Market update: Tough talk from the RBNZ, but are rate falls on the cards for 2024?

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Well, here we are — our final housing market update for the year.

For this one, we’ll be looking not just at what’s been happening this past month or so but our thoughts on what could be in store for 2024.

On the interest rates front, the big news in the last month or two has been a big downward shift in wholesale interest rates

Wholesale rates are one of the big drivers of bank mortgage rates — and in the last eight weeks or so, they’ve fallen about 0.7%. It’s a significant drop, which means they’re now back down to roughly where they were a year ago.

This week we had negative economic growth of 0.30% for the September quarter against a forecast of growth of 0.30%. This was a weak outcome in line with our view of a weakening NZ economy throughout this year.

It’s put an end to speculation from parts of the market that were adamant about further OCR increases, and now the widespread prediction is that mortgage rates will start coming down again towards the middle of 2024.

That’s something I’ve been predicting for a while now, as I’ve seen more and more evidence that the economy is slowing faster and harder than many (I think) realise.

Despite positive movements in wholesale interest rates, we’ve heard some tough talk from the RBNZ at its last Official Cash Rate (OCR) announcement of the year on 29^th November.

It once again held the OCR steady at 5.50%. Still, the accompanying commentary had a pretty hawkish tone, making it clear that while previous rate increases are working, the RBNZ hasn’t completely ruled out the possibility of further hikes.

Based on the information it has at hand right now, the RBNZ is still pointing to early 2025 as the likely turning point for interest rates — but if the economy continues to slow down as it has been, I think we can expect that forecast to come forward, too.

We won’t know any more about where the RBNZ’s head is on that front until the first OCR announcement of 2024, on 28^th February.

With the full brunt of higher rates yet to flow through, the tightening effect on the economy will continue to grow

The average mortgage rate being paid in New Zealand at the moment is between 5.00% and 5.50% — so there’s still a lot of tightening to flow through as more homeowners transition to current rates of up around 6.99%.

And people are bracing themselves for that.

For retailers, I think Christmas will probably be a tight this year. At the least, Kiwi certainly won’t be spending quite as much as we have in previous years.

This will flow through to the economy, as the drop in consumer spending helps to counteract the potential inflationary impact of higher immigration levels.  

As that plays out, most economists expect New Zealand is headed for a period of pretty low growth over the next couple of years — and this long talked-about recession is likely on the cards at some stage as well.

But, in a further sign that things are starting to stabilise in the housing market, not much has changed with house prices in the last month

We saw buyer activity pick up in November as the market moved out of its pre-election holding pattern — a trend likely to continue through the first half of 2024.

But even with higher levels of buyer activity out there I’m not expecting to see house prices take off again in a hurry, and there are a couple of reasons for that:

1. With interest rates still high, buyers are currently being stretched to their absolute limits on the affordability front. If that’s the case, things on the buyer side of the equation won’t support massive growth in house prices.
2. Sellers are making their return alongside buyers. Many people have held off listing over the last two years because the softness in the market has made it so difficult to sell. Now that prices are levelling out and all that backed-up supply has started coming through, that should support higher levels of buyer activity without the market getting tight and driving up prices.
3. While we’ve had massive levels of immigration in recent months, it’s not the sort that will meaningfully add to buyer demand. The numbers are weighted significantly towards those on working holiday visas — who will create more demand in the rental market than anything else.

So, yes — while transaction numbers are picking up, as long as some of these other factors hold true, house prices should remain relatively stable.

That’s it from me for 2023. Thanks for keeping up with our market updates — and we’ll be back again in early 2024