OCR reduced again but by less than before

Following the Reserve Bank’s (RBNZ) announcement today Wednesday the 9th of April that it is reducing the Official Cash Rate (OCR) by 25 basis points to 3.50 percent, I thought you would be interested in knowing what impact I see this having on the housing market and interest rates.

Today’s OCR review is the 2nd of seven planned for this year and follows the abrupt departure of Adrian Orr as Reserve Bank Governor. Orr’s tenure as Reserve Bank Governor will surely go down in history as one of New Zealand’s worst public servant appointments ever made. It is acknowledged by most economists that under Orr’s leadership the Reserve Bank's decision to keep interest rates too low for too long during the pandemic was the key cause of house prices getting out of control in New Zealand. Orr and the Reserve Bank were then forced into crashing the NZ economy which included the introduction of debt-to-income ratios which now impose artificial restrictions on the amount banks can lend to home buyers based on their income. I can’t recall a Reserve Bank Governor in New Zealand that has ever received more public criticism from former Reserve Bank senior staff. Most this criticism has been entirely justified when you look at how the Reserve Bank in Australia has been led by comparison including during the pandemic. History will not be kind to this man, nor should it be.

Christian Hawkesby is now acting Reserve Bank Governor for six months while the recruitment of a new Governor to serve for a five-year term takes place. The decision taken today to reduce the OCR will likely see little downward movement occur in advertised fixed interest rates for Kiwi borrowers. With the impact of American tariffs currently causing a great deal of uncertainty in the offshore markets there is more evidence mounting now that we might be closer to the low point for interest rates than many think. Longer term fixed rates are primarily influenced by overseas cost of funds and as things stand today the likelihood that borrowers will be able to secure a 2+ year fixed rate much cheaper than that currently available seems less certain now. Although further OCR reductions are expected to be announced by the Reserve Bank in May & July this year, meaning short-term rates are likely to fall further, we are unlikely to see these rates becoming significantly cheaper. Some borrowers may be relaxed about continuing to play the short-term game fixing for 6-12 months but a growing number of people are looking for the certainty that a longer-term fixed rate can offer hence the 4.99% p.a. for 2 years fixed has been incredibly popular these last few weeks. Again, borrowers need to decide what fixed term is best for them based on their own financial circumstances. We have the next CPI official inflation announcement due from Stats NZ on the 17th of April and this could be crucial now to influencing what the Reserve Bank does in May & July. Despite economists expecting annual inflation to drop to a four-year low, it failed to budge in the December quarter, and there are fears a “reacceleration” could be on the cards later this year with rising rents being the largest contributor to the lack of change. If the Reserve Bank believes inflation may be about to rise again above it’s 1 to 3 percent target band it will have to intervene.

House values around the country continue to be impacted by the tough economic conditions currently been experienced by many households. There is also now a record glut of unsold properties. Real Estate Institute of New Zealand (REINZ) has noted increasing levels of unsold homes nationally. Barfoot & Thompson’s unsold stock numbers in Auckland have been climbing, with 5300 places unsold in January, 5900 in February and 6200 last month. The real estate company noted reluctance by some Aucklanders to accept prices offered. Some vendors were meeting market expectations and being realistic regarding asking price, while others had begun to expect a higher price. As the strong flow of new listings onto the market continues, the relative supply-demand imbalance is likely to restrain house price growth in the near term. Vendors must be cognisant of this.

A soft labour market continues to weigh heavily on household confidence, particularly in Wellington. The Wellington region has suffered significantly from both private and public sector job cuts. These cuts have also affected Palmerston North, where 24% of jobs in 2023 were in the public sector. Other rising costs are also dampening current purchasing demand i.e. high insurance costs and high rates increases. Wellington City house prices are now on average $371,000 from their peak experienced during the pandemic, more than a house deposit. Some owners thus risk selling at a loss. Porirua, Lower Hutt, Upper Hutt and Wellington City suburbs have all lost more value than the 20% deposit a first home buyer may have put down, worse if the buyer had less than 20% deposit back in 2022. As councils around the country reassess ratings valuations now for ratepayers’ post pandemic when ratings valuations were then set “artificially high” owners’ expectations of what their property is worth will need to be adjusted. The reality is that Wellington is currently experiencing a house price correction, and this is likely to persist as long as job losses in both the private and public sector job continue. Affordability remains the key determiner for what purchasers are ultimately prepared to pay for a property.

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