Following the Reserve Bank’s (RBNZ) announcement yesterday Wednesday the 14th of August that it was reducing the Official Cash Rate (OCR) by 25 basis points to 5.25 percent, I thought you would be interested in knowing what impact I see this having on the housing market and interest rates.
One economist was quoted yesterday as saying it was "probably the biggest flip-flop" ever seen from the Reserve Bank. "The bank clearly has no idea why the economy has apparently changed so much between May and August." It seemed the bank had woken up to what other commentators and economists were seeing. "It's just that they fought against that view in May, it makes it a lot harder to trust what they say." Herein lies the problem now for borrowers when deciding on an appropriate fixed term for their mortgage. With the Reserve Bank formerly so adamant there would be no scope for an OCR cut until at least May 2025 would you believe them now that this reduction made to the OCR is going to be followed up with successive rate cuts? The expectation is that this will happen or otherwise what was the point of yesterday’s announcement.
We have another two OCR review dates due in 2024. One on the 9th of October & another on the 27th of November + the next CPI (inflation) data due for public consumption on the 16th of October. The Reserve Bank will need to be fully confident that inflation has fallen into its desired target band of between 1-3 percent and can remain there “long-term” to consider another two 25 basis point cuts between now and Christmas. At present inflation is still not officially within the target band that was supposed to trigger a cut to the OCR. The bank noted that services inflation “remains elevated” but is expecting this to continue to decline, both at home and abroad, in line with increased spare economic capacity.
Managing borrowers’ expectations now around where interest rates might fall to potentially is important. Whilst it’s great to finally see a cut to the OCR and for this to happen earlier than expected we won’t be seeing a sizeable reduction to the cost of borrowing money for some time and this will be fully reliant on continued cuts been made to the OCR. Given the mixed messages coming from by the Reserve bank nothing can be guaranteed. The banks will be reluctant also to give up the margins they have been enjoying since the pandemic ended so competition to lend will determine how quickly we see mortgage rates falling. As of this moment I have only seen one main bank communicate to mortgage advisers a reduction to their advertised "fixed" rates from the 20th of August, but I am sure others will follow. Long term I don’t see us getting close to the very low mortgage rates we saw during the pandemic. This was a once in a generation event. The Reserve Bank’s earlier decision to reduce interest rates to record low levels was a key instigator for a lot of the inflationary pressure that we have had to confront in New Zealand. They have learnt this lesson the hard way and will be unlikely to repeat the same mistake again.
Borrowers need to decide themselves now what fixed rate term is the best option for them financially. Most people want to have certainty with their loan repayments as a home loan is their biggest financial commitment. Traditionally most borrowers elect to fix their home loan’s repayments for a minimum of 12 months. Again, you need to decide yourself what fixed term is best for you based on your own financial circumstances.
With interest rates falling the bank “test rates” used to stress test new mortgages will also start to reduce meaning that the borrowing power of many loan applicants would now usually improve. Unfortunately, with the Reserve Bank getting its earlier wish to introduce Debt to income ratios (DTIs) these will now impact many customers when they come to borrow money for a home loan. This has been purposefully engineered by the Reserve Bank to combat house price inflation but will also end up impacting many first home buyers negatively. Although the cost of borrowing money is going to reduce ongoing cost of living pressures will see many Kiwis hesitant to overcommit themselves when purchasing a new home. House prices will increase over time but not anywhere near the extent that we saw during the pandemic.
Please let me know if you would like to discuss the current mortgage rate that you are on with your bank or are needing assistance with finance to purchase a new property or refinance.
Kind Regards
Simon
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