Homebuyers have upper hand – but for how long?
The official cash rate has dropped to 4.25%, a 0.50% cut, the Reserve Bank of New Zealand has confirmed.
It is the third consecutive drop in the cash rate since August, marking 1.25% of cuts as the Reserve Bank looks to stabilise the economy, having got inflation (2.2% over the third quarter) back within its 1% to 3% target band.
The final official cash rate announcement for 2024 was eagerly awaited by mortgage borrowers and homebuyers. But the good news is tempered with a warning that buyers may soon lose the upper hand in price negotiations, as lower interest rates increase demand in the housing market.
Ahead of the decision, markets had priced in a 50 basis-point cut, with ASB and Kiwibank economists saying this was “the path of least regret” and “the right thing to do”.
Releasing its Monetary Policy Statement on Wednesday the Reserve Bank said that inflation continued to decline and was close to the midpoint, Monetary Policy Committee members noting that economic activity remained subdued and employment growth was expected to remain weak.
“The Committee agreed that a 50-basis point cut is consistent with their mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates and the exchange rate,” the statement read.
The committee also noted that market interest rates had declined in response to actual and expected OCR decisions, and that the drop in mortgage rates had been less than for wholesale rates, which it said partly reflected “changes in the composition and cost of bank funding”.
“The average rate on outstanding mortgages has now peaked at 6.4% and is expected to decline to 5.8% over the next 12 months as borrowers refix their mortgage interest rates at lower levels in line with a falling OCR,” the MPC said.
Highly anticipated decision a ‘huge relief’
Daniel Lipman (pictured above left), director and financial adviser at Blueprint Finance, described the lead up to the November official cash rate decision as “one of the most anticipated” he could remember.
He said that many of his mortgage clients, including those due to draw down loans, had chosen a floating interest rate in anticipation that fixed rates would fall.
“For borrowers, this [represents] a huge relief and a positive outlook on the future,” Lipman said.
A year after the one-year fixed rate special rose above 7%, Lipman said that homeowners were still feeling the pinch and that many everyday Kiwis had made “significant lifestyle changes” to ensure their mortgages were paid first.
“One positive I've noticed are clients who are implementing more strict household budgeting in order to combat higher interest rates,” Lipman said.
“Many who’ve done this are now choosing to keep their repayments the same when they come up for their fixed rate rollover, meaning they are paying more principal each fortnight and paying their home loans off faster.”
ASB chief economist Nick Tuffley (pictured above centre) confirmed that ahead of Wednesday’s decision, a 0.50% cut in November had been fully factored into wholesale rates, which influence fixed rate mortgage rates.
Markets had also priced “a near 100% chance” of a further 0.50% cut in February.
Tuffley said that expectations for the official cash rate were an important driver of term interest rates, and any major rethink in the outlook would cause rates to shift.
‘Buyer’s market’ tipped to change
Adrian Dale (pictured above right), mortgage adviser at Trilogy Financial Solutions, acknowledged that homebuyers had been able to take advantage of lower house prices, but warned that the November cut could bring that to an end.
Noting that markets were starting to forecast a rise in house prices (ASB’s November Housing Confidence Survey showing a net 24% of respondents now expect price gains), Dale said that although it is still considered to be a ‘buyer’s market’, that would likely change in 2025.
“With another OCR drop and hopefully a further drop to fixed rates, that is going to be a shot in the arm for house prices,” Dale said.
Throughout 2020 through to mid-2021, record-low interest rates saw house price growth soar, peaking at 28.8% in October 2021 (according to CoreLogic figures), with fear of missing out (FOMO) at play.
With interest rates continuing their descent, Dale said there was a real possibility of a recurrence, particularly in Auckland.
“There’ll be a tipping point where FOMO kicks in and things will start to lift again.”
Tuffley said that interest rates were “arguably the most important cyclical driver” of house prices. Migration flows, underlying planning regulations and building costs were also an influence, he said.
A low official cash rate “increases the debt servicing capacity of borrowers” and their willingness to borrow, and for investors, means a lower level of expenses.
Tuffley said that ASB expected house prices to grow “up to 10%” over 2025.
“A November OCR cut is but one incremental step the RBNZ is making to bring interest rates down to a more neutral level from highs that clearly crunched the housing market,” he said.
Bank test rates could drop below 8%
Advisers said that mortgage stress test rates (the rates banks use to test affordability) ranged from 8.05% to 8.15% and that a drop to the 7% range would be optimal for borrowers.
“Having monitored these trends over the past year, if the shorter-term rates (six-month fixed and one-year fixed) rates drop, I’d assume a drop in the test rate, and by a similar margin,” Lipman said.
The current level of test rates means that Debt-to-income (DTI) ratios (caps on borrowing linked to income) are not required, and advisers said they did not affect mortgage applicants.
“As the test rate progressively decreases, we’ll begin to see DTI come into play,” Lipman said.
Homebuyers urged to plan ahead
Heading into the festive season, Lipman encouraged mortgage borrowers to enjoy themselves while keeping a tight eye on their budget.
Keeping discretionary spending to a minimum would benefit their back pocket as well as mortgage interest rates, which are influenced by inflation and high spending, he said.
Dale urged homebuyers wanting to buy in early 2025 to plan ahead and get advice early.
He acknowledged that borrowers may have to wait longer for lending decisions, and that banks, as with other sectors, operate on fewer staff over the holiday period.
“Move early, get prepared and so if you do see opportunities, you’re ready to go.”
