a lot further?
Discover more:
- Tony Alexander: The big surprise in my last poll of 2024
- Liquidation sale of crumbling estate with dark past
- House built and owned by 40 Kiwi tradies heads to auction
Probably not, but the strength of the upward leg of the housing cycle this time is likely to be very muted compared with other cycles over the past three to four decades. Restraint on the upturn will not just come from the limited nature of interest rate declines. Gaining access to credit is harder than it used to be. Banks have to apply more rules set by the Reserve Bank, the newest being the debt-to-income ratio limits.
Restraint on the price upturn will also come from the much higher number of new dwellings being built than in the past. Even after the economy’s dire period over the past couple of years, the number of consents issued for the construction of new dwellings has only fallen to just below the 34,000 number seen the last time numbers boomed heading into 2004.
Independent economist Tony Alexander: "House prices over the next three to four years will likely rise but the annual gains will be in the 5%-10% range rather than the 10%+ we have often seen before." Photo / Fiona Goodall
Growth in dwelling supply has been good and while the outlook for townhouse construction looks negative, there are signs of a stirring in the standalone house sector.
Now add in rule changes freeing up more land for development and allowing greater housing density and we get a different supply versus demand dynamic than over the past few decades.
House prices over the next three to four years will likely rise but the annual gains will be in the 5%-10% range rather than the 10%+ we have often seen before. Having said that, with all of the rapidly changing elements in the global economic and geopolitical environment alongside the unpredictability of migration flows in and out of New Zealand, anything is possible.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
