First-home buyers drive housing market despite weak economy
New Zealand’s weaker-than-expected economy has raised the likelihood of deeper OCR cuts this year, with mortgage rates set to ease but risks building elsewhere.
The June quarter’s 0.9% GDP contraction has already prompted major banks, including Westpac and ASB, to revise their forecasts and back larger rate cuts at the Reserve Bank’s October meeting.
Economy weaker than expected
New Zealand’s economy shrank by 0.9% in the June quarter, a deeper contraction than anyone anticipated, according to Stats NZ.
“Last week’s Stats NZ data showed that the economy contracted by 0.9% in Q2, more than anybody had been expecting,” Kelvin Davidson (pictured), chief economist at Cotality NZ, wrote for OneRoof. “The economic indicators in Q3 – such as retail card spending – have been better, so we may not necessarily be in another technical recession.
“However, the problem is that the 0.9% contraction in activity implies there’s more spare capacity in the economy than previously thought, which further raises the chances of an inflation target undershoot down the track, as well as risking unnecessary disruption, such as job losses now.”
Before the GDP figures, most experts expected two 25bp OCR cuts before year-end. Now, Davidson said, “a cut of 0.5% in October followed by 0.25% in November is looking more likely.” That could mean cheaper mortgages, particularly for floating and shorter-term fixed loans.
Inflation no longer a roadblock
Davidson noted that easing inflation pressures also support further OCR cuts.
“While the price of key items such as food is still rising, up by 5% in the year to August, rents are flat to falling,” he said.
“In other words, when you aggregate it all up, price pressures aren’t necessarily receding fast, but they’re not getting worse either. This is largely consistent with the Reserve Bank’s expectations, so inflation is unlikely to prevent further OCR cuts.”
First-home buyers hold strong
Property sales fell by about 5% year-on-year in August, but Davidson said this was likely a temporary dip.
“Indeed, at 87,875 over the past 12 months, sales are at roughly their highest level since mid-2022,” he said.
First-home buyers remain dominant.
“First-home buyers continue to dominate in the current market, accounting for 27.5% of purchases in July and August, according to the latest Cotality Buyer Classification figures,” Davidson said.
Lower house prices, KiwiSaver withdrawals, and low-deposit lending are driving demand.
Investors have returned to their typical 25% share, while movers continue to underperform.
Switching surge continues
Davidson said mortgage switching has become a defining feature of the market.
“There’s a lot of it going on, as people roll off existing fixed rates and chase a cashback at the new bank. Another record high could be set in August,” he said.
The Reserve Bank’s mortgage lending figures for August are due this week and will reveal more about loan structures and borrower behaviour.
Outlook: Fingers crossed
Davidson pointed to upcoming data releases as key markers for recovery.
“And finally, keep an eye out for the NZ Activity Index and ANZ’s consumer confidence reading, both for August,” he said. “After the poor Q2 GDP result, let’s hope they’ll bring some better economic news.”
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