A shot in the arm for the country?

Following the Reserve Bank’s (RBNZ) announcement yesterday Wednesday the 20th of August that it was reducing the Official Cash Rate (OCR) to 3.0 percent, I thought you would be interested in knowing what impact I see this having now on mortgage rates and the housing market.

There was an expectation the Reserve Bank would cut the OCR from 3.25% to 3% in response to deep weakness in the economy. An OCR cut is typically done to add stimulus. The OCR has been falling since this time a year ago now and has dropped by 2.5 percent since the current easing cycle started. So far there has been minimal change to mortgage rates because the banks had already anticipated this change yesterday and had reduced some of their advertised mortgage rates earlier.

In May, the bank expected the cash rate to bottom out at 2.9% next year; now it believes the low will be 2.5%. It is anticipated 2026 (election year) will be more likely a year of decent economic growth thus if the OCR does get cut to 2.5% in the next six months, then borrowers should anticipate relatively quick increases once we get into 2027, and corresponding increases in advertised mortgage rates. If the cash rate stays at 3% or above, then those rises will be more gradual once the tightening cycle restarts.

With inflation currently sitting at the upper limits of what the Reserve Bank states it is happy with compromises will clearly need to be made moving forward in terms of giving the economy a shot in the arm. It’s important to remember also a new permanent Reserve Bank Governor has yet to be appointed to the role. This individual might take a different stance to what is currently been done by the central bank. The potential for slightly cheaper mortgage rates over the next few months will not offset the cost-of-living pressures currently been experienced by so many families. If OCR cuts are being done now to add stimulus to the economy it’s hard to see much impact from these cuts whilst house insurance, council rates, food and energy prices all continue to rise annually beyond average wage growth.

With the current state of the economy people are rightly nervous about their job security and thus many want certainty when it comes their mortgage repayments. For this reason 18, 24 & 36 month fixed terms all remain popular with borrowers given the low levels that these fixed terms currently sit at. Given longer term fixed rates are primarily driven by offshore markets based on the continuing events unfolding overseas it seems likely these rates won’t become significantly cheaper, however they could increase without warning. As always when fixing their repayments borrowers need to decide what fixed term is best for them based on their own financial circumstances.

The housing market continues to remain subdued (especially in the Capital) primarily due to worries about job security remaining high. This will act to suppress home demand for the remainder of 2025. A recent survey of real estate agents showed that 54% can see buyers are worried about their job. The Reserve Bank has admitted to being surprised that house prices haven't been increasing as they expected with the OCR been lowered now over the past 12 months. This statement indicates the central bank does not understand housing affordability and the cost-of-living pressures I mentioned above. The Reserve Bank’s justification for introducing Debt to income ratios (DTIs) last year was supposedly because house prices in many parts of NZ were deemed by the bank now to be unaffordable.

Given the considerable uncertainty regarding the economic outlook, where inflation is headed, and what policy choice the Reserve Bank will make, it’s very hard to predict where house prices will be heading in NZ. For what it’s worth the Reserve Bank itself is now saying they are not expecting prices to increase a great deal over the coming 18 months. I think for many potential buyers they need either certainty with their employment, house prices to fall further or a combination of both before they now take the plunge.

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 to refinance.

Kind Regards

Simon