Falling rates lift mortgage demand, but risks linger
Demand for residential mortgage lending in New Zealand has increased for the first time since 2021, according to the Reserve Bank’s latest Credit Conditions Survey.
However, poor economic conditions and higher unemployment rates are expected to remain significant obstacles to a full recovery.
The rise in demand follows five consecutive OCR cuts by RBNZ since August, reducing the rate by 200 basis points to 3.5% and gradually easing borrowing costs for borrowers.
Mortgage demand strengthens, but recovery expected to be gradual
RBNZ noted that “poor economic conditions and higher unemployment rates are likely to remain headwinds against a full recovery in residential mortgage credit demand,” interest.co.nz reported.
While mortgage demand has picked up, the central bank said the impacts of lower interest rates “will take time to fully materialise.”
“This improved sentiment has been driven by a reduction in interest rates and increased listings, which together has translated into higher demand for mortgages,” RBNZ said.
Some of the increased demand has also come from borrowers switching loan providers to benefit from falling rates.
Banks expect the rebound in mortgage lending to continue over the next six months, buoyed by the prospect of further rate cuts and a higher volume of home sales.
Consumer credit demand remains muted
In contrast to the mortgage market, consumer credit demand failed to meet banks’ expectations.
“In the September 2024 Credit Conditions Survey banks expected consumer credit demand to pick up in the next six months,” RBNZ said. “However, this expected increase in demand did not materialise.”
Subdued consumer sentiment and persistent economic uncertainty have dampened demand for secured loans and credit cards.
Interestingly, banks reported an increase in unsecured lending, possibly driven by consumers using short-term loans to cover income gaps or unexpected expenses.
“While banks expect a small recovery in consumer credit demand in the next six months, the outlook is muted because of high consumer uncertainty amid poor domestic and global economic conditions,” RBNZ said.
Commercial property lending sees modest improvement
Demand for commercial property loans showed a gradual uptick over the last six months, “albeit from a very low base,” interest.co.nz reported.
Looking ahead, banks forecast a much larger increase in commercial property lending, supported by anticipated cuts to the official cash rate.
“Lower borrowing costs are expected to enhance investment viability, improve returns on leveraged property investments, and attract both domestic and offshore investors back into the market," RBNZ said.
However, banks warned that “demand may remain uneven across the sector, with caution in office property.”
Rural lending demand drops amid strong commodity prices
Rural lending saw a sharp decline as dairy farmers reduced their reliance on credit due to strong commodity prices and favourable production conditions.
“Strong commodity prices and favourable production conditions have increased profitability for dairy farmers, reducing the need for working capital financing and liquidity credit,” RBNZ said.
As farmers use available cash flow to fund operations and investments, banks expect rural credit demand to remain low. However, some banks noted that sustained high dairy prices could eventually lead to renewed borrowing for land purchases and business expansion.
Business lending falls amid investment delays
The RBNZ survey also found that business credit demand was mixed.
Capital expenditure loan demand fell as businesses delayed investment due to heightened economic uncertainty.
However, “SMEs and corporates increased borrowing for working capital and lines of liquidity due to ongoing cashflow constraints,” RBNZ said.
On balance, business credit demand declined over the survey period, with the looming threat of US tariffs further weighing on sentiment.
