OCR officially held unchanged yesterday! What does it mean for borrowers? Experts assess current market conditions

As widely expected, the Reserve Bank of New Zealand announced yesterday afternoon that the Official Cash Rate (OCR) would remain unchanged at 5.5%. Since raising the OCR on 24 May this year, the Reserve Bank has repeatedly said it needs to remain at this elevated level for an extended period to ensure inflation is effectively controlled and brought down from its current 6% to the target range of 2–3%.

(Reserve Bank of New Zealand Governor Adrian Orr)

Experts assess current market conditions

Since the end of May, major commercial banks' funding costs for one-year fixed mortgages have increased by 0.25%, compared with 0.6% for two-year terms, 0.8% for three-year terms and 0.9% for five-year terms. Banks have therefore raised their fixed mortgage rates in succession, despite no substantive change in official monetary policy.

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Prominent independent New Zealand economist Tony Alexander attributes these higher borrowing costs to the US Federal Reserve's decision to raise interest rates. Stronger-than-expected US economic growth and labour market performance have heightened the Fed's concerns about inflation and the possibility of further monetary tightening in the US.

CoreLogic chief economist Kelvin Davidson said yesterday's Reserve Bank decision came as no surprise, as New Zealand's overall economic conditions, including inflation and labour market performance, had not changed materially since the previous Monetary Policy Statement in mid-August. In fact, last week's ANZ business and consumer confidence surveys showed encouraging signs that inflation was easing further. Inflation risks remained relatively balanced: petrol prices, for example, would push inflation higher, while the delayed financial pressure on ordinary households from earlier OCR increases would help bring it down.

Where will the OCR go next?

(CoreLogic chief economist Kelvin Davidson)

Davidson said the Reserve Bank could still leave the OCR unchanged at its next Monetary Policy Statement meeting on 29 November. Expectations of falling dairy prices in the near term, along with the delayed effects of earlier monetary tightening that had yet to be fully felt, could provide reasons to hold. He therefore believed a “wait and see” approach remained the prevailing theme. In particular, people should watch two important data releases before the next Monetary Policy Statement: third-quarter inflation figures on 17 October and official labour market figures on 1 November. He expected that even if these figures offered the Reserve Bank of New Zealand some reassurance, it could still raise the OCR. With three months between November and the following Monetary Policy Statement, the Bank might act earlier to “get ahead of the market”.

However, Davidson also said there was no need for excessive concern. Even if the OCR rose again before the end of this year, substantial mortgage rate increases had already occurred, and low unemployment had helped absorb their impact. Meanwhile, property sales volumes were recovering, and house prices were showing signs of rising after bottoming out. He believed neither the OCR nor mortgage rates would fall significantly for at least the next year or so. This could mean the housing market recovery would be fairly limited, particularly given poor housing affordability and the new debt-to-income limits for mortgages due to be introduced in 2024.

The housing market outlook 

Clearly, borrowers are unhappy with the OCR outlook, despite the Reserve Bank of New Zealand repeatedly stating that using higher mortgage rates to restrain the economy is the “right” thing to do. This raises a question: with mortgage rates climbing by 0.25%–0.75% over the past four months, could the housing market run into trouble again?

(Prominent independent New Zealand economist Tony Alexander)

Tony Alexander's answer is no. On the contrary, he believes the housing market recovery is gaining momentum. Although interest rates have a substantial influence on the housing market, they are not the only consideration. Decisions to buy or sell property depend on prices, transaction timing and other factors.

One important factor is the surge in net migration, which has now reached a record 96,000 people. This influx will eventually restrain wage growth, helping to curb inflation. For now, however, the main effects are that businesses are finding it easier to recruit staff, while pressure on rents and housing supply is increasing. First-home buyers and investors are responding to unrestricted population growth by bringing forward property purchases. Growth in the supply of new homes is slowing, and prospective buyers are considering existing properties. More precisely, despite higher financing costs, they are deciding to stop putting off their purchase plans.

Another important factor is the general election. If the New Zealand National Party wins office, investors will return to the market, while many homeowners will be discouraged from selling. Overseas buyers could reappear at the upper end of the market and influence properties priced close to NZ$2,000,000.

Alexander also noted other factors that could influence the housing market, including banks slightly relaxing lending criteria, government home-buying assistance programmes and continued falls in house prices. He predicted that the house price upswing that began in June would continue at a slow pace from 2024 to 2026.