Rate cuts were a "big move," but they haven't been enough to make the numbers attractive
Kiwibank economists say that mortgage rates aren’t yet low enough to breathe life back into the property market.
Despite mortgage rates falling steadily over the last year, house prices still dipped for the second consecutive month in August, and investors have remained firmly on the fence. Kiwibank chief economist Jarrod Kerr (pictured above left) said the Reserve Bank has made significant progress in reducing borrowing costs, but the cuts have simply removed the restriction from monetary policy rather than making it stimulatory.
Kerr also noted that around two thirds of New Zealanders own their home. When their most significant asset drops in value, that feeds through to a wider lack of confidence among households and businesses.
For investors, he said it’s no real surprise that they’re on the fence as the maths speaks for itself. He recently asked investors at various events what it would take for them to get back into the property market, and one investor pointed out that mortgage rates are currently sitting at around 5%.
“He said rental yields are 3-3.5%,” Kerr said. “And we can’t bank on or rely on capital appreciation anymore.
“The property market going nowhere points to very weak investor appetite and very weak construction,” he said. “The Reserve Bank has cut mortgage rates from 7-7.5% down to 5%. That’s a big move, but it’s just taken the restriction out of monetary policy. It hasn’t made it stimulatory.”
Is it better across the ditch?
In Australia, the picture is quite different. House prices have lifted steadily over the last six months, unemployment is one percentage point lower compared to New Zealand, and migration levels are strong.
Kerr said the impact can be traced back to COVID days, when both the Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) went into aggressive stimulatory settings, and ended up having to introduce steeper hikes.
“Both the RBA and RBNZ stuffed up over COVID, like many central banks,” Kerr said.
“The Aussies didn’t hike as much. They did not clamp down as hard as RBNZ. It had this residual fear of inflation, because it was running a little bit high into COVID, that it was going to come out being extremely hard to tame.
“Actually, they more than tamed it. Both central banks have gotten inflation back below 3% – if not temporarily, but the Aussies didn’t force a recession.”
Kiwibank economist Sabrina Delgado (pictured above right) said that interest rates are still sitting too high for the housing market, and growth is also being held back by slower migration inflow.
“You’re adding more housing to the housing stock, there’s less demand, so you really are seeing not a lot of price movements,” Delgado said.
Looking ahead
RBNZ has clearly signalled that more rate cuts are coming. ASB chief economist Nick Tuffley now expects the OCR to reach 2.5% by the end of the year, with 25 basis point reductions in October and November.
Still, it’s likely to be a hard road ahead. ASB’s Economic Weekly notes that despite retail spending showing some improvement in Q2, housing activity has "started flatlining again" even as fixed-term mortgage rates have been falling since late 2023.
“Fiscal policy is unlikely to ride to the demanded rescue as the Government continues to eye up the structural deficit left by the COVID period,” Tuffley said.
“We got a bright spot this morning, with retail trade volumes in Q2 up 0.5%. But, with the Government focussed on long-term challenges with the fiscal position, the heavy lifting for the economy needs to come from the RBNZ.”
