In it’s August review, the Reserve Bank of New Zealand (RBNZ) Monetary Policy Committee announced that the Official Cash Rate (OCR) would be cut to 5.25 percent.
According to the RBNZ announcement, the Monetary Policy Committee noted “that the weakening in domestic economic activity observed in the July Monetary Policy Review has become more pronounced and broad-based. Headline inflation has declined, and business inflation expectations have returned to around 2 percent at medium- and longer-term horizons. Committee members agreed that monetary policy restraint can now begin to ease. The pace of loosening will depend on the extent to which price-setting behaviour continues to adapt to lower inflation and inflation expectations remain well anchored to the target mid-point.”
While the RBNZ’s move to bring the OCR down to 5.25% may seem like a small adjustment, it carries significant implications for the New Zealand economy, particularly for those with mortgages. Today’s announcement will be extremely welcome news for mortgage holders or those looking to get onto the property ladder as the RBNZ also gave its strongest indication yet that rates will continue to drop over the next 12-months with market commentators and economists are forecasting that rates are likely to continuing dropping at each OCR announcement by around 0.25 percent for the next year. This would indicate interest rates falling to around 5 percent by the end of 2025.
Stability for Mortgage Holders
The RBNZ’s decision to drop the OCR to 5.25 percent reflects a delicate balancing act between supporting economic growth and managing inflation. However, today’s announcement also came with strong signals from the RBNZ that the OCR will continue its downward trend over subsequent announcements.
This is positive news for mortgage holders or those looking to get onto the property ladder. With market commentators and economists forecasting that rates are likely to continuing dropping at each OCR announcement by around 0.25 percent for the next year, it is expected that interest rates are likely to fall to around 5 percent by the end of 2025, providing some welcome relief to homeowners.
With today’s cut and more forecast to follow, we are advising that clients hold off on refixing their rates until one-to-two weeks out from when their rates will expire to allow as much time as possible for these cuts to come into action. For most clients we are strongly advocating that they then fix all their lending for six months so that they will then be able to take advantage of the further cuts to interest rates.
While this may involve paying slightly more now, the potential savings from the expected rate cuts over the next six months should be substantial. Typically, we recommend splitting risk by choosing different fixed-rate terms. However, based on today’s OCR announcement, we are firmly in favour of fixing for a six-month term given the expectation that rates are likely to continue falling over this period.
Implications for the Property Market
For those questioning whether now is the ‘bottom of the market’, today’s signalling will likely give property buyers and investors more confidence in re-investing in the market. This means that for those who are in a stable financial position and who can secure a mortgage, there might only be a finite opportunity to take advantage of the current buyers’ market to buy or upgrade to a new home, or to expand your property portfolio.
With today’s interest rate cut and with more forecast on the horizon, we are calling out that this is the bottom of the market. This makes it an excellent time to buy as stock levels are high and there is limited competition from buyers. With further cuts anticipated throughout 2025, it may now make more sense for people to buy a house vs rent, and will also make rental investments stack up better.
For those considering their options, it is worth talking to your financial adviser and real estate agent now. As experienced investors and buyers re-enter the market, stock levels are likely to start reducing as we move into summer and there will be more competition for properties, reducing the number of deals to be had. This will have a knock-on effect of more people realising that prices are likely to increase and change the mindset from a fear of overpaying to a fear of missing out. On the back of this shift, we pick prices are likely to rise in 2025. Potentially not hugely, but certainly a 5-10% rebound could be on the cards for 2025 from the current depressed pricing.
Preparing for the Future
If you are interested in understanding more about the implications of today’s announcement, please click here to book a free consultation with one of our financial advisers to discuss your options. As with any financial decisions, we recommend talking to your adviser about your specific circumstances. By taking into account economic forecasts alongside your financial position and objectives, your adviser will be able to recommend the right loan structure and strategy for you.
The content of this article should not be taken as financial advice, or a recommendation of any financial product. Threefold is not liable or responsible for any information, omissions, or errors present. We recommend seeking advice from a qualified financial adviser before taking any action.