Reduction of up to one percentage point expected
David Cunningham, CEO of mortgage broking firm Squirrel, has predicted a substantial reduction in home loan interest rates, possibly by a full percentage point, in the next couple of months.
Cunningham noted that the decline in wholesale rates before Christmas should have already prompted lower rates.
“I would be surprised if we don’t see most fixed interest rates down between 0.5% and 1% by March,” Cunningham told Stuff. “Bank margins are very wide at the moment.”
A one-percentage-point decrease could mean two-year fixed rates falling below 5.9% and one-year rates around 6.35%.
Cunningham said that while an OCR drop may not occur before mid-year, banks could “very, very quickly” adjust fixed rates, as they should have done before Christmas, given the massive decrease in wholesale rates.
He suggested that the Reserve Bank might find comfort in allowing the home loan market to stimulate the economy, considering the declining inflation rates globally.
“They don’t have to lower the OCR tomorrow to get the outcome they want, they can sit there saying they're being prudent but at some point, they will probably privately express comfort with interest rates falling to stimulate the economy a little bit,” Cunningham said. “A lot happens in fixed interest rates in New Zealand as opposed to the OCR moving.”
The mortgage boss emphasised RBNZ’s need to focus on the future rather than the past, with inflation decelerating more rapidly than anticipated in other global regions.
“Why would New Zealand be any different?” Cunningham said.
Chris Tennent-Brown, an economist at ASB, sees potential for longer-term mortgage rates to decrease if the decline in wholesale rates continues.
“Term deposit rates for the longer terms have come down a tiny bit and that’s an important part of the mix too,” Tennent-Brown said.
Mike Jones, from BNZ, expressed caution, however, mentioning that the market may have gotten ahead of itself in expecting sustained falls in mortgage rates.
“There’s a tonne of Reserve Bank easing priced in for later this year and it seems unlikely the bank will endorse this given their ongoing inflation concerns,” Jones said.
“The other thing to bear in mind is that term deposit rates – a key component of bank funding costs – are yet to fall. So, the risks to fixed mortgage rates are lower but I think we’ll have to wait until later in the year for a sustained down trend.”
Cunningham observed that population growth is currently masking the economic downturn’s true extent and questioned the sustainability of rising house prices in such an environment. He noted that New Zealand is unique in not having returned to pre-COVID house values, attributing this to Kiwis borrowing extensively during the pandemic’s low-interest-rate period.
New Zealand’s higher reliance on short-term home loan fixes than many global counterparts intensified the impact of low-interest rates. However, New Zealand experienced a more pronounced decline in house prices from the peak compared to other nations, he said.
“In fact, right now, New Zealand is the only country across the comparison group where house prices are not still near, or even above, the previous peak,” Cunningham told Stuff. “That’s because, after spending up large when interest rates were low, Kiwi borrowers have felt the bite of recent interest rate increases particularly harshly.”
He said that considering the significant spike and subsequent pullback in house prices, the net change in the country's increase aligns with other nations, standing at approximately 25%.
“We are back where we probably should be if we compare to other parts of the world,” Cunningham said. “The rise in wages over that period, the rise in construction costs, almost validate the current price. If you say the starting point for prices pre-COVID was right, which is arguable, you could argue the level of prices is now back where it was three years ago.”
As interest rates decline and the economy improves, Cunningham expects a gradual pickup in house prices, but he doesn’t foresee a rapid acceleration. He acknowledged that consents for new houses have declined, possibly influenced by developer concerns about future price trends, and anticipates a confidence boost in new developments as prices stabilise, although this impact may take years to materialize, Stuff reported.
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