Rate worries: Was the Reserve Bank just playing safe ahead of the election?

1. Reserve Bank sticks to the script

There was no surprise that the RBNZ held the official cash rate unchanged at 5.5% last week, given that neither inflation or the labour market had strayed off course since their prior OCR decision in mid-August. However, it was perhaps a bit more surprising that the statement they released seemed slightly relaxed about the need for any more OCR increases in future – going against the emerging expectation amongst analysts, commentators and financial markets that a rise could well be delivered at the final meeting for the year on November 29.

Of course, the RBNZ may have just wanted to stay on the straight and narrow with this decision, given its proximity to the election and its need to stay politically neutral. But either way, the bottom line is that we still just have to wait and see – and on that front, the next consumers price inflation reading on October 17 becomes vital. For borrowers, however, the implications of all of this may not be major. After all, even if we do see another OCR rise this year, the largest mortgage rate increases are now firmly behind us, and thanks to low unemployment, they’ve largely been absorbed fairly well – at least so far. But don’t count on mortgage rate falls anytime soon either.

2. Shorter fixed popular again

Speaking of mortgage rates, the Reserve Bank’s latest lending figures showed that 70% of new loans (house purchase, bank switch, top-up) in August were fixed for up to two years, well above the average over the past 2½ years of around 62%. In other words, people are favouring shorter fixes again, after a brief foray into the terms longer than two years. This probably offers a bit of certainty, roughly the best rates on offer, and also a reduced risk of over-paying if people fixed too long and found that rates then fell more sharply than expected.

3. The downturn’s (probably) over, though not everywhere

The latest CoreLogic House Price Index showed that national average property values flat-lined in September, the first time they hadn’t fallen since March 2022 – and signalling that the market downturn has probably now come to an end, at least at the national level. But beneath the surface, house price patterns are still a little patchy – rising in Auckland, Christchurch, and Dunedin in September, but dropping in Hamilton and Tauranga. With mortgage rates still high, I’d expect this patchiness to remain a feature for a while yet, keeping overall house price growth subdued.

CoreLogic chief economist Kelvin Davidson: "Don’t count on mortgage rate falls anytime soon." Photo / Peter Meecham

4. Construction industry continues to slow

According to Stats NZ figures last week, new dwelling consents in August were 30% lower than the same month last year, bringing down the annual running total to around 42,000 – compared to the peak in May last year of 51,000. However, while this is clearly not ideal for builders themselves, the silver lining is that consents are still pretty high compared to the past, and for prospective new-build buyers, the good news is that smoother supply chains and more capacity in the industry are seeing cost growth slow. To be fair, new-builds may not get much cheaper though (just grow at a slower rate), given that labour accounts for 40-50% of a project’s total cost and wages don’t tend to fall.

5. Population growth putting pressure on rents

On Wednesday Stats NZ will publish the latest net migration figures, with rent price data due on Thursday. This is a fascinating combination at present, with strong net migration over the past year

or so seemingly causing the supply/demand balance to tighten in the rental sector, with rents themselves inevitably starting to accelerate. The next releases will probably show more of the same.

- Kelvin Davidson is chief economist at property insights firm CoreLogic