There’s lots to discuss and dissect this month, so let’s get stuck in.
Here’s the latest on what’s been happening with interest rates, the domestic and global economy, and the New Zealand housing market over the last few weeks.
On the interest rates front, the big news is that the Official Cash Rate (OCR) is now expected to hit a low of 2.75%
And that’s because, sure, we might be out of recession—but economic growth is still weak, unemployment hasn’t come down, and the housing market isn’t showing any real signs of recovery either.
Last month’s annual inflation figure (for the March 2025 quarter) was a little higher than expected, at 2.5%—which felt, to some people, like possible cause for concern. But if we stop and take a closer look at what's behind that number...
- Rent hikes were one of the largest contributors to the increase. In reality, the latest figures show rents are actually falling, thanks to the huge oversupply of property we're seeing across most parts of the market. So, I can’t see that being an ongoing issue.
- Changes to the Government’s Fees Free tertiary education programme (from first year free, to the final year) were also a big factor. And that’s just a one-off.
In other words, there’s a lot in that inflation number which should just flow through and out the other side. Generally speaking, we’re expecting to see slightly higher levels of inflation moving forward anyway, which will be offset somewhat by a slightly stronger NZ dollar.
So, I can’t see that inflation result having any impact on what happens with interest rates from here—and an OCR of 2.75% feels like an appropriate target.
Domestically, there just isn’t a case for rates to get much lower than that, and the Reserve Bank (RBNZ) will be really mindful of not wanting to drop interest rates like they did during Covid, and risk overstimulating the economy to the point where inflation runs away on us.
The big unknown at the moment is everything playing out overseas
Between Trump’s flip-flopping on trade tariffs, escalating tensions between India and Pakistan (which is effectively a proxy for geopolitical tensions between India and China), and the Russia-Ukraine conflict, there’s a whole lot of agitation going on at an international level right now.
With all these big global powers throwing their weight around, the potential economic repercussions for us (in our tiny little country down at the bottom of the South Pacific) feel pretty scary.
But again, I can’t see it having too much of an impact.
And the reason for that? The analogy I’d use is that New Zealand’s economy, built on things like agriculture (meat, dairy) and exports, is a bit like a Toyota Corolla.
It’s not sexy, it’s not high-growth, but it is reliable. It’s like I’ve said before, people always need to eat. And so that should help to protect us from some of the massive ups and downs that high-growth economies overseas are facing.
If we can get a free-trade agreement across the line with India, that’s going to be really positive. And while US trade tariffs will likely be inflationary—a result of the breaking down of global trade relationships, and taking production out of low-cost economies—they’re also an opportunity for New Zealand to strengthen our trade links with other countries.
We won’t come out entirely unscathed, but I think New Zealand is better placed to weather the storm than many other economies around the world.
So, we’ve got our next OCR announcement coming up on 28th May
Then 9th July and then 20th August.
At this stage, each of those is predicted to bring a 0.25% cut—ultimately getting us down to 2.75% by late August.
Assuming that’s what happens, come September or October, we should see one-year fixed mortgage rates bottom out at around 4.5%.
Longer-term fixed rates likely don’t have that much further to fall, because they’re more heavily influenced by all the weird and wonderful things happening overseas with Trumponomics and tariffs, etc.
If you can get a longer-term rate below 5%, I’d say that’s a pretty attractive proposition.
What does a good mortgage rate strategy look like in this environment?
Now that we’re edging closer to the bottom of the cycle, it’s a good time to be hedging your bets by splitting your loans across a mix of shorter and longer terms.
If there’s a lesson to be learned from the last few years, it’s that when inflation gets away from the Government, rates can go up really quickly—so splitting your loans just helps you spread your risk and means you won’t feel that pain all in one go.
I recently fixed a couple of my loans for two years at 4.99%, which felt like a good rate, and I’ve got a few more loans maturing a bit later in 2025, by which time I’m hoping rates will have dropped a little closer to 4.5%.
While falling interest rates are bringing some relief for borrowers, there's no silver bullet—and even though some parts of the housing market are starting to pick up, it's still pretty weak out there
Things are starting to tick over pretty nicely at the entry-level end of the market. First home buyers have got the memo that it’s a buyer’s market out there right now—and they’re jumping in to take advantage of lower house prices, lower interest rates and lots of choice while they can.
Investors on the hunt for a bargain (and who can afford to borrow more under new DTI restrictions) have started to come off the sidelines in greater numbers, too.
But activity at the upper end of the market i.e. existing homeowners looking to upgrade or downsize, is still really limited, and that’s down to two things.
The first, for many, is that the affordability simply isn’t there.
When interest rates were up around 7%, a lot of homeowners were in a position where they either couldn’t—or could just barely—afford their mortgage.
Now that interest rates have come down slightly, that’s offered some relief, but not enough for people to feel comfortable going out and spending huge amounts of money or leveraging themselves into bigger and better properties. It’s just enough that they can afford to live.
High listing numbers also mean it’s a tough market for sellers.
With all the housing stock out there at the moment, buyers are spoilt for choice. There’s still strong demand for high-quality properties—but otherwise, even if you do choose to list, there’s no guarantee anyone will be willing to buy.
And so that’s a massive consideration for people as well.
The net result is that—unless people really *need* to be transacting (because they’re moving cities, need more space for a growing family or have to sell because they can’t afford their mortgage)—it just feels safer to hold off for a year or two, until the market and the economy are in better shape.
What does that mean for house prices?
ANZ has recently revised its house price growth forecast for this year from 6% down to 4.5%, but I think even that is a little too optimistic.
As far as I’m concerned, we’ll be lucky to see a 2%-3% increase in house prices this year—driven mostly by activity at the entry-level end of the market.
Anything more than that is unlikely until there’s a lot more life back in the economy (confidence has returned, immigration’s picked up again) and the influx of people who need to sell have sold, clearing out the supply side of the market somewhat.
That will help to bring a bit more balance to the supply and demand equation, supporting further house price growth in 2026.