1. OCR likely to be left alone this week
The biggest event this week in terms of the economy and the property market will be the latest Monetary Policy Statement (MPS) from the Reserve Bank, at 2pm on Wednesday. There’s almost no chance the RBNZ will change the official cash rate (OCR), but its projections and commentary about the coming 3-6 months will be very interesting – in terms of overall economic growth, employment, inflation, house prices, and of course the OCR itself.
My expectation is that the OCR won’t need to be raised again in this cycle, partly because the lagged effects of previous sharp increases are still working their way through the system, especially for those borrowers who are yet to fully reprice mortgages from older/lower rates onto current higher levels. But other economists aren’t so sure, with some anticipating one more OCR increase, probably in November. To that end, any tweaks within the MPS to the forecast cash rate path, perhaps to push back the timing for any eventual cuts, could suggest that the RBNZ is also still very worried about inflation – and that another OCR rise couldn’t be ruled out just yet.
As noted, I’m less concerned about that, and I think we can still say in general terms that mortgage rates have peaked. But if that’s wrong, the risks are still slightly more weighted towards the upside rather than the downside.
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2. Loan sizes still restrained relative to incomes?
The Reserve Bank’s latest figures (for Q2) on mortgage lending by debt to income ratios will be a fascinating set of data, due out Tuesday this week. Recently the amount of lending at high DTIs has already fallen – partly because higher mortgage rates naturally limit how much debt can be serviced from a given income – and the latest figures will probably show more of the same.
But we’ve always said that if formal DTI limits are introduced next year, it’s not so much about this cycle anyway; it’s more about preventing a repeat of the post-COVID boom when mortgage rates do eventually drop back again – by tying long run house price growth more closely to incomes, and limiting how many properties anybody can own at any given point in time.
3. Net migration will still be boosting property demand
Stats NZ’s net migration data for June are due out this week too, and although the figures have been showing signs in the past few months of just easing back a little (as departures rise and arrivals to NZ of non-citizens dip), they’re still very high – and that will be boosting overall property demand. If anything, June’s numbers may continue the gradual slowdown, but won’t change the overall story too much; which is ongoing population growth, and more need for housing.
CoreLogic chief economist Kelvin Davidson: "Any tweaks to the forecast cash rate path, perhaps to push back the timing for any eventual cuts, could suggest that the RBNZ is also still very worried about inflation." Photo / Peter Meecham
4. New borrowers just want the cheapest rate
The Reserve Bank’s latest monthly data on new lending showed that the majority of people still fix (80%) their mortgages rather than float (20%). But within that fixed segment, there’s been quite a shift in the terms chosen – e.g. in March, 35% of loans were on 1-year fixes, 24% 2-years, and just 4% on three years. But in June, those figures had shifted to 28%, 18%, and 16% – i.e. a big rise in popularity for terms longer than two years.
Of course, it’s not hard to see why preferences have changed, given that three-year fixed rates have gone below the one-year rates since March. In other words, many new borrowers (or those topping-up or shifting banks) are simply still choosing the lowest rates on offer – probably because of affordability considerations right now, even if that raises the risk of over-paying further down the track, in the event that market rates drop sharply before that three-year fixed term has expired.
5. Rental growth is picking up
Stats NZ’s figures last week showed that rental growth (based on new bonds lodged) rose from an annual rate of 3.5% in June to 4.1% in July – above the average of around 3% and also the fastest rate since June last year (5.1%). This is something that has always been on the cards, given increasing wages, but also restricted rental listings and rising demand (hence falling vacancy rates). Further rises in rents seem likely in the coming months, which is obviously favourable for landlords but not tenants – although the long-term pace of growth may still be capped due to the fact that rents are already high in relation to incomes.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
