OCR pressure: Will NZ's 'Goldilocks' housing market get a fairytale ending?

1. It’s Official Cash Rate time again

This week, there’ll be plenty of interest focused on the next cash rate decision, announced at 2pm on Wednesday, but it’ll probably come and go pretty quickly. The Reserve Bank is almost certain to hold the OCR at 5.5% and will probably just reiterate the message from six weeks ago – that inflation is slowly easing but remains too high, so the OCR may not be coming down until early next year. As such, the general plateau for mortgage rates may also be in place for most of 2024. (Next week, on April 17, we get the latest CPI figures so we'll see how inflation performed in the first quarter of this year.)

2. The ‘Goldilocks’ market

The latest CoreLogic House Price Index showed a 0.5% monthly rise in national average property values in March, after similarly muted figures of 0.3-0.4% in January and February. In other words, the market seems fairly well balanced – not too hot, not too cold – with a rise in sentiment, for example, being offset by stretched affordability, still-high mortgage rates, and more listings (hence greater buyer choice and softer price pressures). We’re picking that the subdued rate of price growth will remain a feature throughout 2024, with any upwards influence on prices in 2025 from lower interest rates being counteracted by the probable caps on debt to income ratios for mortgages.

3. Plenty of construction data to digest

Last week Stats NZ published February’s new dwelling consents data, which showed a ‘less weak’ result – with consents only down by 6% from the same month last year. Of course, we need to be careful here, because February 2023 was probably impacted (held down) by the aftermath of the weather events. In other words, I wouldn’t be rushing out to say that the consenting downturn is almost finished just yet! The bottom line has not changed: consent activity is declining just at the time when population growth (net migration) has been very high.

Meanwhile, Stats NZ also published an experimental dataset looking at code compliances (dwelling completions) and the time to get projects finished. There’s a lot to pore over within this dataset, but the key points are lengthening timeframes to build – e.g. 18 months recently, from about 12 months pre-Covid – but also more completions. On this series, about 43,000 dwellings got their compliance certificate in 2023, compared to less than half that figure a decade ago. Of course, as noted, with consents falling, the problem is that completions are now also set to drop again in future.

CoreLogic chief economist Kelvin Davidson: "The OCR may not be coming down until early next year." Photo / Peter Meecham

4. Employment is still rising, albeit not as quickly

Stats NZ also reported last week that filled jobs across NZ rose by 0.3% seasonally adjusted in February, another fairly solid result. However, more broadly the pace of new job placements has slowed, from an annual rate of 3.6% in April/May last year to 2.1% now. Of course, jobs growth wasn’t going to be able to stay so strong forever, and against the backdrop of economic recession, that’s (2.1%) still not a bad result. Overall, yes, jobs growth has eased, but the labour market is still supporting housing activity and those households who are adjusting to higher mortgage rates.

5. Short fixes remain popular

Regardless of your views on where mortgage rates might go over the next 6-12 months, what we can certainly infer from the actual data is that many borrowers at least consider the peak to be here. Recent Reserve Bank data shows that the majority of new loans are being fixed for no more than two years, and that may well remain the case in this week’s release, covering February data. Of course, fixing short and reducing the risk of overpaying later (if/when rates fall) comes at a current cost, with one year fixed rates still higher than, say, three year rates.

- Kelvin Davidson is chief economist at property insights firm CoreLogic