Will the Reserve Bank of New Zealand cut rates this Wednesday? Housing outlook worries: waiting and rebounds in the shadow of high interest rates. This week’s key events for property investors

1

When exactly will the Reserve Bank cut rates?

 

This week’s main event comes at two on Wednesday afternoon, when the Reserve Bank of New Zealand announces its latest official cash rate (OCR) decision. Although it will attract widespread attention, the announcement is generally expected to hold no surprises: the Reserve Bank is expected to leave the OCR unchanged at its 10 July meeting, keeping the current rate of 5.50%.

 

Starting with a 0.25% rate increase in October 2021, the Reserve Bank used a series of aggressive hikes to push interest rates to their current level in response to inflation peaking at 7.3% in mid-2022. Despite this, the latest annual inflation rate, for the first quarter ending in March, remained at 4.0%, still some distance from the Reserve Bank’s target range of 1% to 3%.

 

Unfortunately, the crucial June quarter CPI figures will be released on 17 July, a week after the OCR review. This means the Reserve Bank can only base its decision at the 10 July meeting on existing data, which suggest there is not yet sufficient reason to change the OCR. According to the Reserve Bank’s forecasts released in May, annual inflation will fall to 3.6% in June, then decline further to 3.0% in the September quarter of 2024, before reaching 2.9% in the fourth quarter ending in December.

 

Reserve Bank of New Zealand Governor Adrian Orr

 

Although the market widely expects the Reserve Bank to leave the OCR unchanged until the second half of 2025, expectations of a rate cut are growing. Few major economic releases have appeared since the last OCR review on 22 May, but some secondary indicators suggest the economy is weakening and inflation pressures are easing. Unfortunately, the Reserve Bank still needs firmer evidence that inflation has indeed returned to a manageable range.

 

Recent economic data certainly point to poor conditions. GDP grew by just 0.2% in the first quarter of this year, for example, and the economy was in technical recession in four of the preceding five quarters. Very weak retail spending, declining business confidence and rising business failures also indicate that the economy is under immense pressure. Expectations of an earlier Reserve Bank rate cut continue to rise, with estimates of the likelihood of a cut in October now exceeding 50%. Even so, the Reserve Bank is more likely to consider a cut at its November review.

 

2

A “dead cat bounce” and weak house prices

 

 

The recent modest rise in house prices has been described as a “dead cat bounce”: a brief, unsustainable recovery. CoreLogic’s latest house price index shows that national average house prices fell 0.5% month on month in June, with Auckland recording a larger decline of 1.2%. High mortgage rates and abundant listings are clearly the main constraints on price growth. Although prices held steady in some cities, including Christchurch and Dunedin, the overall market remained subdued. Buyers have plenty of choice, naturally putting pressure on prices.

 

3

Continued weakness in the labour market?

 

Labour market weakness is also hurting the housing market. The latest Stats NZ figures show that job numbers were unchanged in May, growing just 0.9% year on year, the smallest increase since March 2021. Economic difficulties and low business confidence are adding to the housing market’s troubles. Job insecurity is making many people more cautious about buying a home, further suppressing demand.

 

 

4

Residential building consents continue to fall?

 

The continuing decline in residential building consents is undoubtedly another negative factor. Consent numbers fell 15% year on year in May, extending the downward trend of the past 18 to 24 months. Although the annual total remains substantial, this does not change the market’s overall subdued state. Reversing the decline in building consents in future would help ease potential housing shortages.

 

5

Measures to increase land supply

 

The Government is trying to improve housing affordability by increasing land supply. Housing Minister Chris Bishop announced a series of new measures last week (Further reading: Finally confirmed! Government officially announces major relaxation of housing planning rules to meet housing growth targets! Housing Minister announces six changes) aimed at increasing the long-term supply of land available for new housing. These measures include requiring city councils to plan land supply 30 years ahead, removing minimum apartment size requirements and encouraging more intensive development near existing infrastructure. If successfully implemented, these measures could help ease housing shortages to some extent.