Light at the end of the tunnel for mortgage borrowers

In recent weeks, there’s been quite a significant shift in the general mood and commentary around the outlook for the economy and labour market, inflation, the official cash rate, and mortgage rates. So, what exactly has happened and what might it mean for the property market?

First, there’s no doubt that NZ’s economy is in the doldrums. Most indicators for important sectors such as retail, manufacturing, and construction remain subdued, and overall business sentiment continues to track at low levels too. Related to all of that, we’re now starting to see employment fall a bit, with job cuts being made in high-profile areas such as media and the public sector.

In turn, this all but guarantees that inflation will be back within the 1-3% target band pretty soon. That’s partly because general consumer spending is subdued and firms can’t push through the same kinds of price rises they might have been looking at previously. At the same time, such chunky price rises aren’t sometimes necessary anyway, because their input costs have slowed down (e.g. wages).

The Reserve Bank has certainly got its eyes on all of these changes, and even though the official cash rate (OCR) was held unchanged at 5.5% at their most recent meeting (10 July), the media statement that accompanied the decision had a much ‘softer’ tone, signalling that they weren’t as concerned about inflation as before, and the door could be opening for near-term OCR cuts.

Off the back of that mood-shift, as well as normal competitive pressures, we’re already seeing the banks react by dropping some of their mortgage rates, although not necessarily across all terms yet, and nor have the falls been dramatic. Even so, for many cash-strapped mortgage borrowers, any respite at present would be more than welcome (albeit less beneficial for savers).

Looking ahead, then, the first official cash rate cut in this cycle is now only a matter of when for 2024, not if. And the longer the economy stays so sluggish, the faster and/or more significant the OCR cuts are likely to be in 2025 too. The upshot is that mortgage rates are set to drift lower in the coming months, helping new borrowers as well as those households with existing loans that are due to roll off their current fixed rate.

In turn, this is likely to provide some degree of impetus for the housing market, which right now is still pretty subdued. Indeed, sales volumes dropped in June compared to the same month last year, and property values nationally have drifted down by around 2.5% since February’s ‘mini peak’, with bigger falls in key markets such as Auckland and Wellington. This weakness isn’t surprising when you consider that job security has dropped and that willing & able buyers have the power when it comes to pricing – due to the elevated levels of listings that are available on the market.

Of course, even if this current lull for the property market does come to an end fairly soon, any subsequent ‘upturn’ may not be particularly robust. After all, the unemployment rate could still drift higher into 2025, which will tend to be a handbrake for property. And although lower mortgage rates would tend to push in the other direction, we also now have to keep in mind the newly-introduced debt to income (DTI) ratio rules. The DTIs aren’t having an effect right now, because high mortgage rates are already capping loan sizes. But as rates fall, that’s when the DTIs will start to bind, limiting how much debt people can have based on their household income.

All in all, while mortgage rates might not necessarily plunge in the next 6-12 months, there is definitely now light at the end of the tunnel.