Official cash rate cuts may not necessarily drive a new housing boom

Clearly the hottest topic in regards to the economy and property market in the past few weeks has been the official cash rate (OCR) cut and the associated falls in mortgage rates – which, to be fair, were already happening anyway in advance of the Reserve Bank’s move. What underpins the OCR change and how might the housing market react?

With inflation proving very stubborn in the past few years (remember that inflation is a rate of change, not the level of prices), the Reserve Bank (RBNZ) has been right to keep the pressure on in regards to interest rates. But now the headline inflation rate is back very close to the 1-3% target band, the RBNZ has decided that the adverse risks to the economy and labour market from a delayed cut outweigh the problems associated with any lingering price pressures – the particular areas of concern here have been the sharp increases in insurance premiums and council rates.

Indeed, the RBNZ’s press release that accompanied their decision to cut the OCR on 14th August noted the sharp deterioration in timely economic indicators such as electronic card purchases, manufacturing and services surveys, and property sales activity. Meanwhile, of course, the unemployment rate has also begun to rise – albeit so far due to more labour supply rather than widespread job losses (although job losses have also now started too).

From here on, the RBNZ’s forecasts suggest that the OCR might drop another 1.25% or so by the end of 2025, reaching 4%. This implies a ‘typical’ mortgage rate of maybe 5.5%, although the degree of competition amongst the banks for market share and also what happens to wholesale interest rates in global markets will also have a say in local mortgage rates too.

At face value, then, there’s scope here for a bit of upwards pressure on house prices to re-emerge. Certainly, the post-COVID period has reinforced how powerful an influence interest rates really are in the housing market, even though in the near-term it could be via a boost to sentiment rather than a dramatic improvement in the actual day to day position of households’ finances.

Indeed, personally, I wouldn’t be ruling out some kind of short-term lift in property values. But there are also plenty of reasons to be cautious about the scope for a strong or lasting upturn. For a start, many housing affordability measures remain at or near their lowest (worst) levels for at least 20 years, including both mortgage payments and rent as shares of median household income.

In addition, there’s still plenty of listings/stock sitting on the market available to purchase. On top of that, although the arrival of OCR and mortgage rate cuts might dissuade some cash-strapped investors from a possible sale, others who have found themselves off the hook for capital gains tax sooner than they expected (due to the reduction in the Brightline Test) may well choose to list.

Meanwhile, most forecasts suggest that falls in employment will now take over as the key upward influence on the unemployment rate. That will tend to subdue the housing market, even if for most people it’s actually via the adverse impact on their feelings of job security (rather than an actual job loss). Indeed, the unemployment rate could ‘only’ rise to perhaps 5.5% or so – low by past standards.

And finally, the faster mortgage rates fall, the quicker the debt to income ratio restrictions will bind – tying prices more closely to incomes over the cycle, and slowing down the rate at which investors can grow a portfolio, unless buying new-builds (which are exempt). Yes, there are high DTI allowances or speed limits, but they might end up being reserved for expensive markets and/or first home buyers.

All in all, many people will be relieved that interest rates are finally falling (albeit not savers). But there remain reasons to be cautious about the next housing upswing starting straightaway.