Will the Reserve Bank of New Zealand deliver consecutive rate cuts in October and November?! This week's key developments for property investors

1

Could the Reserve Bank accelerate rate cuts?

 

Westpac economists now forecast that the Reserve Bank of New Zealand will make consecutive official cash rate (OCR) cuts in October and November this year. They also believe gross domestic product (GDP) may have contracted 0.6% in the second quarter of 2024, while unemployment is expected to exceed 5.5%.

 

Westpac chief economist Kelly Eckhold

 

Westpac chief economist Kelly Eckhold said the latest data showed a sharper-than-expected decline in economic activity in the second quarter of 2024. This was reflected in high-frequency indicators such as business and consumer confidence indices and purchasing managers' indices. Eckhold said: ‘We think GDP fell 0.6% in the second quarter. Given this weak performance, economic growth is expected to remain subdued in the second half of 2024.’

 

Eckhold said these weak trends in economic growth and the labour market would reassure the Reserve Bank that inflation's path towards its 2% target was more certain than at the beginning of 2024. OCR cuts are therefore expected to come sooner. The OCR has remained at 5.5% since May 2024. Westpac economists had previously expected cuts to begin in November, but now believe the Reserve Bank will cut rates consecutively in October and November.

 

Financial markets clearly also expect earlier OCR cuts. Markets are currently pricing in a nearly 75% chance of a cut at the next OCR review on 14 August. A cut in October is fully priced in, with three cuts of 25 basis points expected by November.

 

2

Are house prices still falling?

 

CoreLogic's July house price survey shows that New Zealand's national median house price has fallen 2.5% since February. Prices fell a further 0.5% in July alone, bringing the total decline from the post-COVID pandemic peak to 16%. Even so, current prices remain 19% above pre-pandemic levels. Prices fell across the main cities in July, although some provincial markets showed greater resilience. This price weakness is closely linked to the high number of properties currently on the market and declining confidence in job security, particularly as actual job losses occur in some industries.

 

3

Employment conditions remain difficult

 

The labour market also appears far from encouraging. Stats NZ data shows employment fell 0.1% in June compared with the previous month, following declines of 0.2% in April and 0.3% in May. Approximately 14,000 jobs have been lost since March. Clearly, these losses are relatively small against a total of 2,380,000 jobs still in the market, but they are undoubtedly a major blow to families affected by redundancies. Labour market weakness is adding to uncertainty in the housing market.

 

 

4

Unemployment may rise further

 

This Wednesday, Stats NZ will release official labour market statistics for the second quarter. The Reserve Bank of New Zealand expects unemployment to rise from 4.3% in the first quarter to 4.6% in the second. A result at that level or worse could strengthen expectations of earlier interest rate cuts, especially if it reflects more people actually losing jobs rather than an expanding labour force. Nevertheless, unemployment may peak at 5–5.5% in the second half of next year, which would still be low by historical standards. Therefore, despite labour market weakness, home sales and prices will not suffer another sharp decline.

 

 

5

Are non-performing loans under control?

 

With mortgage rates remaining high for now and the labour market weakening, measures of debt repayment stress will clearly attract close attention. On the positive side, these indicators have not changed much so far. The latest Reserve Bank of New Zealand data shows approximately 0.5% of loans on banks' books are overdue or impaired, up from 0.4% a year ago and 0.2% two years ago, but still low. This suggests debt repayment stress has not yet increased significantly.

 

6

New dwelling consent applications continue to decline

 

A Stats NZ report says new dwelling applications in June fell sharply, down 36% compared with the same month last year. This was decline number 20 over the past 21 months. The annual total is now approximately 33,600 dwellings, compared with a peak of 51,000 in May 2022. To be fair, that peak was a record high and arguably exceeded the industry's actual capacity to build homes. However, as interest rates gradually fall, construction activity is expected to recover in 2025.